Not even China can help Australia's commodity exports: Russell
The opinions expressed here are those of the author, a columnist for Reuters.
By Clyde Russell
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LAUNCESTON, Australia, April 10 (Reuters) - Australia has gone from a leader of the pack in commodity exports to a laggard, as prices of resources more dependent on China struggle to build momentum.
China is the world's biggest importer of crude oil, iron ore, coal, liquefied natural gas (LNG), copper and lithium, among other more minor commodities.
Australia is the world's largest exporter of iron ore and lithium, and ranks second in coal and LNG.
Australia was also a major beneficiary in the spike in prices for many commodities, including coal and LNG, that occurred in the wake of Russia's invasion of Ukraine in February 2022.
But now the tables have turned somewhat, and it appears that commodities with a greater exposure to China are struggling more than those without.
The contrast is illustrated by the differing fortunes of two of the world's biggest and most important commodities, crude oil and iron ore.
Global benchmark Brent crude futures LCOc1 ended at $89.59 a barrel on Tuesday, and are up 23.9% from the low of $72.29 reached on Dec. 13.
Iron ore contracts traded in Singapore SZZFc1 ended at $105.97 a metric ton on Tuesday, and are down 26.2% from their recent peak of $143.60 on Jan. 3.
While China is the world's biggest importer of both of these commodities, its imports of crude are just over 10% of total world demand, while it absolutely dominates iron with a share in excess of 70% of seaborne volumes.
China's demand hasn't been much of a factor driving crude oil prices this year, rather it's been a combination of output cuts by producer group OPEC+ and geopolitical tensions caused by the ongoing Israel-Hamas conflict, which has drawn in other regional actors such as Yemen's Iran-aligned Houthi group.
But for iron ore, the state of China's economy, the world's second-biggest, has been the driving force behind the softening prices.
While some parts of China's economy appear to be recovering, such as consumer spending and manufacturing, the property construction sector remains soft.
While China's uneven recovery may explain the struggling iron ore price, it doesn't provide answers for softness in coal and LNG.
STRONG VOLUMES
China's demand for all grades of coal from the seaborne market has been robust, rising 16.9% in the first quarter of 2024 from the same period a year earlier, according to data compiled by commodity analysts Kpler.
Imports of LNG are also up strongly, rising 22.7% to 20.21 million tons in the first quarter from the same period in 2023.
Despite China's strong demand, the price of Indonesian thermal coal, of which China is the biggest buyer, has been slipping, with commodity price reporting agency Argus assessing 4,200 kilocalories per kilogram coal at $54.83 in the week to April 1, down 39.4% from its recent peak of $90.45 in early December.
LNG prices have also been struggling, with the spot price for cargoes for delivery to North Asia LNG-AS ended last week at $9.50 per million British thermal units, up slightly from a three-year low of $8.30 on Feb. 23, but down 47% from its northern winter peak of $17.90.
The weak thermal coal and LNG prices are more a factor of lower demand from Europe because of a warmer-than-usual winter, as well as strong supply growth from major exporters, in the case of coal mainly Indonesia, and for LNG the United States.
Lithium is also a story of rising supply overwhelming moderating demand growth as the huge increase in electric vehicle sales of the past few years starts to moderate.
The overall picture for Australia is that the boom period since the invasion of Ukraine is coming to an end, and that the commodities with the strongest outlook are those where supply is constrained.
Currently this rules out Australia's three biggest earners, namely iron ore, coal and LNG.
However, there is a silver lining, or rather a golden lining.
Australia is the world's largest net exporter of gold, and the precious metal's surge to a record high will boost export earnings.
Spot gold XAU= hit a new peak of $2,365.09 an ounce on Tuesday, and it has gained 30.7% since hitting a six-month low of $1,809.50 in October.
The problem for Australia is that its combined export earnings from iron ore, coal and LNG are forecast by the government at A$300 billion ($199 billion) in the 2023-24 fiscal year.
Export earnings from gold are expected at just A$28 billion, so even the strong rally in prices won't be nearly enough to offset weakness in Australia's big three commodities.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Sonali Paul)