Coal recovery hopes dented

HOPES of a more sustained recovery to help repair the Australian budget after a 30% surge in coal prices between March and September could be dashed, after India and China quietly ramped up production over the past fortnight.
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Hopes for a coal recovery may have been overstated.

Anthony Barich

Deloitte Access Economics’ Melbourne-based partner David Rumbens said recent events in Asia’s two great superpowers of commodities demand would likely reduce the global coal price going forward.

That will affect the profitability for Australia’s coal exporters and the corporate tax receipts for the Commonwealth.

Last week the federal parliament reached agreement on a package of measures to help reduce Australia’s budget deficit by $6.3 billion over the next four years, as spending on the baby bonus is removed, funding for the Australian Renewable Energy Agency is cut by $460 million and Family Tax Benefit Part A for families on more than $80,000 a year is scaled back.

However, Rumbens warned “there’s more to do”, and while commodity prices would play a role, he revealed some facts behind the recent surge in coal prices, which may put a dampener on the government’s hopes, and those of coal exporters.

Coal is one of Australia’s largest export earners, with the country having exported $34 billion worth of coal – thermal and metallurgical – in 2015-16, which made up about 14% of Australia’s total export value of $243 billion.

China’s version of Australia’s Productivity Commission, the National Development and Reform Commission, announced in March that coal mines across the country were only allowed to operate 276 days a year, down from 330.

While the policy, aimed at reducing the supply of coal and encouraging reform in the industry, removed 10-15 million tonnes of supply from the Chinese coal market, Rumbens said it was actually “too successful”.

The policy resulted in a global energy coal market supply shortage as China imported some of the lost domestic production, and prices shot up more than 30% from around $50 to more than $70/tonne between March and September.

That is still down about 50% on the 2011 peak of $140/t.

However, before Australian coal miners could start celebrating too much and Treasurer Scott Morrison could start counting on some extra tax income, late last month the NDRC became concerned coal and energy prices in China might be getting too high.

It subsequently relaxed the 276 working day policy for some of the country’s largest coal mines so that they could work 330 days.

Rumbens said that policy reversal would increase the supply of domestic coal in China and likely result in a softening the global price.

“Other countries are also contributing to this additional supply, including India, another large importer and user of coal, which has increased its own domestic supply in the last year by around 10%, while demand for coal in Europe and North America continues to decline due to the increasing use of gas and renewables in the energy mix,” Rumbens said.

“Interestingly though, lignite coal demand in Germany is increasing as nuclear reactors are being retired.

“These recent events will likely reduce the global price going forward, profitability for Australia’s coal exporters, and reduce corporate tax receipts for the federal government.

“So close to budget repair, yet still so far.”