BHP Billiton reported a 35 per cent drop in second-half profit which just added to signs of a wider malaise in Australia’s mining industry.
A slowdown in China and the global economy is threatening the commodity boom in Australia and the south Australian economy that has thrived on mining.
The Australian coal industry has already been cutting jobs and is now losing ground to the U.S., according to Bank of America analysts Bin Gao and Ethan Mou.
Coal accounts for 20 per cent of Australia’s exports and until as recently as May, its coal exports to China had been strong, showing large year-over-year growth. But as shale-gas production picked up in the U.S., and natural gas prices started to fall, American utilities companies started to shift away from coal to natural gas to meet their electricity needs This in turn caused demand for coal and in turn coal prices to decline.
U.S. coal producers naturally turned to international markets, and Gao and Mou write:
“Coal exports by the US to China, a relatively unnoticed trend, can have significant and long-lasting substitution effect on Australia, in our view. In fact, the effect has already started showing up in recent months.
……With US coal exports rising and grabbing share of China’s imports, Australia stands to get hurt the most, being the second-largest coal exporter to China (after Indonesia), in our view. China’s coal imports from Australia dropped 2mn tons in June over May, while its imports from the US surged 1mn tons – signs of an early substitution effect that could impact demand for Australian coal, in our view.
…It is interesting to note that the substitution effect does not seem to have gained the attention of Australian mining companies yet. If so, the damaging effect can potentially lead to large delays/cancellation of coal mining projects in Australia due to price pressure and excessive supply, in our view.”
While miners appear optimistic they should remember that Beijing’s focus is employment and as long as job losses don’t worsen, China is unlikely to unleash another investment stimulus. Gao and Mou expect that the “substitution effect of U.S. coal exports and over-optimism about Chinese demand” will hit the mining industry and weigh on the Australian economy.
This chart from Gao and Mou shows how the U.S. is eating into Australia’s share of coal exports to China:
Photo: Bank of America Merrill Lynch