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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 18 September 2016

Kinda coal

Under pressure

Australia's commodity price index is about to come under a heap of pressure over the next three months. 

The spot price of iron ore has quietly slipped down by 5 per cent over the past week, while steel prices have also shown indications of weakening. 

Australia ships so much iron ore - overwhelmingly to China - that in this financial year the red dirt still accounts for more than a third of the Reserve Bank's Index of Commodity Prices at 33.9 per cent.

Metallurgical (coking) coal (11.9 per cent of the index) and thermal coal (8.6 per cent) are the next two most important commodities respectively. 

In fact with iron ore and coal being so important to Australia's national income the Reserve Bank has introduced new sub-indices to track the impact of spot prices and average export prices:

"Reflecting the relative importance of bulk commodity exports to the Australian economy, the Bank will commence publishing an additional ICP based on spot price movements for the bulk commodities (namely iron ore, metallurgical coal and thermal coal). 

The Bank will also publish two bulk commodity subindices: one using the spot price movements for these commodities; and the other using their average export price movements."

Iron ore to tank

With record volumes being shipped - and inventories also hitting record highs - it's thought that the iron ore price could be heading as low as $40/tonne by the end of the year, from a recent peak of $62/tonne, which will be a painful adjustment.

Record iron ore cargo was again shipped from Port Hedland in August at 42.9Mt (+9 per cent year-on-year) as China continues to import unprecedented volumes of red dirt.

35.4Mt of that iron ore cargo was bound for China in August, the highest monthly volume to date.

The Port of Port Hedland has seen 461.2Mt of iron ore shipped over the past year - also a record.

The paradox here is that the longer iron ore prices remain at current levels, the greater the potential uplift in production from the higher cost and thus marginal producers. 

There has been a boost to demand for iron ore following Chinese housing market stimulus and another surge in dwelling prices in the largest cities, but it's expected to fade.

Coal burning up

In this context, we could use some brighter news, and some temporary relief may be provided by the coking coal price, which has exploded ~170 per cent higher since February in US dollar terms. 

Business Insider explains the supply disruption and lift in Chinese production here

The August Chart Packs showed that the boost to coking coal spot prices had barely even begun to be reflected in Australia's average export prices. 

Bulk Commodity Prices graph

So there should be a boost in the post here over the next few months - and the same applies to thermal coal.