WESTPAC: Coal is amazing

Photo by Juan Naharro Gimenez/WireImage

Coking coal is the talk of financial markets, especially in Australia.

After years of relentless price declines, its spectacular rally over recent months has captured the attention, and imagination, of many a market analyst.

Only weeks after HSBC’s Paul Bloxham declared that coking coal is “exciting”, Sean Callow, senior currency strategist at Westpac, has gone one better in a research note released earlier this week, declaring that it is now “amazing”.

An upgrade that fits with increasingly bullish sentiment towards Australia’s second largest goods export behind iron ore in terms of dollar value.

The Minerals Council of Australia’s marketing campaign launched last year promoting the “endless possibilities of this little black rock” certainly appears to be coming true, at least for miners, shareholders and government coffers.

This chart from Westpac that shows the “amazing” rally in the premium hard coking coal spot price shipped from Australia’s east coast. It’s up 260% since the lows seen in May, undoubtedly amazing even though it is well below the peaks seen in previous years.

The combination of an acceleration in Chinese infrastructure investment, mine closures and supply disruptions has proven to be a potent mix.

“The chart reminds us of how volatile coking coal prices can be. Any reversal could be dramatic,”says Callow. “But for the time being, this is a clear positive for Australia’s economy, including the projections in the mid-year budget update due before year-end.”

Along with being a positive for the economy, Callow says it’s also a supportive factor for the Australian dollar.

“This keeps AUD/USD fair value estimates tilting higher,” he says, while acknowledging that “any AUD gains near term may have to be focused on cross rates rather than against USD” given the latter’s recent “impressive” strength.

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