Material Matters: China, Met Coal & Gold

Commodities | Jan 20 2021

Australian miners could piggyback on China’s rising growth prospects; A look at what could happen if China were to continue its ban on Australian coal; Stronger AUD playing spoilsport to rising gold prices

-Rising Chinese growth bodes well for Australian miners
-Coking coal and the Chinese ban: A scenario analysis
-Gold: Robust demand backed by a different narrative

By Angelique Thakur

China: The Dragon rises

China’s economy gathered speed in the December quarter, finishing the year on a high note with GDP growing 6.5% versus last year. This takes the GDP for the entire 2020 calendar year to 2.3%, a remarkable feat amidst a covid-ravaged world.

But that's not all. The economy is poised for further growth as it enters 2021, with UBS analysts pegging the growth forecast for 2021 at 8.2%.

This bodes well for Australian miners as well as a robust China implies higher demand for key commodity sector raw materials.

Backing this assertion is a report by UBS that sees upside risk to its iron ore forecast for 2021 on the back of continued growth in China’s crude steel output.

Crude steel production in China reached new heights in 2020, growing by 5.2% to 1.053bt. The trend has continued into the first few weeks of January, with output between January 1-10 amounting to 2.9mtpd.

UBS expects crude steel output to grow 2% in 2021 with demand for iron ore expected to tag along.

Propping up demand for coal is the rise in electricity generation in China, up 11% year on year in December 2020. A major chunk of this rise is attributed to the exceptionally cold winter season.

Insufficient Chinese domestic output and freezing temperatures will support the import of seaborne coal, suggests UBS, noting upward risk to its 2021 coal price forecast.

The broker isn’t so optimistic on aluminium, its bullish stance changing with the more than -10% correction in Shanghai Futures Exchange aluminium prices coupled with an increase in inventory levels in China over the last four weeks.

Coal: What if China does not change its Australian coal ban policy?

Continuing in the same vein, Macquarie is bullish on met coal prospects and forecasts a deficit in 2021 for the market, with prices expected to average north of US$150/t this year.

China’s coking coal demand, expected to be around 36mt in 2021, is expected to be responsible for a huge chunk of this deficit.

However, before investors get too excited, Macquarie reminds all of one very important if unfortunate fact - a bullish stance on met coal is contingent on the relaxation of China’s ban on Australian coal.

While there are signs we are moving in the right direction with the partial easing of cargoes at Chinese ports, it is not unthinkable for China to stick to its ban.

What would then happen to seaborne coal and how will this affect the market?

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