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Monday, January 17, 2011

Coal prices not going to $400/tonne

Wood MacKenzie, coal industry consultants are forecasting hard coking coal prices to reach $400-500/tonne as a result of the flooding in Queensland. We previously wrote about the impact of flooding on Queensland's coal industry. I must admit I opened my mouth too soon, as I did not know the severity of the floods. The arguments however remain:
1. Power generators tend to stock up to 90 days supply for any shortages - that means there will be a great many consumers who are ok for 3 months. We might also expect cement companies and the like to sell their coal and for them to use other viable feedstock, since they have even more flexibility.
2. The prospect of high coal prices will ensure that engineering contractors give priority to restoration of exports. i.e. The fact that Rio Tinto and BHP are primarily affected, gives them the capacity to mobilise people within their companies, i.e. from iron ore (west coast) to coal (east coast) in a matter of days.
4. There will undoubtedly be sections of railway track which are effected, however its hard to believe 10km-sections have been washed from their foundations. Track is not like a bridge. Particulate matter is more likely to accumulate in front of, in between and behind track than pull it out. Even if bridges are uprooted, temporary trucking solutions are possible. This is more likely to protect the track rather than wash it away; albeit encasing the track and infrastructure in a lot of waste.
5. What might be categorised as 'thermal' coals for sale are not necessarily strictly thermal coals, but are likely to have some coking properties, which means they can be blended with hard coking coals in order to achieve sales.
6. Opportunists abound in the world, and there are none greater than the Chinese. Expect the Chinese producers to come up with 50Mt in the next 3 months. This will be thermal coal mind you, but Australian and Colombian premium ('semi-coking' in a crisis) coals will attract a premium.
7. Steelworks will adjust their coal ratios in order to take lower quality coal and this will result in reduced steel output. Just ask the Indians; they have been using dirt for coal for the last 50 years.
8. Australia is the largest coal exporter, however let us not forget the capacity of governments, particularly of China and India to internally regulate markets. i.e. These governments can take measures to direct resources into coal markets. i.e. If the Chinese govt (which owns a great deal of heavy industry and rules with immense punitive power) redirected coal from cement production to power production, consider the impact. China produces 1.5 billion tonnes of coal per year, compared to Australia's (I am guessing as I'm out of date) 240Mtpa. Now this is all coal...but I am sure that some Australian thermals will miraculously be going to coking markets...if only as part of a blend. With what you ask? Canadian coals, Australian exports which are unaffected; Australian shipments already in stockpiles around the world, etc. It is not hard to envision that trucks will be used to move coal around washed out railway sections...even if it does diminish the quality of the coal through rehandling.
9. Another consideration might well be the seasonable timing of the flooding. We are in the summer for Australia, so winter for Asia. This is thus not a time of great air conditioning demand, but significant heating demand. We have also to consider the fact that coal is base load and some countries have hydro pumpstorage capacity which they can run down, and then rebuild when coal stocks rebuild. Time of day electricity pricing might also be significant in some markets, though I'm outdated on these facets. I think Asia has been slow to adopt such practices....because they remain highly regulated or under-sophisticated power markets.
10. In times of need, might we also expect scrap metal prices to take off, and in the process taking some pressure off the need for raw materials, and therefore the volatile shipping freight demand. The greatest impact will probably felt in bulk carrier availability...but even then if prices ever reached $400/tonne, you could well expect Chinese barges to be towing coal to China from Queensland. I exaggerate of course, but we can reasonably expect freight charges to rise, and all manner of smaller carriers in the panamax class to be used to deliver coal when those facilities are back on track. No doubt those railways which are the worst effected will be recommissioned last. i.e. Some will hardly affect shipments I suspect.
In the meantime, coal mine pits will be dewatered (that might take a week), with another week for those pits to dry out, and tested for pit wall stability. Looking at the rainfall distribution from the following Bureau of Meteorology map, I don't think the problem is bad outside the Surat Basin.
At the end of the day, it is hardly a time of rapacious consumption...that we need coal prices to rise to $400-500/tonne. My expectation is that they might get up to $250/tonne in the spot market, but it will be such a short-lived phenomenon that it will scarcely make any difference to producers, and more probably the shipping companies will make all the money, and those profits will go a short way to offsetting their losses for all the ships at sea waiting for non-existent coal in the preceding month.
Nope...merely Queenslanders will need to work harder for a month or two, before they get back to their jet skis. Such is the legacy of capitalism....of course if we continue on our path towards fascism we will experience a different phenomenon....the 'flow-on' effect of natural disasters causing a crippling blow to services.
People like to make money in crises. Fear is the easiest way to motivate people. Its far more effective than greed. You get people in a place where they suspend their judgement and they are compelled to seek the most tangible, concrete reward...a report which will promise all the solutions. You kind of feel compelled to buy it just to make sure that you have your bases you are accountable. The media loves to promote crises as well, because it sells newspapers....and best of all, its like free advertising. I can imagine there are hoards of procurement managers around the world looking at buying the Wood MacKenzie report. I just question whether they will have any special insight. They will have to do a lot of research....and I can't imagine that they will have any greater insight than those coming to them in fear or greed. Why? Because none of them will be looking at the bigger picture...and all will instill their fears and any consultant is going to reflect those fears. After all, they will not be going out in the field, nor have the full context to make accurate judgements. My belief is that an accurate report will take 2 months to prepare and by then the problem will be almost over.
It is a crisis to be sure....I would just hate people to think much money is going to be made out of it. It lacks too many imperatives for a real crisis:
1. Scarcity
2. Lack of substitutes
3. Longevity
That is my 'not so humble' opinion, but then I find humility greatly overvalued. An excuse for poor analysis. I'm only human....all manner of injustices have been performed under such catch cries. My excuse is rather than I have greater objectives in mind than to merely make or save you money.
Andrew Sheldon

Wednesday, January 05, 2011

Correction to media reports - coal exports

If you read the press, you will hear that "Queensland (Australia) is losing up to A$100 million ($131 million) a day in coal exports because of the unprecedented floods". The reality is far less tragic, for a number of reasons:
1. Coal exporters and consumers have come to expect disruptions to coal supply. For this reason most coal consumers have 60-90 days of inventory capacity to meet their immediate needs. The implication is that, if we assume they each have an average of 70 days capacity utilisation, then the consumers have over 2 months to receive supplemental coal supplies in order to ensure normal power, steel or cement plant operation.
2. Coal producers have long and short term contracts, and those contractual obligations are set at market price, so there is no incentive to go elsewhere.
3. Coals from different mines vary in quality, so consumers do not like to disrupt supplies necessarily unless there is some commercial or supply reason to do so, otherwise they are creating technical/operational difficulties they don't need.
The implication is that Australia is not losing that amount of money; those exports are simply being deferred, though not without cost. So what costs can we expect? Well, ships are going to sit idle for 2 weeks, and for the next few months after, they will be fully booked rebalancing consumer stockpile inventories. Money will need to be expended by Queensland Rail to rehabilitate those sections of track damaged by the flood. These companies might need to employ people on overtime, however they will also have insurance to cover them for such events. The media reported that 100's of kilometres of track were destroyed...more likely just submersed....though there will be considerable damage where there is flow because saturated soil loses its cohesion, so track is more easily ripped up by flowing water.
The biggest loss is of course to agriculture and the destruction of property. It strikes me as silly that insurance companies only cover people for the effects of rain, and not flooding. I know that there has been this response before by insurance companies when houses on the South Coast of NSW were flooded. Is not the intent of insurance to protect a person from unforeseen events, and that the insurance companies are the ones to identify them, since it is a technical risk, which they are in the business of assessing. i.e. They are not fulfilling the spirit of their role. This is where you get ambivalent court rulings, because the law does not clearly establish whether a judge should rule:
1. With the letter of the law, i.e. The law is a dogma, held out of context. This is the basis of statutory law, and explains why bureaucrats are so unthinking in your dealings with them. Its the policy, and they have no power to interpret it 'in context'.
2. With the spirit of the law, i.e. The law is a philosophical construct, that it is based on principles, and those principles are held in context. This is the basis of common law, where judges make new law by applying the law to specific contexts.
If you appreciate that statutory law is being called upon to fill the 'perceived gaps' in common law, it will be apparent that we are being a more unthinking society because of such creeping dogmatism. This can continue until we finally march 'with pride in democracy' towards fascism. I would already argue that we are already there, but its a matter of degree. Some of you might want to wait until Comrade Rudd is marching with the band down Anzac Parade, but I just consider that a huge opportunity cost, more of a concern than our 'deferred' exports.
You can read more about these issues on my political blog or even my judicial website.
Andrew Sheldon

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