coal prices triple

Trade to surge on coal dealBy David Uren and Andrew Trounson
April 08, 2008 01:13am
Article from: Font size: + -
Send this article: Print Email

Coal prices expected to triple
BHP close to a deal with South Korea
Standoff with China as negotiations continue

AUSTRALIAN coal exporters are expected to win a tripling in prices this year following an unprecedented standoff with China that sent the trade deficit plunging to a record $3.3 billion in February.

Export revenue dropped by $800million in the month as shipments of coal and iron ore were held up by floods, cyclones and the negotiating tactics of Australian mining companies and the Chinese Government over new contracts for the two key ingredients needed in steelmaking.

The trade deficit was a 30 per cent dive from the previous month.

"It is extraordinary to see such a large trade deficit in the middle of the largest resources boom in more than 50 years," said ABN Amro chief economist Kieran Davies.

The mining companies appear set to triumph, with BHP Billiton close to a deal with South Korean steel giant Posco for a price of $US300 ($325) a tonne for coking coal in 2008-09, up from $US97 in 2007-08.

Negotiations with the Chinese on iron ore sales are likely to lead to a much bigger increase than the 65 per cent won by BHP and Rio Tinto's Brazilian rivals. Iron ore prices could rise by between 71 and 85 per cent for the year that started on April 1.

Thermal coal, which is used for power stations rather than steel-making, is expected to more than double from its existing level of $US56 a tonne.

The impact of the coking and thermal coal price rises alone would boost Australia's annual 2008-09 export revenue by $35 billion to $56 billion.

News of the breakthrough with Posco, the third-biggest steelmaker in Asia, helped drive shares in BHP and Rio sharply higher. However, the wider stock market was held back by heavy falls among the banks after ANZ increased its provisions for bad debts to almost $1 billion.

Shares in ANZ, which is exposed to troubled companies such as the Centro property group and collapsed stockbroker Opes Prime, slumped 6.6 per cent as BHP rose 5.1 per cent and Rio jumped 4.6 per cent.

Negotiations between BHP, Rio and Chinese state-owned steelmakers on iron ore and coal prices have been continuing for months amid reports of corporate gamesmanship on both sides.

Several shipments of Australian iron ore failed to get import permits from China because, it was claimed, they were priced high and China wanted to send a message this was not acceptable.

It was also suggested there was "strategic" slowing of the shipping schedule by Australian mining companies to put added pressure on the spot market for iron ore.

"We think there was likely strategic behaviour on both sides ahead of the annual contract renewals," Deutsche Bank chief economist Tony Meer said.

The severe floods in Queensland in January and February also contributed, with spot prices for coking coal reaching $US400 a tonne as desperate steel mills tried to secure supplies.

According to the trade figures, exports of iron ore dived by 27 per cent in February, while shipments of coal were down by 21 per cent.

BHP has yet to confirm the price increases, but Posco has confirmed increases in the hard coking coal price of 205-215 per cent. The European steel giant Arcelor Mittal is rumoured to have agreed a contract price of $US305 a tonne with BHP.

Mr Meer said the effect of the increases would be to lift Australia's terms of trade - the level of export prices relative to import prices - by about 17 per cent this year. As with previous increases in the terms of trade, there will be a big boost to budget revenue, with the Government collecting almost a third of the additional sales revenue in company tax.

The price gains may push the value of the Australian dollar from the current US92.4c to parity with the US dollar, increasing the pressure on manufacturing and service industries such as tourism and education, which depend on export revenue.

The rises will also increase the gap in performance between the resource-rich states and the southeast states.

Economists expect there will be a dramatic improvement in Australia's trade balance over the year ahead as the new prices take effect and mining companies start commissioning the massive expansion projects they have been building for the past three years.

Farm exports, which rose just 1per cent in February, are expected to continue their recovery from drought, with high prices for commodities such as wheat.

"The trade deficit, while a shocker, should show some improvement this year, given that China is soon likely to pay significantly more for coal and iron ore," Mr Davies said.

However, the poor trade performance is likely to push Australia's current account deficit, which measures trade, interest and dividend payments, out to a record 7.5 per cent of GDP.

Mr Davies said the last time Australia ran a deficit this size was after the Korean War wool boom went bust in the early 1950s.