The AUSTRALIAN 29 Jan 2008FINANCIAL markets may be sweating on a...

The AUSTRALIAN 29 Jan 2008

FINANCIAL markets may be sweating on a US recession, but prices for Australia's bulk mineral exports, coal and iron ore, are soaring as a spate of supply disruptions reveals just how tight markets are.

Women pull a cart filled with coal in Wuhan, in central China's Hubei province, after supplies were disrupted. Picture: AFP
Floods in Queensland and power cuts to mines in South Africa have reduced supplies from key coal exporters, while China is cutting coal exports to manage production for its own soaring power demand.

There were reports last week that ships seeking to load coal had been turned back from China's largest port, Qinhuangdao, after heavy snow and rain sent power consumption soaring and hampered coal transport.

In South Africa, power cuts to industry could last up to four weeks, as utility Eskom battles soaring demand and tight coal supplies as it is forced to compete with strong export markets for local coal.

The power crisis forced BHP Billiton to halt mining at its South African manganese operations.

But while temporary supply shocks are sending spot coal prices soaring, the outlook for coal and iron ore demand is strong.

Internal demand for construction and power in China and other developing countries is set to drive rising demand for iron ore and coking coal for use in steel making, and for thermal coal in power generation.

Westpac senior international economist Huw McKay said the balance sheets of emerging economies were at their strongest since at least 1980.

And while slowing growth in the US and Europe would weigh on demand for emerging economy exports, China's growth was being driven primarily by internal demand.

"People think China is export-dependent, but it clearly isn't," Mr McKay told The Australian.

"I don't see much threat to China's domestic demand, which is more commodity-intensive than the export sector."

He said that among commodities, bulk mineral markets were leveraged to buoyant emerging economies while base metals were more exposed to slowing developed economies. Developing world demand is set to underpin steep hikes in annual coal and iron ore contract prices this year, with tight spot markets providing no relief to Chinese and Japanese price negotiators.

Japanese steel companies are due to start second-round iron ore price negotiations this week with major suppliers Rio Tinto, BHP Billiton and Vale of Brazil.

And there are strengthening market expectations that prices could rise by 50 per cent or more.

Soaring spot coal prices are also likely to put pressure on Asian steel mills and power utilities to agree to steep price hikes.

"Customers are growing increasingly nervous about waiting for lower spot prices before settling 2008 term contracts," ANZ's chief commodity strategist Mark Pervan said last week.

According to Macquarie Equities, thermal (power station) coal miners are now seeking close to $US100 a tonne for spot cargoes, compared with the current contract price of just $US55/tonne.

There is a similar story in coking coal, used in steel making, with miners now offering cargoes at $US210/tonne compared with a contract price of $US98/tonne.

Two weeks ago Macquarie was forecasting the contract thermal coal price at $US88/tonne, and predicted the coking coal price would be $US150/tonne.