Replies to post #668 on The Rising Influence of Rising Affluence

[DewDiligence]

Coal Prices Heat Up in China

[This article contains some handy factoids for investors in coal-mining companies, wherever their mines may be located.]

http://online.wsj.com/article/SB20001424052748703612804575222212477812190.html

›The Country, an Exporter for Decades, Now Imports; Suppliers Try to Keep Up

By SHAI OSTER
MAY 4, 2010

Beijing – China's appetite for imported coal has ignited coal prices and fueled deal-making on the belief that the country, once a major coal exporter, will be a long-term buyer of foreign coal.

Last week, the benchmark price at Australia's Newcastle port for thermal coal—the type burned in power plants—hit $108 a metric ton, the highest since October 2008, according to globalCOAL, an international trading platform. Australia is one of China's biggest coal suppliers.

China's coal-importing binge started last year, when international prices were low as a result of the recession and Beijing's stimulus spending kept domestic prices relatively high. With coal the primary fuel for China's economic engine, the buying is continuing even as global prices rise. China's coal imports in March jumped 165% from March 2009.

The country's growth amid the global economic rebound is already driving up a swath of commodities, including iron and oil. But so far—at least for coal—prices remain below the prerecession highs of 2008, when Newcastle coal breached $180 a ton.

Still, in March, Goldman Sachs raised its estimates for global coal prices, with supplies of certain types of coal remaining tight through 2011 because there aren't a lot of new mines opening soon.

In a quarterly report, the China Electricity Council, an industry trade group, recently warned that demand for thermal coal used in power plants would remain high for the rest of this year because of strong growth and supply constraints. More than 70% of China's electricity comes from coal-fired power plants, and the country's power-generating capacity is expected to expand 10% this year.

The surge in Chinese demand is prompting acquisitions. Last year, Chinese miner Yanzhou Coal Mining Co. bought Australia's Felix Resources Ltd. for $3.2 billion. St. Louis-based Peabody Energy Corp., meanwhile, is trying to buy Australia's biggest coal exporter, Macarthur Coal Ltd.

For decades, China was a net exporter of coal, selling some 83 million metric tons more than it bought internationally in 2003. By 2007, that had started to change, with China recording net imports in some months, a development that helped to send global coal prices to records.

But last year, trade swung, with China importing nearly 126 million metric tons and exporting just 22 million. China swallowed more than a fifth of the 600 million tons of total seaborne-coal trade last year, jolting the global coal business at a time when steel mills and power plants elsewhere were sidelined by recession.

The trend has continued this year, with coal imports in the first three months of 2010 jumping 226% from a year earlier to 44.4 million tons.

That is still a fraction of China's overall consumption, which amounted to 1.4 billion tons of coal in 2008.

"Coal producers and freight operators were dreading the economic crisis, and then China came to the rescue, single-handedly supported prices and stopped them from falling further," said Zhou Xizhou, an analyst at IHS Cambridge Energy Research Associates.

Shipments From Wyoming

Suppliers are scrambling to keep up. Vic Svec, head of investor relations for Peabody Energy, estimated Asia will add enough power plants in the next three years to burn the equivalent of a billion more tons of coal annually, with most of that new demand from China.

Mr. Svec said Peabody has long sold China coal from its mines in Australia, but in the past two years, the company has increased shipments from its Powder River Basin mine in Wyoming. [In the same vein, CLF is now shipping small quantities of met coal to China that come from the US Great Lakes region.]

Prices for contracts in 2014 are higher than prices for coal for immediate delivery, he said, a sign that traders think the supply-and-demand balance will be tighter in the future.

Beyond that overall growth in demand, the import surge also stems from a growing mismatch between the coal China produces domestically and the coal it needs. China has some of the world's biggest reserves of low-quality thermal coal, but such coal tends to have higher levels of pollutants like sulfur.

The newer, cleaner power plants being built require better grades of coal. And many of those plants are on the coast, where it can be less expensive to buy seaborne coal than to bring it by rail from China's remote inland regions, where most mines are.

China also has inadequate domestic supplies of higher-grade coking coal, which is a key ingredient for making the steel that feeds the country's booming construction industry. Coking coal and other types of coal used to make steel, known as metallurgical coal, accounted for 27% of China's coal imports in 2009, up from 16% in 2008, according to J.P. Morgan.

The Drought Effect

Some factors driving China's coal buying are temporary. A key reason for March's big jump in coal imports was a major drought in southwestern China that left rivers too low to power hydroelectric dams, causing greater reliance on coal-fired plants.

Meanwhile, a string of mining accidents in recent weeks have prompted a nationwide safety crackdown that could slow production, according to J.P. Morgan. And to boost safety, the government last year began a consolidation of mines that reduced output.

There is a big risk that could reverse China's demand for coal: The housing boom could stall. But many analysts think that is unlikely to curb demand for steel and coking coal because the government recognizes the need for the construction sector to drive the economy.‹

[DewDiligence]

Australia Plans 40% Surcharge on Mining Profits

[Mining stocks such as BHP/BBL, RTP, and CLF have been clobbered this week even worse than the broad averages. The 40% surcharge would be applied to the EBITDA line and would itself be deductible in the calculation of the ordinary corporate income tax. The surcharge would increase the effective income-tax rate on Australian mining profits from 43% to 57% starting in mid 2012—ouch.]

http://www.ft.com/cms/s/0/ba5cf366-5616-11df-b835-00144feab49a.html

›By Peter Smith in Sydney
May 2 2010 20:00

Australia’s centre-left government angered the country’s mining industry on Sunday when it announced plans for a 40 per cent tax on profits generated by resource companies.

The so-called resources super profits tax, which mirrors a levy imposed on offshore petroleum projects, forms part of an overhaul of the country’s taxation system to address the challenges of an ageing population and rising healthcare costs.

Analysts estimated that the new tax would cut earnings at BHP Billiton, the Melbourne-based mining group, 19 per cent. London-based Rio Tinto, which operates highly profitable iron ore mines in Western Australia, could suffer a fall of nearer 30 per cent.

Marius Kloppers, BHP chief executive, said the plan would increase the group’s “total effective tax rate” on profits from its Australian operations from about 43 per cent to some 57 per cent from 2013.

He described the stability and competitiveness of Australia’s tax system as central to the group’s investment in the country. “If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians,” he said.

Canberra said that it would also cut the corporate tax rate from 30 to 28 per cent for non-resources companies, increase mandatory pension payments from 9 per cent to 12 per cent and create a A$5.6bn ($5.2bn) infrastructure fund for the mining industry.

The government was responding to the 138 recommendations contained in a review of the tax system by Ken Henry, Treasury secretary.

The review was the most extensive of the country’s tax system in half a century, although critics said its scope was limited after Canberra said changes to the goods and services tax regime were off-limits. Its publication came as Kevin Rudd, Labour prime minister, prepares for a 2010 election. He was under pressure after reneging on promises that brought him to power in 2007 when he defeated John Howard’s Liberal/National coalition.

In a significant climbdown on climate change reforms, Mr Rudd last week delayed the introduction of the country’s ambitious emissions trading scheme until 2013 at the earliest. A day later, he said cigarette excise taxes would rise 25 per cent to raise A$5bn for the health sector over four years.

The new resources tax will begin from July 2012 and raise an estimated A$9bn a year from 2013-14, which is about 0.7 per cent of national income.

Wayne Swan, treasurer, said Australians were entitled to a “fair share” of the country’s non-renewable resources. “It will be a better way to tax resources because it only taxes profits and fully recognises the large investments made in resource projects,” he said.

But Mitch Hooke, chief executive of the Minerals Council of Australia, a lobby group, said the plan meant that the country would have the highest taxed mining industry in the world [no kidding].

“Australia’s hard-earned reputation as a stable investment environment will be dramatically undermined,” Mr Hooke said. “If the government’s new tax proposal goes ahead, A$108bn worth of future investment in the minerals industry will be under a cloud.”

Tony Abbott, opposition leader, warned that the mining tax would destroy the resources boom.

“Putting a great big tax on the mining industry is like handicapping our most successful athletes. It’s bound to drive investment and jobs overseas,” he said.

Mr Rudd’s decision to delay the emissions trading scheme prompted Malcolm Turnbull, the country’s former opposition leader, to renew his political ambitions.

Mr Turnbull, who was ousted by his own party in 2009 after backing Mr Rudd’s emission trading laws, said he would quit politics at the next election.

However, he reversed that decision on Saturday when he attacked Mr Rudd for an “extraordinary act of political cowardice” over his emission trading laws delay.‹