Growing concerns surrounding air pollution in China’s heavily populated cities has driven the country to set reduction targets, implement restrictions and hunt for alternatives to thermal coal. Translated, this spells concern for local coal producers who are now unable to comfortably correlate signs of growth in the Chinese economy with improvement in prices, given China drives demand and is now committed to steering away from a commodity that remains in oversupply. In Australia, slowing demand and supply growth has seen multiple costly coal mines placed on hold in the past 12 months, while miners have been forced to slash hundreds of jobs from Australian operations. New Hope Corporation Limited
(ASX:NHC) Managing Director Robert Neale believes that many resource companies are overvaluing their coal assets, while his own companies shift towards oil and gas reflects a view that a recovery in coal is not on the horizon.
Deutsche bank commodity analysts have issued two consecutive quarters of upwards revisions to Chinese economic growth forecasts, however coal prices remain bleak. This is in no small part owing to China’s plans for a greener future, which include pollution reductions of up to 25 per cent in three major industrial zones by 2017, and the banning of new coal-fired power stations in those regions. Chinese powers aim to reduce coal consumption to below 65 per cent of total energy use by 2017. On these ambitions, Deutsche Bank is estimating Chinese thermal coal imports will drop to 220 million tonnes in 2014 and 196 million tonnes by 2016. They are estimated at between 240-250 million tonnes this year.
Global bank Citigroup has taken all of these factors into consideration in labelling the trend of increasing Chinese demand for thermal coal as an ‘unassailable assumption’ over the past decade. Citigroup says coal-exporting companies counting on robust future demand could be most at risk, given China currently accounts for more than half of global coal demand. Now that its renewable and nuclear energy potential is on the rise, Citigroup predicts Chinese coal demand will in fact peak before 2020.
Economic news
Activity in China's manufacturing sector expanded slightly in September to hit a six-month high, according to the HSBC flash China manufacturing purchasing managers' index. The index printed at 51.2, after a read of 50.1 in August. A reading above 50 signals expansion.
In the land of the giants
BHP Billiton Limited
(ASX:BHP) Chairman Jac Nasser says increases in supply have placed downward pressure on many commodity markets and expects the trend to continue over the short term. Mr Nasser says although lower rates of investment across the industry will ultimately lead to more balanced markets, resource companies will need to improve productivity and be prepared to adapt to change in this more challenging environment. Despite the caution, Mr Nasser says BHP maintains a positive outlook over the longer term, as fundamentals such as wealth creation, demographics and urbanisation continue to create demand for commodities across Asia and other markets. Mr Nasser also reaffirmed the global miners confident outlook in agricultural fertiliser potash, following a sizeable recent investment in BHP’s Canadian Jansen potash project.
Mr Nasser also believes that recent signs of economic improvement in the US will continue, in an upbeat assessment of the global economy. Mr Nasser told media the improvement in the US and the changing focus of the Chinese economy meant the world should witness more balanced growth over the coming decade. Despite gas prices improving in the US, BHP says it expects prices for iron ore and coal to be weighed down over coming years by the sharp increase in supply.
BHP Billiton’s Limited
(ASX:BHP) new petroleum boss Tim Cutt has separated the capital-intensive US shale business from its oil-and-gas interests. Mr Cutt told media about the reorganisation, saying it involves the appointment of an asset manager for shale and an asset manager for the conventional business. He says the reshuffle is part of a strategy shift by BHP's Andrew Mackenzie, who is focused more on value and cash generation and less on volume growth. Mr Cutt told media the shale business holds up well under Mr Mackenzie’s productivity agenda and that it’s expected to extract billions in value from the existing portfolio.
Also this week, BHP Billiton Limited
(ASX:BHP) celebrated the opening of its $US1.5 billion Macedon gas plant in Western Australia. The global mining company claims the plant will supply 20 per cent of the state’s domestic gas over the next two decades. WA Premier Colin Barnett officially opened the plant last week, following first gas production from the site last month. Macedon has a production capacity of up to 200 terajoules per day, however BHP says this could double to 400 terajoules daily as part of a planned expansion.
Rio Tinto Limited
(ASX:RIO) has invited the Australian Taxation Office to monitor its bookkeeping in real time to reduce the risk of unexpected tax bills, according to media reports. The mining giant is set for another period of tax uncertainty as the new government plans to roll back the carbon tax and minerals resource rent tax from July 1 next year. The previous government also passed laws requiring the ATO to publish the income and tax payable of companies earning over $100 million a year. Tax Commissioner Chris Jordan told media the agreement offers a no surprises approach.
Rio Tinto Limited
(ASX:RIO) subsidiary Pacific Aluminium is considering curtailing production at its alumina refinery at Gove in the Northern Territory. The decision has attracted political backlash, with Northern Territory Chief Minister Adam Giles saying he’s disappointed the company has chosen to scare its employees by discussing curtailment of its Gove refinery before all its options have been exhausted and a final decision has been made. In February, former Country Liberal Party chief minister Terry Mills announced a deal to keep the refinery open by releasing 300 petajoules of gas to help it with running costs. But in July, Mr Giles said the deal had never been signed and instead made a series of offers, first for 195 petajoules, then for 175 petajoules, and now says there's an additional 30 petajoules available from a potential mobile gas facility from 2015.
Other company headlines
Fortescue Metals Group Limited
(ASX:FMG) will manage and supervise two ore processing facilities at its Christmas Creek mine effective immediately. The miner says it’s exercised its step-in rights under the terms of its contracts with Crushing Services International Pty Ltd (CSI). The miner says it’s taken the action, in conjunction with CSI and its parent company Mineral Resources Limited
(ASX:MIN), to ensure the safety and hazard free operation of the facilities. Fortescue says production will slow at both facilities during the transition of management, but expects full-year production targets will be unaffected.
Alacer Gold Corp
(ASX:AQG) has agreed to sell its Australian business to a subsidiary of Metals X Limited
(ASX:MLX) for $40 million. Alacer says Metals X will take ownership from October 1 and has paid a $10 million deposit, which is non-refundable unless the Australian Foreign Investment Review Board rejects the deal. Alacer will also retain the right to receive up to $2 million of deferred cash payable from La Mancha Resources for the acquisition of Alacer's 49 per cent interest in the Frog's Leg mine in April. Alacer will keep ownership of some long lead items acquired before the South Kalgoorlie Expansion Project, which have a book value of $7 million. Alacer CEO Rodney Antal says the sale will allow Alacer to focus on its Turkish operations.
Worleyparsons Limited
(ASX:WOR) says it’s entered into a global enterprise frame agreement with Shell covering surface facilities capital projects for unconventional oil and gas assets. The 5-year agreement plus optional 5-year renewal provides for engineering, procurement and construction management services. The agreement covers projects at Shell’s unconventional oil and gas assets in the US, Canada, Asia as well as future opportunities across the world. CEO Andrew Wood says the company has a growing global relationship with Shell. Mr Wood says the award allows WorleyParsons to assist in the development of Shell’s unconventional oil and gas assets around the world.
By Joel Spreadborough
