Australia: Surging coal prices to boost economic growth, prop up interest rates

Prices for Australia's second-biggest export earner have been on a tear since July and are now finally feeding into contracts between miners and their customers.

By: Reuters | Sydney | Published:October 12, 2016 11:28 am

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Surging coal prices are set to shower Australia in cash, erase its trade deficit, jumpstart nominal economic growth and, perhaps, mark the end of a five-year campaign of interest rate cuts by the central bank. Prices for Australia’s second-biggest export earner have been on a tear since July and are now finally feeding into contracts between miners and their customers.

Reports this week suggest Japanese steel makers have agreed to double the price of coking coal for the fourth quarter to $200 a tonne. That would be a transformation from the first quarter of the year when the mineral fetched just $81.

In just the past three months spot prices for thermal coal have climbed 40 percent, while coking coal is up 130 percent. That is a boon for Australia where coal accounts for a tenth of exports at around A$2.8 billion ($2.12 billion) every month.

“The price spike, if sustained, could potentially be large enough to wipe out the country’s overall trade deficit by itself,” said George Tharenou, an economist at UBS. The trade shortfall stood at A$2 billion in August when the surge in prices had yet to be fully felt.

That would be heaven sent for a mining sector that was considered down and out just a few months ago. Just this week, Glencore said it would hire more than 200 workers at its Collinsville coal mine amid resurgent Asian demand. The desperately needed boost to profits should shore up investment, dividends and wages, while gifting the Coalition government with a welcome tax windfall.

And it is not just coal. Prices for the country’s single biggest export earner, iron ore, currently sit at $56.60 a tonne compared to a trough last December of $37. Asian spot prices for liquefied natural gas, another major earner, are up over 50 percent from lows touched in April.

Australia has more than $180 billion of LNG projects coming online which would make it the world’s top exporter. Analysts at ANZ estimate the rise in coal alone could lift annual growth in nominal gross domestic product from the current recession-like 3 percent to a far healthier 5 percent.

All of which is likely what Reserve Bank of Australia (RBA) Governor Philip Lowe had in mind last month when he foreshadowed a lasting turnaround in Australia’s terms of trade after a half decade of decline. And it is a major reason why UBS thinks the RBA is done cutting rates after easing to a record low of 1.5 percent in August.

“There’s going to be a noticeable improvement in the terms of trade and nominal GDP growth,” said Tharenou. “The economy simply doesn’t need more stimulus.”