China props up economic recovery

WITH production cuts hitting hard in early 2009, ILN spoke to an analyst from Australia’s commodities forecaster about the prospects of idled capacity being revived and the reasons behind the lift in Chinese demand.
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Blair Price

Australian Bureau of Agricultural and Resource Economics chief commodity analyst Jammie Penm, who worked on the commodities report released yesterday, gave his view on when idled coal operations could return to former production levels.

“With all the spare capacity it really depends on the pace of world economic recovery or, should we be more precise, when the recovery will actually come,” he said.

“It certainly is creating issues in terms of forecasting.

“In our assessment we made an assumption [that] world growth for 2010 will only be around 2.1 per cent. The underlying scenario is by the end of this year we shall see some sign of recovery and then go into 2010.

“Then by 2011 we should get back to [a] potential growth rate of around 4 per cent for the world economy.

“Any deviation, if the recovery comes a bit earlier or later, will have implications for spare capacity.”

Going through the statistics, Penm could see the importance China has had during the global economic downturn, especially during the March quarter, as the country increased its demand for major mineral and energy commodities across the board.

“One can attribute the increase to the significant stimulus package implemented by the Chinese government, especially in terms of infrastructure; but still, if you look at the world economy as a whole, it seems to me that the bright spot really is the domestic demand in China.

“Hypothetically, if that strong domestic demand is not there, then I think the alternative scenario would be very pessimistic.”

That is why ABARE stated there was considerable risk in terms of the current outlook in its report, Penm said, as it really depends on whether the world economy will stage a recovery and how strong it will be.

“If you rely on China alone, I don’t think the strength in terms of demand will be sufficient to maintain high levels of commodity prices.”

He said a global recovery would certainly depend on the stimulus packages implemented by international governments and how effective those packages would be.

While media reports were mixed on China’s 4 trillion yuan ($US585.38 billion) stimulus package when the details emerged a few months ago, criticism has centred on a lack of new spending in the three-year program, with some of the initiatives already under construction.

When asked whether the recent lift in Chinese commodity demand was due to stockpiling or infrastructure development, Penm said it was a million dollar question.

“From our observation and experience, China buys and sells the same commodity at the same time. It’s a bit difficult to say but if you look at the current situation, given the size of that stimulus package, I think one cannot rule out that there is a genuine demand for infrastructure investment.”

In the case of thermal coal demand, he said the nation’s infrastructure bottleneck combined with low freight prices allowed power companies to import coal rather than purchase it domestically from northern China and go through the rail system.

China’s increasing imports of metallurgical coal have also been helped by tougher safety policies, which have reduced domestic production from the small mines sector.

Macquarie analysts are expecting to see idled mining capacity around the world switched on again in the second half of this year on the back of increasing Chinese coking coal demand.

Macquarie has forecast premium hard coking coal to reach $US140 a tonne next year in benchmark contracts.

Production cuts to Australia’s longwall sector this year include Xstrata’s decision to suspend production at its Oaky No. 1 mine and a 15% output cut at Rio Tinto’s Kestrel longwall, both in Queensland.

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