I continue to be beguiled by the ignoring of the degradation in many of the factors that were once used as reasons to buy stocks. The China market correction has led to 1 whole day (a week ago Monday) of worry. The Baltic Dry Index (which when it was rising was a green shoot) continues a swan drive after a short break last week. [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Precursor to Loan Growth Slowing?] China has begun curtailing the mind numbing amount of loans it pushed out in 1st half 2009. Yet for now none of it matters.


At this point, so many commodities and the Baltic Index itself have been captured by China's overweighted influence [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] [May 13, 2009: Commodities - It's China's World: We Just Live in It] so I cannot tell if this is a resting spot while China negotiates on iron ore prices, or if this is (as stated above) a leading indicator of the plummet in Chinese loans. We heard similar stories as we see below in terms of copper about 4 months ago but instead it just was a few week break before China stockpiled even more of the metal. [Apr 6, 2009: Analysts Estimate Copper Prices Could Fall 21% in Q2] So it is hard to tell what is going on in commodities anymore since 1 country's actions are dominating the action.

As I look through individual subsectors of commodities, coal has actually been an out performer the past month... so we'll see when we look back in a few months if this is actually a change in direction by China or just a pause in the action for that market. Via Bloomberg:

  • China’s unprecedented appetite for imported coal is about to be sated, jeopardizing a five-month rally in prices by adding to a global surplus of the fuel used in power plants from Perth to Chicago.
  • After importing a record 48 million tons in the first six months, China is opening mines idled by worker deaths this year following safety upgrades in a bid to bolster economic growth. Huadian Power International Corp. expects China’s largest coal- mining province, Shanxi, to boost output by 60 percent in the second half of the year. That would mean an increase of 150 million metric tons, almost twice what Germany burns annually. (that's just staggering when you think about it)
  • China, the world’s largest producer and consumer of coal, ordered the closure of almost all 10,000 of the country’s small pits during the Spring Festival in January, and plans to open some were delayed following a deadly accident in February. Small mines that account for about 25 percent of China’s production were told to merge and those deemed unsafe were closed.
  • Of the 10,000 small mines in China, about 2,598 are in Shanxi, according to the China Daily newspaper. Output in Shanxi may rise to 400 million tons in the second half from 250 million tons in the first six months
  • With little need to buy coal outside the country, prices may tumble, falling as much as 7 percent in Europe alone, Barclays Capital says.
  • China’s purchases will plunge 33 percent between June 30 and Dec. 31, based on the median estimate of four analysts surveyed by Bloomberg. (we'll see, but the main takeaway is as with copper, oil, iron ore, potash, anything outside natural gas - China is the marginal buyer in the world; if you only knew their 3 month foreward plans you'd be set)
  • “In the first half, China really supported the market and put a pretty firm floor under the thermal-coal price because it was sucking in so many imports,” said Andrew Harrington, an analyst at Patersons Securities Ltd. in Sydney. “It’s difficult to be confident that it will continue at such a rate.”
  • China’s July coal imports fell 13 percent to 13.9 million tons from 16 million tons in June, a record high, customs data show today.

  • Six-month supply contracts signed by Chinese buyers in February and March are expiring and aren’t likely to be renewed at the same amounts as global costs remain high and as domestic supplies rise, said Huang Teng, the general manager of Beijing LT Consultant Ltd., a coal consultant based in the capital city.

Meanwhile there is a game of cat and mouse going on - Europeans are stockpiling coal in anticipation of further increases in Asian demand. Which also has driven prices up - since this coal is not on the open market. So everyone looks around and asks Whose on first (when does this global recovery ex- government transfer payments begin again?)

  • Reduced demand may swell global supplies that ballooned during the recession. Stockpiles held by electricity generators in the U.K., Europe’s biggest importer of coal, rose 68 percent in May from a year earlier to 17.4 million tons, the most since at least 1995, government data show.
  • “Europeans are fully stocked, but not reselling because they fear higher prices with an Asia-led economic recovery,” said Emmanuel Fages, a Paris-based commodities analyst at Orbeo. “The cost of carry for storing coal is cheaper than buying the coal for later delivery.”

Same in the U.S.

  • In the U.S., inventories jumped 15 percent in the first four months of the year, compared with a 1.1 percent gain in 2008 and 2.4 percent in 2007.

One of the reasons I was bullish on the commodity subsector of coal in 2007 was unlike natural gas it is much easier to transport and I saw Asian demand, specifically that of China, as a way to transform what was once a mostly domestic resource into something much more global. [Sep 18, 2007: Another Look at Coal] Hence coal would (slowly) become something more akin to crude oil, and less like natural gas.

A key driver of this demand has been China's emergence as a net importer of coal in 2007. The country is firing up a new coal-burning plant each week, and this growing appetite has devoured coal from Australia, South Africa and other suppliers that would normally ship to European markets.

Some European consumers have therefore turned to U.S. suppliers to replace coal that is now too expensive to ship all the way from Asia.

As usual, I am early on these big picture things (which sometimes hurts) but this prediction is beginning to bear fruit...

  • The rapid increase in Chinese coal output may upset the calculations of producers in other countries, including the U.S., where exports rose 38 percent last year.
  • St. Louis-based Peabody Energy Corp. sold 16 percent of its coal production outside the U.S. last year, regulatory filings show. The company’s sales outside the U.S. climbed 30 percent to 40.3 million tons, outpacing total sales growth of 8.2 percent to 255.5 million.

Long term I am still very bullish on coal. Near term? Ask China.

[Jan 14, 2008: New Coal ETF (KOL) Introduced from Van Eck Global]

[May 20, 2008: Market Vectors Coal (KOL) Red Hot]