Coal price doubling in three months could deliver $25b economic boost

As appeared in The Australian Financial Review (AFR) 11th October 2016

The mining industry has reached an agreement with Japanese steel makers that prices for most Australian coking coal will jump 117 per cent in just three months, an increase that means that the benefit of rising prices could be felt across the economy.   The agreement means most Australian coking coal will be sold for $US200 per tonne over the next three months, compared with $US81 per tonne in the March quarter.   The boom in coal prices could add 2 per cent to national income this year, boost federal budget revenues by close to $7 billion and start wages growing again, some economists say.   Less than a year after the coal industry was accused of being in terminal decline, shuttered mines across Queensland and NSW have been reopened, including the Collinsville coal mine in Queensland owned by Glencore, which will create 200 jobs. Agreement over the December quarter ‘contract price’ for coking coal was finally achieved, according to data provider IHS, after negotiations between Peabody Energy and Nippon Steel in Sydney in recent days.   The biggest Japanese steel makers have been in Australia for the past week attending conferences in both Sydney and Melbourne, and those visits helped solve an impasse that had lasted two weeks longer than usual.   According to Deloitte economist Chris Richardson, the federal budget gets a $65 million boost with every $US1 rise in the coking coal price, meaning coking coal exports in the December quarter should add $1.7 billion to federal revenues, and potentially $7 billion if prices persist for a year.   The spot price has surged even higher to $US213 per tonne in recent days and coal for power generation, which has long been the target of environmentalists, is up 60 per cent over the past four months.   HSBC’s global commodities forecaster, Paul Bloxham, said commodity prices had emerged from the slump they hit when Chinese demand slowed four years ago. He calculates the price increase will boost nominal GDP by $25 billion, about 2 per cent, if mining companies are able to charge as much as spot prices, which the contract negotiations suggest is possible.   ‘If commodity prices are past the trough, as we believe they are, then Australia’s ‘income recession’, to the extent that we had one, is in the past,’ Mr Bloxham said.   ‘If coal spot prices are pushed through to contract prices, income growth might pick up quite strongly. It would be a significant boost to corporate profits, tax revenue and you could get some lift in wages growth.’   Wages boost   Wages growth tends to closely follow Australia’s terms of trade, a measure of how much the country receives from its exports compared with the cost of imports. Higher coal prices will likely push up the terms of trade, which could boost company profits and lead to higher wages, Mr Bloxham said.   Investors are already benefiting from the rally. Whitehaven shares have risen seven-fold to $2.86 this year. BHP Billiton shares are up 36 per cent to $23.80 this year.   When prices for coal used in power stations bottomed, over two-thirds of Australian thermal coal mines were losing money. At current prices, the entire industry is likely to be profitable.   The head of the Minerals Council of Australia, Brendan Pearson, seized on the price increases to hit back at critics of the industry, which he said contributed more to the economy than any other last financial year.   ‘Given the tendency of anti-coal activists to conflate a cyclical downturn in prices with a structural decline in demand, it is worth noting that prices for metallurgical coal are at a four-year high and the spot price for thermal coal has increased by 55 per cent since the start of 2016,’ he said.   Turnaround   Analysts expect BHP Billiton’s coal division to switch from a loss last financial year to contributing 20 per cent of the entire company’s operating earnings this year financial year.   An open-cut coal mine in Queensland shut down by Brazilian miner Vale two years ago is now thriving under a new owner, Stanmore Coal.   Production at Collinsville, which produces lower quality coking coal than BHP, was dramatically reduced in December 2015 because of weak demand, and a staff of about 50 had been processing stockpiles at the mine since then. The restart of mining is a sign that market demand is strong enough to want lower-quality coal again.   ‘Our Collinsville mine has made material progress in increasing operational efficiencies and reducing costs in the current market and the decision to return to production is positive news for the local community and the wider region,’ said Glencore’s head of open-cut coal mining in Queensland, Tony Galvin.   Government forecasters expect coking coal exports to hit a four-year high this year. The Office of the Chief Economist, which is part of the Department of Industry, Innovation and Science, estimates that coking coal exports will rise 35 per cent this financial year to $26.4 billion.   Written off   Coal industry veteran Barry Tudor said coking coal was a finite resource that would always be in demand, much to the benefit of Australia, which he said had the world’s best-quality coking coal region in Queensland’s Bowen Basin.   ‘When the price was at its lowest point, those who wrote it off were a bit premature … The facts are there is strong demand, there is limited supply,’ he said. ‘We lead the world in seaborne coal from the Bowen Basin, so there is a lot of prosperity for Australia that comes out of that basin and it underpins an awful lot of economic benefit for Australia.’   Mr Tudor made his name leading Gloucester Coal to a $640 million takeover by Yancoal in 2012, and he recently returned to the sector to buy the Olive Downs coking coal tenements from bankrupt US miner Peabody Energy.   The Olive Downs acquisition was made by Mr Tudor’s new coal vehicle Pembroke Resources, which is backed by Denham Capital.   While the impacts of the coal price rally are expected to be felt for at least a further three to six months, few expect the rally to last long term.   China has relaxed its 276-day policy twice in recent months, and most analysts believe the coking coal price has peaked at current levels.   Macquarie analysts predict hard coking coal prices will average $US111 per tonne in 2017, and sell for less than $US100 a tonne in 2018.   ‘The price of both commodities is expected to decline from current levels over the outlook period to the end of 2017,’ the Office of the Chief Economist said.