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Are we facing a peak demand scenario for Australian coal and iron ore?

June 10th, 2009 · Greg Atkinson · 32 Comments

Almost everyday we hear about how commodities exports have helped protect Australia (so far) from the worst of the global economic crisis. However although Australian exports have held up well prices and volumes have still fallen for many mining products but almost nobody seems to be asking the question, what will happen if demand and prices for some key Australian commodities never returns to the levels reached in 2008?

Sometimes I wonder if many Australian financial journalists and market commentators realise that the world is a fairly big place and that Australia is not the only nation that digs stuff out of the ground. In addition many seem blissfully unaware that some nations realise that they rely on Australia too much for everything from LNG to Uranium and are actively seeking alternative sources of supply or ways to reduce demand.

We also have the Government and Treasury confident that the demand for resources will pick-up again and in fact they are counting on this to help pay down Australia’s debt in the years to come. But is it possible that demand for some of our key mining exports has already peaked and that prices will remain below recent highs for many years to come?

GaveKal Research have a very talented oil market specialist named Ahmad Abdallah who has written for some time now about Peak Demand which is a scenario where oil starts to enter not only a long term decline in terms of supply, but also in terms of demand. Many people often raise their eyebrows when a long term fall in oil demand is mentioned but consider this, Japan’s oil use peaked back in the 1970’s and apart from some blimps along the way has managed to keep below 1970’s levels ever since.

Demand reduction for commodities such as oil, coal and even iron ore can be achieved via improved technology, product substitution or simply just because of reduced economic activity. In Japan’s case smaller more fuel efficient vehicles combined with an excellent mass transit system have helped reduce the need for imported oil.

So you may ask how would a nation reduce it’s demand for coal? Well many G20 countries are already looking at non-fossil fuel sources of energy as a way to reduce their CO2 emissions and although Australia seems all starry eyed about so called “Clean Coal”, most large energy consuming nations are pushing ahead with plans to build more nuclear power plants and carry out capacity upgrades. (see: Plans for New Reactors Worldwide )

In addition billions of dollars are being spent worldwide on new facilities to generate energy from the sun, wind, water, tides, garbage and even the earth’s own trapped heat. (geothermal) So isn’t it possible that coal in any form will become a less desirable source of energy as the 21st century progresses? Then of course there will be further improvements in energy efficiency and this will reduce (to some extent) the growing demand for energy across the world anyway.

Iron Ore on the other hand has no known substitutes and is likely to be very much in demand for many years ahead. However this does not necessarily mean that the demand for Australian iron ore will continue to rise and that Australian miners will be able to set prices again in the future. Africa and Russia for example are also ramping up production and in the years ahead countries like Brazil and Australia might find their iron ore operations facing much stiffer competition.

In 2008, iron, iron ore and steel plus coal made up 36% of Australia’s total merchandise exports and altogether mining exports contributed 61%. If we compare this to say Canada (another resource rich country similar to Australia) we find their mining exports only contributed 35% but overall they are a bigger exporter than Australia.

How can this be you may ask? Simply because Canada is also a significant exporter of manufactured products which contributed 31% of the value of their exports compared to a paltry 7% for Australia. (source: Australia and Canada – Comparing Notes on Recent Experiences) I suggest readers have a look at the above speech by Glenn Stevens from the RBA, it is an interesting read.

Because Canada has a more diversified economy this has meant that so far it has suffered more than Australia as a result of the global economic downturn. However this also means that Canada is better positioned to deal with any long term softness in commodities prices. In Australia mining exports have delivered the good times, but our reliance on them could also cause us a lot of pain in the future.

Imagine how Australia’s trade figures would look in the years ahead if demand for Australian iron ore and coal never recovered to 2008 levels and prices remained flat. This would slash billions off the value of our exports and it is quite possible that other exports may not be able to make up for this drop.

Remember we are not the only supplier of commodities. Japan aims to source Uranium from Russia and is actively seeking to reduce it’s dependence on Australia coal by building a number of new generation nuclear power plants. China has increased iron ore imports from Russia and also has plans to ramp up energy generation via nuclear power.

There are large deposits of iron ore and other commodities in Africa and even within Asia there are mining operations that have yet to reach their full potential. So is it wise for Australia to be so complacent and believe that we are somehow the undisputed mining champions of the world?

It may appear inconceivable to many that Australia’s strong mining sector could be challenged in the future and even face a period of decline. But 20 years ago how many Americans thought that their car industry would end up on it’s knees? Didn’t they once think that their auto workers were the most productive in the world and that the United States would continue to dominate the car market across the world….or at least domestically!

Of course I could be very wrong; the Japanese and Chinese may forgive Australian miners for charging over the top prices during the boom, things could all get back to normal and demand and prices for Australian commodities surge back up again. But what if I am right?

Where is Australia’s Plan B and I wonder if the Treasury modelled any scenarios where commodities exports remained weak for many years and if so, what impact will this have in terms of future Federal Budgets and in reducing Australia’s debt? Do we as a nation have any plans to deal with a world where our miners may no longer be in such a dominant position?


32 responses so far ↓

  • 1 Scott // Jun 12, 2009 at 1:07 pm

    Great article Greg. This is something that is not often talked about but the potential negative impact would be enormous. I too wonder what goes on within the treasury in terms of analysing our potential medium to long term economic situation.

  • 2 Greg Atkinson // Jun 12, 2009 at 4:42 pm

    Hi Scott. thanks for the feedback. I worry about the sort of forecasts, planning etc. churned out by the Treasury as I would imagine “Group Think” would be the order of the day. I cannot imagine you would have much of a career there if you challenged the consensus view of where the economy was going, or where the Government said the economy was going!

  • 3 Pete // Jun 15, 2009 at 10:06 pm

    Where is Australia’s Plan B and I wonder if the Treasury modelled any scenarios where commodities exports remained weak for many years and if so, what impact will this have in terms of future Federal Budgets and in reducing Australia’s debt?

    There is no Plan B…

    Although I expect that if we get to that stage, the Gov. will have to start funding itself (printing money). I guess we’ll see

  • 4 Greg Atkinson // Aug 23, 2009 at 9:15 am

    What I don’t quite get is that Rio, BHP etc are cautious about the outlook for commodities and yet the RBA/Treasury are expecting Australian to bounce back from 2010. It seems the Government is counting a lot on demand from China holding up but maybe the miners can already see weakness in demand?

  • 5 Greg Atkinson // Oct 29, 2009 at 12:24 pm

    Interesting article in The Australian today: China may seek thermal coal elsewhere if Australian export costs rise, says report

    As I have been saying for a long time, Australia is not the only nation that digs stuff up.

  • 6 Greg Atkinson // May 27, 2010 at 2:24 pm

    Interesting comments from Tim Flannery reported today online at WA Business News:

    ” Prof Flannery also had an alarming prognosis for coal, which is the backbone of Australia’s economy but is a heavy-emitting source of energy.

    The great hope for coal’s future – the burying of carbon emissions underground, called carbon capture and storage – is not working, Prof Flannery said.

    The technology was ready but interest had flagged and large-scale CCS plants were not being built.

    Prof Flannery said the world had to get rid of conventional coal-fired power stations within 20 years to avoid dangerous warming.

    This would be big news for Australia, which has massive coal reserves.

    Three-quarters of the country’s electricity comes from coal. Coal is Australia’s biggest export item, worth $46 billion in 2008. “

    Seems my peak demand view might not be crazy after all hey? 🙂

  • 7 Biker Pete // May 27, 2010 at 2:31 pm

    Nor my notes over a year ago re China’s worldwide thorium quest.
    🙂

    DRA has become decidely bullish on China recently. It’s quite interesting to note their comments on the massive expansion of rail links in China.

  • 8 Greg Atkinson // Jun 19, 2010 at 8:41 am

    Well it seems even the Australia media is starting to write about Mongolia. This article in The Australian makes interesting reading: Leighton takes train to Mongolia’s mining boom

    Of particluar interest to me was this passage:

    “…the listed Energy Resources LLC, is selling high-quality coking coal to the neighbouring Chinese at $US60 per tonne compared to Australian miners BHP Billiton and Rio Tinto, who are charging more than double the price.”

    I wonder how much per tonne the Treasury reckons Australia will be getting for coking coal during what Ken Henry believes will be a decade long mining boom?

  • 9 Ned S // Jun 19, 2010 at 8:24 pm

    “LLC, is selling high-quality coking coal to the neighbouring Chinese at $US60 per tonne compared to Australian miners BHP Billiton and Rio Tinto, who are charging more than double the price” – Or as Kev Rudd said to Wayne after they took a quick glance back through the fine print in last month’s budget – “What did you say Plan B was again?” 🙂

    On another note, the good news in here for Japan (and Germany even), might seem to be that they’ve taken most of their whack in regard to the following? :

    http://www.smh.com.au/business/population-fall-poses-immense-new-challenges-20100618-yms8.html

  • 10 Greg Atkinson // Jun 20, 2010 at 11:21 am

    Ned as you know, I reckon we don’t have a Plan B for the Australian economy. It a resources boom or nothing.

    As for the population issue, well I don’t think it is such a bad thing if the world’s population stabilizes or even falls back a touch. We have to get past the 18th century thinking of “populate or perish” and learn to live within our means.

    The population in Japan will level out at some point and by then I would imagine robots will be providing a lot more labor than they do now. This isn’t in the realm of science fiction by the way, they are already around 300,000 or more working robots in Japan now. See: http://www.asahi.com/english/TKY201003260322.html

  • 11 Greg Atkinson // May 24, 2012 at 6:06 am

    According to a report in the Nikkei today it seems the moment of peak demand may be upon us. Quoting from the report:

    “Japanese trading houses and major steelmakers are scrambling to develop coking coal supply channels in Africa and Russia, as prices on mainstay shipments from Australia continue to rise in the wake of strikes and flooding there.”

    Source: Japanese Firms Aim To Lower Dependance On Aussie Coking Coal

  • 12 BP // May 24, 2012 at 9:25 am

    Well, DRA and MMA are still plugging natural gas as the solution; and my understanding is that Japan is increasing their Australian gas imports.

    Your mid-2009 comments on Japan’s nuclear future must surely have changed, post-Fukushima, Greg? (I know mine have.)
    Was this a turning point for Japan?

    Personally, I think there’s more drama happening in Europe than in China… and while I accept that events there will affect China, it’s my view that China will likely ride out a break-up of the EEC, should that happen. We _could_ ask if any such break-up might not actually _benefit_ Chinese export trade(?)

  • 13 BP // May 24, 2012 at 11:24 am

    Twiggy’s view: http://www.perthnow.com.au/business/markets/eurozone-crisis-is-a-beat-up-says-wa-mining-tycoon-andrew-forrest/comments-fn7kjy2l-1226365345566

  • 14 Greg Atkinson // May 24, 2012 at 5:31 pm

    Well let’s put it this way BP..who is China’s largest trade partner? Europe. Is the PMI in China plus a whole heap of other indicators suggesting the Chinese economy is slowing? Yes. Is Twiggy a touch worried? I think so.

    In summary – I don’t think China will benefit from any further crisis in Europe.

    As for LNG imports..actually the Japanese buy a stake in the LNG projects so effectively they own a share of what they import. Also Australia is not the only source of LNG although according to the media in Australia it seems to be.

    My views on nuclear power have not changed. Nuclear power needs to be part of the energy mix.

  • 15 BP // May 24, 2012 at 6:30 pm

    I recall an immense loss of Australian trade with the UK when it aligned itself with Europe in the early 70s. If nations exit the EEC, the possibility exists that China will increase its exports to those countries. How likely is it that the EEC bloc will extend any credit whatsoever to countries which exit?

    I see Rio is pushing ahead with expansion. Twiggy a touch worried? I doubt it. He’s from a line of exceptional West Aussies who forged our history. Without optimism, we might as well pack up and leave our riches in the ground. 😀

    Meanwhile our sixth largest trading partner, India, plans to double its trade with Australia in the remainder of this decade.

    I guess that share traders have to continually factor in the worst-case scenario. If you look at the Big Picture, the ASX is 40% off its high today, but Australian property has remained comparatively unaffected… other than rapidly rising rents in
    many locations.

  • 16 Lachlan // May 25, 2012 at 11:44 am

    Twiggy makes sense to me and I agree with his emphasis on China. Here are some other quotes he has made addressing the issue further…

    Mr Forrest says Australia is not engaging with China “anywhere near enough”, citing a lack of senior ministerial representation at what Boao Forum for Asia meetings.

    “I see other countries with their senior ministers and prime ministers out there selling their own countries and I look around and say where is my country,” Mr Forrest told reporters after speaking at a business lunch in Sydney on Tuesday.

    “Now people don’t need our legal services, they can get them elsewhere.

    “They don’t need our investment banking services, they can get them elsewhere.

    “They don’t need our resources, our energy. They can get them elsewhere, so let’s not take it for granted,” Mr Forrest said.

    Source http://www.perthnow.com.au/business/local-business/australia-taking-china-for-granted-andrew-forrest/story-e6frg2s3-1226330681528

  • 17 Lachlan // May 25, 2012 at 3:41 pm

    I go along with the argument the commodity mix China pays us for will change as their economic situation develops toward consumption somewhat.

  • 18 Greg Atkinson // May 27, 2012 at 8:48 am

    The big Asian economies (China, Japan, India) will source their oil, gas, coal etc via means which best suits them. Australia is just a supplier…a stable one in terms of geopolitical risks but an expensive one and not that reliable as recent industrial action has shown.

    Twiggy is right to be worried.

    This is worth reading as well: Mongolia Rivals Australia to Supply China’s Resources Demand

  • 19 BP // May 27, 2012 at 12:41 pm

    Greg: “Twiggy is right to be worried.”

    Must have missed something. Where’s the news report stating Twiggy is worried? And about what, specifically?
    Yes, I know he objects to mining taxes… .

  • 20 Lachlan // May 27, 2012 at 1:35 pm

    Swan…
    http://www.youtube.com/watch?v=hhumnZuFnHs&feature=related

    Swan seems disgusted that anyone bar the state should control the means of production. As per socialism.
    But fascism is where it’s at, get with the times Swanny 😉

  • 21 Greg Atkinson // May 30, 2012 at 6:17 am

    BP perhaps you might want to look at the FMG 2 year chart and the commodities futures which I suspect would not put a grin on Twiggy’s face.

    Even the RBA is now talking about a slowdown in China so eventually the ultra-China bulls in Australia, who first scoffed at even the possibility of a Chinese economic slowdown, will come around and eventually admit that the latest miracle economy is losing some if its mojo. (despite the best efforts of the authorities to keep massaging the numbers)

  • 22 BP // May 30, 2012 at 10:45 am

    You’ll have to forgive my optimism, Greg. Every day some new project is announced in the West:

    http://www.perthnow.com.au/business/phoenix-john-holland-team-up-to-build-400m-waste-to-energy-plant-in-kwinana/story-e6frg2r3-1226372953553

    We’re having to import thousands of overseas workers to help us manage scores of new projects. It seems those in the eastern states don’t want very highly-paid jobs…

  • 23 Greg Atkinson // May 31, 2012 at 1:15 pm

    Well it’s only taken a few years but now even the Treasury is talking about a post-golden mining boom era. Too bad policy makers weren’t talking like this back when I was ranting on about the same thing since they could have started preparing for the downturn before it was on top of them.

    From The Austrlaian today: “TREASURY boss Martin Parkinson says he has sympathy for mining companies, because the peak of the resources boom has probably passed and the “golden bit” is over.”

    Source: Treasury says the mining boom’s ‘golden bit’ is over: Treasury

    I read elsewhere that Treasury is also looking at their forecast models since they have finally realised that these have been about as accurate as the Amazing Criswell’s predictions.

  • 24 BP // May 31, 2012 at 2:04 pm

    Funny how we (all) extract from these reports what we want to read:

    “We and the Reserve Bank have had a look at past investment booms, and as a share of the economy, it is about to be more than double the size of any previous one – and the data goes back to the 1860s and the gold rush,” he said.

    Dr Gruen said investment proposals stand at some $500 billion, with a big increase already seen this financial year and another big increase expected in the next financial year.”

    Parkinson is softening us up for a 0.5% interest rate cut on Tuesday, no doubt…. 😉

  • 25 Greg Atkinson // May 31, 2012 at 3:40 pm

    No BP, I posted the whole link. Anyway cycles don’t come to a complete stop and I don’t recall anyone saying that inward investment in the mining sector would grind to a halt. Investment proposals by the way are just that, proposals. It isn’t money in the bank and a lot of that will head straight offshore again.

    Buy hey, I recall people scoffing when I even suggested a slowdown in China was possible so I am not surprised that people don’t want to let go of Ken Henry’s “Golden Age”.

  • 26 Stillgotshoeson // May 31, 2012 at 4:38 pm

    Greg, I think what BP is saying is that people can read the same article and come away with a different view point on what the article says.
    The Glass 1/2 full, 1/2 empty thing.

    I never scoffed at your viewpoint of a China slowdown… 🙂

    Even if, and it is a big if, the majority of these proposals go ahead, I agree large amounts of monies will go offshore.

    Even with JG and WS redistribution of wealth policies the economic benefit will be limited whilst the rest of the economy continues to slide into recession.

    Those industries only employ a small number of people (relative to population) and relative industries not much more again, and with the commodity prices in decline the MRRT will unlikely give the returns that the government were hoping/budgeting on getting over the next few years.

    The company I work for has tendered for jobs in WA and Queensland over the last couple of years. Some we have got, many we have lost out on. We have been asked to tender again for a Gladstone job (4th time this will be). Boss has sent a reply asking straight up what they are looking for as we have tendered 3 times already and to save wasting our time and yours, tell us what you want and we will let you know if we can do it.

    I am going to be based in Bathurst from next year. Having 2 divisions, WA, SA, and NT (west) and QLD, NSW, VIC and TAS (east) Work has picked up and we are flat out. We have won back contracts we lost to cheaper companies but their service has been woeful and they have called us back.

  • 27 BP // May 31, 2012 at 6:07 pm

    And I have never scoffed at your viewpoint of a sharemarket meltdown… 😀

  • 28 Greg Atkinson // May 31, 2012 at 9:53 pm

    @BP I don’t recall ever suggesting the market would meltdown even during 2008. My posts are all still available under my name and not an alias.

    @Stillgotshoeson The mining sector will keep on bringing in large sums of money for decades to come. But commodities prices and demand move in cycles which was the main point of the original post above that I wrote in 2009.

  • 29 Stillgotshoeson // May 31, 2012 at 10:14 pm

    Greg Atkinson // May 31, 2012 at 9:53 pm

    @Stillgotshoeson The mining sector will keep on bringing in large sums of money for decades to come. But commodities prices and demand move in cycles which was the main point of the original post above that I wrote in 2009.

    I do not doubt it for a second Greg, tis why I am optimistic for the future for Australia. We have a bad period to get through.

    The MRRT to reference is more to the state of play in so much as support for near term budget issues.

    As for an alias, does not take a genius to figure out who I am. The tag is not for anonymity , tis a play on The Barefoot Investor moniker.. Barefoot implying, be relaxed about investing, put your feet up and follow sensible rules/ideals to acheive your financial goals. Stillgotshoeson is a play on that in that I have not put my feet up_yet_. 🙂

  • 30 Greg Atkinson // Jun 1, 2012 at 8:27 am

    @Stillgotshoeson The MRRT is a mess because it was a rushed piece of legislation that came in via a back-door deal with a select group of mining companies. When it comes to tax policy this government is a mess. They initiated the much heralded taxation review headed by Ken Henry and then basically shelved it once it was released.

    Now them to bring in measures that are aimed whoever is in their sights at the time.

    Perhaps a ‘cleaner’ way to get a better share of the resource boom would be to insist that the commonwealth is given an equity share in all new projects (regardless of size) and that this is locked away in a sovereign wealth fund?

  • 31 Biker // Jun 2, 2012 at 3:10 pm

    Greg: “@BP I don’t recall ever suggesting the market would meltdown even during 2008. ”

    Nor do I, Greg. Nor do I. You’ve forecast quite an improvement for the latter half of 2012, in fact.

    Nice bit of ‘editing’ there. Made my point…. 😀

  • 32 Greg Atkinson // Jun 28, 2013 at 3:36 pm

    Well it seems even the Premier of WA is now talking about a peak demand for Australian resources.

    Today in The Australian:

    WEST Australian Premier Colin Barnett has warned this may be the last major period of growth for the nation’s iron ore producers.

    Chinese steel production would grow at a slower pace going forward, probably levelling off by 2020, Premier Barnett told The Australian and Deutsche Bank Business Leaders Forum in Perth today.

    The iron price peaked at $US190 a tonne in February 2011 and fell to a low point last September of $US91. The key steel-making ingredient is currently trading at around US$114 a tonne.

    Premier Barnett said that while at today’s price iron ore producers remained in good shape, there were now price and demand risks.

    Source: Big growth period ending for iron ore, Colin Barnett warns

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