At the same time management at Cockatoo was being turned upside down after Korea’s SK Networks walked away from participating in a share placement there were positive hints of rising demand for coal in Japan and China.
China just announced a record month of steel production, which means demand for metallurgical coal is rising, not falling as had been feared. Japan is re-writing its long-term electricity production plan, and thermal coal will play a much bigger role than previously proposed.
More on the China and Japan coal demand factors later. First a few thoughts on what happened to Cockatoo, which appears to have been hit by doubts about the strength of worldwide economic demand, especially the pace of Chinese growth.
The Koreans, in keeping with their standard inscrutability, said little when dropping the proposal to help fund new mine developments, except that they were concerned about “ongoing uncertainty in global markets”
Australia, in particular, has been the subject of a rising tide of negative comment thanks to its heavy reliance on China for mineral and metal exports. As a result a number of top investment banks have turned negative on Australia’s growth outlook.
The latest criticism has come from French investment bank Societe Generale, which is advising clients to sell the Australian dollar because the economy is over-heated and overdue for a correction.
This particular criticism, which the entire resources sector should note, is that SocGen believes below the surface of what seems to be a strong Australian economy lies an over-reliance on a combination of bank credit and a belief in never-ending Chinese demand.
The SocGen report notes the so-called commodity super cycle is not as super as some people believe because it is really: “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble. Australia looks like leveraged leverage”
High internal costs, which have given Australia five of the world’s 15 most expensive cities, are also a worrying factor, and more so when placed alongside a revitalised and aggressive union movement, and a minority government looking shakier by the day.
In fact, the more The Hog read last week’s demolition job on the Australian economy, and thought about the Korean walk-out at Cockatoo Coal, the gloomier he felt about the outlook for Australia and its coal industry.
But, that was until news started to flow in about Japan’s hunt for thermal coal supplies to replace mothballed nuclear power reactors, and China’s record rate of steel production, which must be leading to stronger demand for metallurgical coal, no matter what SocGen is telling clients.
The Japanese appetite for thermal coal, in the wake of its Fukushima nuclear meltdown, is affecting the coal market in two ways. Direct demand for extra imports is one factor, but a much higher level of investment in foreign coal mines by Japanese power utilities, and possibly by a Japanese government agency is another.
Japanese corporate investment in coal mines is not new, but Japanese government investment is an interesting possibility flagged last week by Jogmec, a Japanese agency that funds overseas natural resource projects.
According to London’s Financial Times, Jogmec president Hirobumi Kawano, said on the sidelines of a copper conference in Chile, that the Japanese Government was thinking about extending Jogmec’s mandate to permit investment in coal.
“In both coking and thermal coal, Japan’s involvement at the production level is currently very limited so Japanese companies’ investment in that area is likely to increase,” Kawano said.
For Australia’s coal industry that is particularly interesting news in the light of Cockatoo Coal’s problem with a Korean partner.
As too is the record Chinese pace of steel production, an event that is not supposed to be occurring if reports of a Chinese economic slowdown are correct.
What appears to be happening is that a slowdown in China is not quite the same as a slowdown in any other part of the world.
The Chinese idea of tapping the brakes is to reduced overall economic growth from 10% to 7.5%, a pace that worries some observers, but does not worry The Hog.
Why? For this simple reason: if China really does pull back to 7.5% annual growth that means the economy of the country will still double in about nine years rather than the seven years implied in 10% growth.
Doubling the Chinese economy every nine years does not sound like a major slowdown. This is why steel production continues to expand at a hectic rate, taking coal demand with it and is a much more positive outlook than that seen by SocGen in its negative view of Australia and its mining sector.
