When US coal giant Peabody reduced its bid for Australia’s Macarthur Coal by 6.3 per cent, the newly-announced Australian resources tax was easy to target as a scapegoat.
Indeed, Peabody said the revision “follows Peabody’s due diligence as well as the introduction of the Australian resources profit tax proposal”. It’s now offering $A15 per share, down from its previous bid of $16 but still higher than its original $13 offer. The bid was raised amid fears of a competing move from Noble, a major shareholder in Macarthur — and as the FT reported, the newfound Chinese enthusiasm for coal imports was a big factor in the ensuing sparks.
However quite a few other things are going on in commodities markets beyond the debate over Australia’s resources tax – not least of which is uncertainty over whether China’s massive demand for base metals will continue, after bank reserve rules were tightened last week. And for coal exporters in particularly, some analysts believe there’s a specific issue around China’s newfound enthusiasm for imports versus its own substantial coal industry.
For Macarthur and Peabody, like most of their fellow coal exporters, China’s recent strong appetite for coal imports has been important.
Macarthur’s 2009 annual report mentions the strong surge in demand for metallurgical coal from China, which emerged as a big importer in the second half of 2009. “Non-traditional” customers, among which China was “predominant”, accounted for 33 per cent of Macarthur’s market in 2009, compared to 9 per cent a year earlier.
The report notes that there is a question over whether China will be in it for the long-term, but says:
“As long as Australian coals remain competitive with domestic supply, as they currently are, we believe China will have real potential as a large existing new market for growth tonnage from Macarthur Coal’s existing and new projects.”
Problem is, that might not be the case after all. Bloomberg reported last week:
Power-station coal from Qinhuangdao, China’s largest port for the commodity, sells for $23.30 a metric ton less than coal delivered from Newcastle, Australia, the widest gap since September 2008, according to CLSA Asia-Pacific Markets. Prices of supplies from Newcastle reached a 19-month high of $152.90 a ton on April 30.
It adds:
Imports from Australia fell 67 percent to 767,268 tons in February from a record 2.32 million tons in June 2009, according to data compiled by the Australian Department of Foreign Affairs and Trade. Average monthly imports in 2008 were 190,239 tons.
Neither of those data points however focuses on metallurgical coal, which seemed to be the big point of interest for Peabody. In its own full-year results in January, it said:
“China’s 2009 net imports of metallurgical coal reached 34 million tonnes, far greater than 2008′s 3 million tonnes. Peabody believes China and India are structurally short of metallurgical coal and will continue to turn to Australia for imports.”
This comment was highlighted in some of the coverage around its bid for Macarthur, launched in late March.
Indeed Paul Manley, Wood Mackenzie’s coal consultant specialising in China, in mid-April made a presentation predicting that China’s appetite for thermal coal imports would decrease as its massive domestic coal industry returned towards its normal production levels.
From the release:
“Even though in January and February of 2010 there was a continuation of the trend in 2009 of record levels of thermal coal imports in China, our view is that in 2010 overall Chinese thermal coal import levels will be lower, marking 2009 a unique year,” explained Manley.
We spoke to Manley about it last month and he explained that the reforms of China’s coal mines – already thought to be responsible for pushing up seaborne coal prices in recent months — were making good progress, affecting the domestic supply and, by extension, the attractiveness of imported coal. Reforms in Shanxi province, which is the country’s biggest coal producer but notoriously unsafe and inefficient, are already coming to an end. Manley points out that even while seaborne prices were similar to domestic prices, China buyers would prefer the higher quality imported product. But once domestic production can again undercut imports, as they have threatened to do in recent weeks, they will opt for local supplies.
Again, it’s important to note that this is thermal rather than metallurgical coal, and that there’s more confidence about prices for the latter right now. Meanwhile another Australian coal exporter, Centennial, last week said it expected a recovery in demand for metallurgical coal – adding that it believed China would remain a net importer.
Related links:
China’s coal bubble - Post Carbon Institute
A market re-emerges - FT
Coal die-off, nat gas boom already reducing US emissions - FT Energy Source
India finds some resistance to the lure of coal - FT Energy Source
