Commodities | Dec 14 2009
By Andrew Nelson
China’s preliminary November trade data are painting a supportive picture for Australian iron ore and coal exports. Iron ore import flows are back to the long-term growth trend, while China’s coal exports were down 30% month on month and are down 47% year on year, with export tonnage being diverted into China’s strengthening domestic market.
All up, China’s iron ore imports were at 51Mt in November, up 12% from October and 57% higher on a year on year basis. The India-China spot price lifted 30% through November to US$105/tcfr. However, stocks at port have of late increased to around 68mt from lows in late November of 65mt . Crude steel production is also moderating, with November crude steel production down 10% on October.
That said, spot prices have stabilised at fairly high levels of US$105/t to US$110/t, although analysts from Citi believe much of the November price increase was driven by increasing freight rates. Yet domestic Chinese prices are increasing, up 10% over November, and Citi thinks that if were this to continue then domestic prices would become increasingly supportive of stronger fundamentals within the Chinese market.
At the same time, China’s coal exports, both coking and thermal, fell to just 1.43Mt. Analysis by Deutsche Bank points to the potential for China to move from being a net coal exporter to a 150Mt importer by 2011, as demand growth starts to exceed supply. The broker notes the closure of small mines in China also contributed to the supply short fall, while removing a big chunk of the low-cost part of the market.
As such, the broker sees a good chance for Chinese domestic prices rising 11% in 2010, which in turn would be supportive of existing seaborne spot prices, thus creating potential upside to the broker’s current projected prices. The broker points out that thermal coal spot prices have already increased by 30% since April and spot hard coking prices have seen a similar rise.
This means Chinese imports of 100Mt this year have now become quite significant given they represent a big chunk of the 850mtpa of seaborne trade as a whole. Deutsche believes this trend makes Chinese domestic prices a de facto regional price setter and on Deutsche’s analysis, current spot prices are quite supportive of domestic delivered prices in China.
Analysts from Citi also believe that China’s sharply improved net import position is a key positive for coal market. The broker points out that coal stocks at power stations have fallen around 20% through November and as result, domestic prices are moving sharply higher. Citi thinks China’s early winter, plus sharply higher domestic coal prices and increasing coastal freight costs, which are up about 100% over the past month, remain supportive of high import levels and thus strong seaborne prices.
These easing freight costs should almost certainly be received as a welcomed boon Australian exporters, as it will enable them to remain competitive in Asian markets. That said, Deutsche notes the trend will also help South African exporters, with there already being some talk of Asian buyers noting the price advantages currently on offer by South African sources.
Still, Australia’s bulks export volumes are at, or at least near to, record-levels, as trade with traditional customers continues to recover. Exports to China, Japan and Taiwan are all on the increase. Analysts from UBS note that strong trade flows and generally rising spot prices in iron ore and coal imply upside risk not only to the broker’s JFY10 price forecasts for iron ore, but are also supportive for coking coal.
Looking at Australia’s bulk performances in October, coking coal exports were down 11.6% from the prior month to 7.8Mt, but the number is still higher on a year on year basis relative to respective base numbers, remaining at elevated levels and above monthly averages for both 2009 and 2008, notes UBS.
Thermal coal exports for October were up 16.1% on September and up 10.1% year on year, also significantly above monthly averages for both 2008 and 2009. UBS notes that while thermal coal exports declined to Taiwan, they almost doubled to China and rose significantly to both Japan and South Korea.
The last piece in the puzzle is iron ore exports, which are also sitting at near record-highs. For October, iron ore exports were up 1.5% on the prior month at 32.6Mt, with exports to China, Japan and Taiwan all higher.
