BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

God Is The Wild Card In The China V Australia Trade Spat

Following
This article is more than 3 years old.

An act of God is probably a tricky concept for a Chinese government official, but it’s one that could become a factor as wet weather on the east coast of Australia threatens coal exports.

Until recently, the China vs. Australia trade spat has been largely confined to tariff hikes by China on some Australian exports and some deft footwork by Australian exporters to open new markets.

But stormy weather associated with a La Nina weather pattern has started to emerge as a factor in coal exports and could become a wild card in the trade dispute which started over an argument about the cause of the Covid-19 pandemic.

(La Nina is Spanish for little girl and is the opposite to another weather effect, El Nino, which means little boy, or Christ Child. A La Nina is marked by the cooling of sea temperatures in the Pacific Ocean. El Nino is a sea warming pattern. They are erratic but generally peak around Christmas).

If anyone was keeping score, China vs. Australia (with or without La Nina) is probably a 50/50 game with modest losses incurred by Australian coal exporters offset by China being forced to pay high prices for Australian iron ore, which is powering a big profit increase by miners of the steel-making material.

Fat Mining Profit To Be Revealed Next Week

A glimpse of the iron ore profits will come next week when the big three of the Australian mining sector, BHP, Rio Tinto and Fortescue Metals, file their full or half-year profits, accompanied by what are expected to be generous dividend increases.

Chinese steel mills, which have already complained about the high price of iron ore, will have more reasons to complain with the commodity trading around $160 a ton, double where it was at this time last year.

Adding insult to injury are higher prices for other minerals used in the steel-making process such as nickel, which is essential in high-grade stainless steel, and which this week hit an eight-year high of $8.45 a pound, up 70% on 12 months ago.

Much of the sharp increases in commodity prices can be attributed to China’s strong recovery after the initial impact of the pandemic, but the latest surge in prices for most commodities, which has sparked comments about a sector-wide “bull market,” is being attributed to a recovery across the rest of the world.

BHP, the world’s biggest producer of metallurgical (or coking) coal used to make steel, noted the early effects of La Nina in its half-year production reported released late last month.

“At Queensland Coal, volumes were lower as a result of planned wash plant maintenance at Saraji and Caval Ridge and significant wet weather impact from La Nina across most operations,” BHP said.

Since then, metallurgical coal prices have surged higher, rising by 50% from $100 a ton in December to recent trades at $150/t.

J.P. Morgan, an investment bank, said in a research note earlier this week that the price rise was being driven by a strong recovery in global steel production and weak Australian exports.

Coal Trade Flow Settled

“Australian miners are reporting that new customers outside China have been found, and it appears the major disruption to trade flow has settled,” the bank said.

“Forward curves show modest gains in prices into the high $150s, which we view as reasonable, not at incentive prices (to encourage a production increase), but high enough for the majority of miners to be profitable.

“Buoyant Chinese domestic markets should also incentivize non-Australian volumes into China.

Watching La Nina

“Finally, we are watching out for a particularly heavy wet season in Queensland given the La Nina weather pattern which should buffer prices through the first quarter of 2021.”

A full blown La Nina can have a devastating effect on Australian coal exports and coal prices. In 2011, widespread flooding forced mine closures and drove the price of metallurgical coal to a record $330/t.

Chinese steel mills, already battling unexpectedly high iron ore prices, thanks to a shortfall in supply from Brazil, would find a repeat of La Nina flooding like that of 2011 a bitter pill but one that would be very much an act of God.