Ore hot, coal not

The twin pillars of Australia’s boom, iron ore and coking coal, continue to diverge. Yesterday the iron ore price broke more decisively out of its post crash trading range, up half a percent or so to $148.70. To say the least, this is a finger in the eye for China bears.

Here is the spot price chart:

The 12 month futures are also rallying though not yet to new highs:

Port Hedland shipments for March out too and show a boom month not to mention quarter:

That’s up 23% in  a year and 35% over two. Iron ore volumes to China continue to be epic.

Here is the recent RBA chart indicating contract price levels sitting somewhere just above $140:

There’s been a lot of bluster by the big miners about selling most of their ore on the spot market, especially from BHP. It’s certainly true of Fortescue, as the crash in the price paid for their ore in Q4 showed. But Rio and BHP still constitute the vast majority or iron ore shipments and the big correction in the Australian trade balance in January showed that the vast majority of ore is still shipped on contract. If prices hold, the April trade balance will see national iron ore revenues grow a couple of percent.

On the other hand, coal remains weak and it’s starting to filter through to projects. BHP announced overnight that it will close the Bowen Basin coking coal mine, Norwich Park. The company (or the AFR) has blamed unions for the closure and no doubt rising costs are a part of the issue but there’s no doubt the big falls in the coking coal price from $330 a tonne to $200 a tonne is the real problem. From the AFR:

The world’s biggest coking coal ­producer has shut a mine in Queensland’s Bowen Basin, putting 1400 jobs at risk, after repeatedly warning that the project might not survive the industrial action sweeping the region.

The BHP Billiton Mitsubishi ­Alliance has indefinitely closed ­Norwich Park, near the town of ­Dysart, and said floods which devastated the state last year, lower coal prices and high costs had made the operation ­uneconomic.

The decision will affect more than 490 permanent workers, 910 contractors and cost about $400 million a year in revenue.

As I’ve mentioned before, rumours of cuts to coal mining plans have been circulating for several months. BHP appears to have taken the opportunity of the strike to shift the blame of the closure onto unions.

On the volumes front, the AFR recently had some aggregated figures:

Sales at the Queensland coal export ports of Dalrymple Bay, Hay Point, Gladstone and Abbot Point were down 14 per cent in the three months to the end of March against the December quarter, but up 24 per cent year-on-year.

Overall, 36.8 million tonnes of coal was exported from those ports in the first quarter of this calendar year, according to data compiled by The Australian Financial Review.

At Hay Point, wholly owned by the BHP Billiton-Mitsubishi Alliance, exports fell only 1 per cent to 7.8 million tonnes in the March quarter from the previous three months. Despite ongoing industrial action, shipments were still 34 per cent higher than the rain-affected March quarter of last year. However, the impact of industrial action became more marked as 2012 progressed.

These may be up on last year’s rain-affected shipments but the AFR neglects to mention that they around or below the same as the year before. This is largely a demand weakness story, indicating North Asia is struggling.

I guess we’re used to China pumping out contradictory data. Now it’s apparent in our two major exports.

The above coal contract chart shows we’re sitting at roughly $230 a tonne so there is another 10% or so price fall to filter through in April (including thermal coal). I continue to think that the balance of these price and volume outcomes will be an ongoing trade deficit.

Comments

    • No doubt other factors play a part, labour costs being one. But as I said, coal services firms have seen cancelled orders for the past several months, before the industrial action began. The price correction in the past six months has been big.

      • OK, thanks. There maybe effects of Indonesian, Mongolian mines coming on line as well. One other thing I saw a big drop in Indian Iron Ore exports reported a few days ago.

    • Different China Fanboy

      this blokes comments on forecast demand pretty much mirror those made by Ashby last month (that were misreported as bearish).

    • Tassie TomMEMBER

      Other factors.

      Nowrich Park has for years been a low profit mine with high costs of keeping it going. The easy coal has run out, and the best way to keep mining is to go underground, which is a lot of hard work.

      BMA would be much better off focusing of nearby Saraji and Peak Downs, which are big, high-profit, low-cost open cut mines with heaps of quality coal.

      I don’t think many of the workers from Nowrich Park will make it to the long-term unemployed list.

  1. So, are the Chinese buying coking coal from somewhere else, or have they developed a steelmaking process that doesn’t require coking coal?

    As I understood it, there are plenty of alternative ore suppliers around, but supply of high quality coking coal is restricted, with Australian being “blessed” with plentiful supplies.

    Doesn’t make sense … unless the Chinese are stockpiling ore again.

      • Mining BoganMEMBER

        Flooding in Brazil and supply difficulties have anything to do with spot prices of ore up?

      • Different China Fanboy

        it looks like you guys have access to a bloomberg terminal. Can you post chinese imports of iron ore and coking coal?

    • Just what I was about to say. Last time I looked, steelmaking required coking coal (which is why it’s called “metalurgical coal”) so I have to wonder how long the two can diverge for.

    • “Doesn’t make sense” – perhaps news of China’s demise has been greatly exaggerated! Plenty of fuel left in the tank – it is a shame that only 2% of jobs come directly from mining though.

      • Yes – a slow down for a while, but then onward and upwards – when a hand full of men & women can directly meddle/influence the market, they will and that meddling is called GROWTH at whatever cost. The Lorax is correct, we are blessed with what China wants & needs.

      • Have seen estimates (ML) of continued softness until end Q2, gradually regaining. Stockpiles high, China domestic production up 20%+, price sensitivity, slight oversupply, economy cooling. However, electricity production up 6.7% Jan/Feb compared last year, rebound in coal fired power generation Feb. But yeah, hopefully onwards and upwards.

      • When I used blessed (above) it was quoted. In my view we are more cursed than blessed, as in the resources curse.

        But yeah, hopefully onwards and upwards.

        As we learned recently, inflation still hasn’t been tamed, so I doubt we’ll see any further monetary easing in the near future. Besides, as Pettis keeps saying China has to rebalance, they can do it voluntarily or have it forced on them. Either way, it will happen.

      • I don’t know much about most things but the chart shows that – as I would expect – iron ore and coking coal prices have moved pretty much in proportion with one another since the chart begins in 2005. Then suddenly, they diverge significantly for the first time. If the demand for flour keeps rising while the demand for sugar starts falling, it deosn’t seem logical that I could be still baking more and more cakes.

        So it’s interesting to wonder why the divergence, how long it might last and which way the two will head when they resume their dance.

      • This entire thread is so disingenuous –

        http://www.indexmundi.com/commodities/?commodity=iron-ore

        There has been no recovery from the crash – the price dropped almost 30% – its like the US recovery, when something falls from the roof the fact that it lifts its batter head is seen as a recovery – a recovery is when it gets back on the roof.

        Here’s the deal – the Chinese government are shutting down Steel plants that are inefficient environmentally – the reason there is no demand in coal is because the steel plants have all run their inventory down as demand has fallen off a cliff – they are restocking. Unless there is a massive increase in spending in the next three months this will be a dead cat.

        My money is on the fact that a lot of the internal disputes have been resolved regarding the leadership dispute – and there is speculation that things will pick up again with a more economically aggressive leadership.

        The only other alternative is that China is responding to Russias massive troop build up on the southern borders in preparation for war – maybe, big call, but could be.

        Hope not. Would be good for the miners, but bad for the rest of us – invaded in about two seconds.

      • Different China Fanboy

        Referring to the price change as a crash is semantics. the price dropped 30% yes — but from exponential highs. current prices are approx 3 times cash cost — its a license to print money.

        most of us would associate “crash” with losses or circumstances where punters are under water e.g. US housing crash.

        As for no recovery — eye of the beholder I guess but world demand keeps growing.

      • I kinda agree with DCF.

        current prices are approx 3 times cash cost — its a license to print money.

        ..and a licence for the Feds to tax windfall profits ? :p

  2. The company (or the AFR) has blamed unions for the closure

    Not the company, but certainly the AFR, MorningStar’s Taylor and our own 3d1k.

    “The impact of last year’s floods, combined with lower coal prices and high costs, has resulted in an operation that is not currently viable,” BMA asset president Stephen Dumble said. “While recent industrial action has had an impact on production, the mine has been unprofitable for some months.”

    (3d1k, don’t bother responding – lets not make the moderator’s life difficult)

    • A couple of months back BHP requested cessation of strike activity at Norwich citing ongoing profitability problems. Union officials, intent pursuing personal power and profile for upcoming internal union election platforms have relentlessly pursued BHP with a series of rolling industrial actions over the most minor of issues.

      Union officials were warned of the financial situation of that particular mine but continued to pursue a path of destruction.

      Do the unions have some culpability. Damn right they do – on this and other projects. They have forgotten they are in the resources sector, a sector subject to commodity price shifts which can rapidly render a project no longer viable. They think they are in the land of the golden goose.

      A wake-up call for the unions.

      HnH chooses to omit this narrative, apparently not understanding that the closure of this mine (already forewarned as being borderline profitable) in the face of persistent and petty union action at BMA sites is also strong message to all involved.

      Time for a wake up call for all.

      • Different China Fanboy

        dangerous tactics for these union bosses because there are no safe labor seats in Qld for them to be parachuted into as a fall back position. 🙂

      • lol. Do they care? As we have seen, being a Union Maestro can be a very lucrative career in its own right…

      • The RH Paul Howe might have to be elected in SA then? Not sure where he’s from, but I’d be amazed if he not on the next ticket somewhere.

      • So you think the Dysart closure will be an isolated incident 3d1k? (unless the unions don’t take the hint)

        It doesn’t make much sense for BHP to be closing coal mines if it foresees prices soon rebounding to rejoin iron ore’s upward trajectory.

      • If price and demand holds (or improves), unions get back to looking after the interests of the workers (ie remaining employed) then there is reasonable possibility that this will be the only imminent closure.

        Indeed, given the above outcomes and BMA and the workers operating in unison toward the best outcome, a return to profitability, there is a reasonable possibility the this closure will not be permanent.

        To take this on face value as the above article does is to misread the dynamics at play. 🙂

      • Oh dear..

        Do the unions have some culpability.

        Some culpability, YES. I am not arguing that at all. But to put the entire blame at the feet of unions and to demonise/vilify the union movement and its leaders, is rather disingenuous.

        A good example of vilification from you, 3d1k, was on pegging the currency – when that idea comes out of the Howes mouth, it is vile and extreme socialism. When Flawse suggests pegging the currency, it is a “cogent and well argued” view, worthy of nothing but praise. Hypocrisy much, 3d1k?

        (Thanks for ignoring my request, this is my last post on this thread)

      • Mate, I ignore all you say. 🙂

        [For the record, where did I say that Howse advocating pegging of the currency was “vile and extreme socialism”. Your continued warping of the statements of others to suit your view needs amendment. Work on it please.]

  3. Royale With Cheese

    One potential reaon for the coking coal/iron ore disconnect is the increasing coal production coming out of Mongolia straight into China. The coking coal and iron ore price indices are for the seaborne export market, quoted on an FOB basis. Mongolian coking coal sold to China sucks demand out of this export market. I’m not aware of corresponding non-seaborne iron ore being exported.

    This presentation from South Gobi (a Canadian-listed Mongolian coal miner) has some details on Mongolian coking coal production:

    http://www.southgobi.com/i/pdf/sgq-presentation.pdf

    I expect that this explains only a part of the disconnect but it is an important factor for the future nonetheless, particularly when Tavan Tolgoi comes into production.

  4. “The twin pillars of Australia’s boom, iron ore and coking coal”

    Greek mythology if it was written by JK Rowling?

    Major Australian exports, 2010-11 (A$m)
    Iron ore & concentrates 58,382
    Coal 43,717
    http://www.dfat.gov.au/geo/fs/aust.pdf

    Whats Australia’s GDP? $1.4T?

    Based on those DFAT export numbers Iron and Coal export numbers equate to 7% of Australia’s GDP.

    If they are twin pillars, does Australia resemble something like The Parthenon except the other 26 pillars that support the economy are draped with Harry’s invisibility cloak and only the ‘twins’ are exposed?