Articles in Category: Exports

Recent smelter closures have seen global aluminum production drop in July for the first time since Q1. Output dropped to 112,000 tons per day in July from 114,100 tons per day in June according to a Reuters report. That equates to an annualized drop of 640,000 tons conveniently very close to the 700,000 tons predicted by us recently as the capacity in Henan province that had been earmarked for closure following government directives to close out dated, polluting and less efficient plants. In fact while most of the drop did come from China, it may have had more to do with low prices squeezing producers margins than the government directives.

At the same time exports from China have almost doubled this year to 1.03 million tons as a mix of primary metal chasing higher physical premiums and downstream semi finished products have found ready export markets. Some downstream products such as small extrusions still carry export rebates of 13-15% but volume bar and plates products had export rebates slashed last year and the only exports now are those miss-labeled as a finished product a frequent tax avoidance game played by Chinese exporters brave enough to take on the customs inspections at ports.

Bloomberg reported that China became a net exporter of aluminum for a second month in July as imports plummeted and exports stayed firm. The paper suggests this is due to falling domestic demand and it’s true to say inventory in Chinese domestic warehouses has jumped 65% this year as production surged to a record 1.42 million tons per month prior to the recent closures.

Outside of China, smelters in North America and the Middle East have closed following power outages. Rio Tinto Alcan’s Laterriere smelter in Quebec lost one of its two pot-lines last month following a transformer failure. Production could be down for weeks or months, details are almost non-existent. Likewise Norsk Hydro’s JV Qatalum smelter in Qatar experienced a power failure this month as it was ramping up towards its 585,000-ton capacity. How much of the plant has been effected is uncertain but estimates are up to 120,000 tons of production capacity down.

None of this seems to have impacted the price. Wider fears about growth in the US and China seem to be driving equity markets at present and the metals prices are taking a lead from that. If prices continue to slide towards $2000 per ton there will be less incentive for marginal capacity to be brought on-stream in China over coming months. In the medium term prices are expected to rise but in the short term the markets are looking rather uncertain.

–Stuart Burns

According to New York Times data just released in the second quarter of this year a stagnant Japan was overtaken by a slowing but still growing China, to make the newcomer the second largest economy in the world behind the US.

Japan’s economy was valued at US$1.28 trillion in the second quarter 2010, whereas China’s came in at US$ 1.33 trillion. It was only in recent years that China overtook Germany to become the third largest economy and last year it overtook Germany to become the largest exporting economy. Just five years ago China’s GDP was $2.3 trillion, about half of Japan’s. While China’s GDP is dwarfed by the US’s $14 trillion, some are predicting China will overtake the US by 2030 but then they made the same prediction of Japan in the 1990’s. China’s rise though has been nothing short of spectacular over the last ten years. China passed the US last year to become the world’s largest automotive market and General Motors, that icon of US manufacturing companies could shortly be producing more cars in China than the US.

As the article points out though, China’s per capita income is more on a par with countries like Algeria and El Salvador than its neighbors in Asia. At US$ 3,600 it has a long way to go to reach the United States at $ 46,000. But China is already the largest producer of many metals including steel and the largest consumer of nearly every commodity. With growth forecast to be around 10% this year and some 150 million peasant workers still looking for migration to low paid jobs in urban environments over the next decade the foundations of China’s continued growth looks relatively secure. Read more

According to a Reuters article, China is on track to produce a staggering 600 million metric tons of steel this year, up from last year’s record 568 million metric tons and six times larger than the number two producer Japan. The worry is the market may not be there to take it. China’s steel mills appear to be churning out steel more in a fight for market share than to meet buyers demands. The big state steel mills in particular are the most reluctant to cut production fearing they will lose market share to competitors, so instead they are cutting prices just as the third quarter contract iron ore prices rises hit the balance sheet, pushing up raw material costs.

Output in the first half of 2010 surged 21% to 323 million tons and output in July fell only 3.7% to 51.74 million tons, still above a 600 million ton annual average. In the meantime, Shan Shanghua, secretary general of China’s Iron & Steel Association CISA is quoted as saying, “we will see the market busy with de-stocking in this half (H2, 2010) and a lot of small mills will shut down.”   Profits at the major steel mills fell 37.8% in June on the month and are expected to drop further in July. In fact other sources are quoted as saying at current prices perhaps only Baosteel will eke out a thin profit, the rest will be in a loss making position. Recent stockpiles have increased by 39% since the beginning of the year to 10.3 million tons at the end of June.

At the same time, exports are rising and western steel companies are finding themselves under pressure. Chinese exports to the Middle East are rising again as the   Silk Road Economy blog describes, graph courtesy of SRE.

SteelOrbis reported that China’s steel exports were up massively in the first half of this year, by 15.25 million tons or 153% year over year but also quoted CISA’s expectation that the change in export rebates may limit second half exports of low value steel items. Conversely this could encourage exports of higher value steel items that are right in the sweet spot of western producers.

Meanwhile the market is well ahead of developments. Share prices of Chinese steel mills have already dropped more than the 19.6% fall in the Shanghai Composite. Shares of Baosteel and Angang Group have both fallen by more than a third since the beginning of the year, while those of Wuhan Iron and Steel have almost halved.

With the removal of export rebates supposedly hindering exports, at least of lower value volume items, rising stocks and a softening domestic market, China’s steel mills have to cut capacity before a chronic rise in inventory pushes prices even further into the red. It would seem even in centrally controlled China, Beijing is not able to control the state steel mills as it would like. With such a lack of discipline, prices could fall further and then export rebates or not, more metal will come onto the world market.

–Stuart Burns

An interesting argument appeared in the Financial Times by Yukon Huang, a senior associate at the Carnegie Endowment and former country director for the World Bank in China. Mr Huang takes issue with the allegations, most forcefully voiced by the Nobel prize winning economist Paul Krugman, that global trade imbalances have been caused by China’s suppression of its exchange rate. His arguments are well structured and worth reading in full at this link to the FT, because he looks back over 30 years to the time of Deng Xiaoping, the architect of China’s reforms, to explore the causes of China’s considerable success in achieving such rapid growth.

The thrust of Mr Huang’s argument is that Deng followed many of the theories of “new economic geography that Mr Krugman was developing at that time. These showed how economies of scale and declining transport costs encourage concentration of production in certain places, and in turn lead to new trade patterns. Specifically Deng is credited with identifying and implementing the three “Ds of this new economic theory. China increased the “density of economic activity by concentrating production in a few coastal cities geared to exports. It cut the “distance between markets through an expansion of transport services and finally it reduced barriers to the movement of goods, helping to eliminate “divisions.

This deliberately unbalanced growth in Mr Huang’s opinion generated huge economies of scale and encouraged some 150m migrant workers to gravitate to the booming commercial centers around Guangzhou, Shanghai and Beijing. Over time, high-technology and export industries relocated to the coast and resource-based and domestically oriented industries established a presence in the interior.

We would not dispute for one moment that this concentration and specialization pushed 500m people out of poverty and led to annual gross domestic product growth of 10%. The share of GDP that was traded surged from 10% in 1979 to more than 70% today. This extraordinary transformation was the result of a complex set of policies, of that we would agree but not Mr Huang’s conclusion that exchange rates played only a minor role. He makes the point that when China finally did allow the renminbi to appreciate from 2005 to 2008, its trade surpluses grew bigger rather than smaller, suggesting that other factors notably savings and investment rates were, and continue to be, (in Mr Huang’s opinion) the primary determinants of China’s trade balances.

Although he makes some sound observations concerning the evolution of China’s trade balances he also completely ignores many other points. His argument suggests China was and is a free market responding to market forces when in fact it is closer to a command economy with many major corporations either still state owned or at least heavily state influenced. Bank lending, interest rates and virtually all infrastructure investments are at the direction of the state.   He paints China as a benign victim of global forces when in fact the current trade pattern is very much of its own design.

Mr Huang specifically says “Given the fragile global economy, China’s major concern is to maintain rapid growth and lessen the inequality that came with its original unbalanced growth. Arguably China’s only concern for the rest of the world is that it will continue to buy China’s goods if costs rise, hence the stubborn unwillingness to allow the exchange rate to find its own level.   The damage the last 30 years have done to western manufacturing in transferring jobs from west to east is immense and irreversible, and nearly all of China’s current wealth is as a result of that transfer. Mr Huang argues that given time the growth of the interior relative to the coastal regions will re-balance the economy and boost internal consumption making the country less reliant on exports. That may be but how long will it take? Another ten years? Meanwhile China grows to become the world’s largest economy on the back of manufacturing destruction elsewhere? An artificially suppressed exchange rate will certainly not hasten internal consumption or the objective of balancing the trade surplus, it will merely perpetuate the low wage environment that has allowed China to rise so far so fast.

While we cannot agree with all of Mr Huang’s arguments and in particular his conclusions, the article is well written and makes an interesting contribution to the debate.

–Stuart Burns

News of US trade figures for May surprised the markets but should they have? The US trade deficit, the [negative] difference between exports and imports, increased 4.8% to $42.3 billion in May, a Wall Street Journal article reported the Commerce Department as saying last week. That was the widest since November 2008. April’s trade gap was also revised upward from earlier estimates. The Commerce Department reported US exports grew 2.4% to a 20-month high of $152.3 billion on the back of higher sales of heavy machinery, medical equipment, power generation and commercial planes an Associated Press article said. Imports however grew faster still, expanding 2.9% to $194.5 billion. The US trade deficit with China, America’s largest overseas trading partner (Canada is its largest trading partner), expanded to $22.3 billion in May. This is the widest level since October and 15% higher than the previous month. Imports expanded by $3.1 billion, far outpacing a $162 million gain in exports.

But the US has been on a long-term trend of rising deficits interrupted briefly by the financial crisis of 2008/9 and although many had been hoping the slide in the value of the dollar would result in an export driven recovery the reality is major export markets in Europe and Japan have been equally depressed and hence not ready-made markets for US goods. It was probably naive to expect US exports to lead the recovery anymore than a weak pound has resulted in an export led recovery for the UK. The reality is both markets suffer from long-term structural problems of debt and lack of competitiveness. Many point to currency manipulation as one reason why the US will not be able to right the balance with China but the $22.3bn deficit with China is only part (admittedly a large part) of a wider $42.3bn deficit with the world at large.

Nor should a rise in imports be seen as wholly a bad thing. It is also reflective of a growing consumer confidence willing to spend money on consumer goods and cars. The strength of this confidence has taken many by surprise coming as it does on the back of stubbornly high unemployment figures, flat salary growth prospects and a depressed housing market. Indeed the rise in imports was after a 9.1% fall in oil imports to $27.6bn as both the price and volume of oil imports declined making the overall rise in the value of imports all the more profound.

Nevertheless there are already calls for action to be taken. A Washington Post article quotes Franklin Vargo, Vice President for International Economic Affairs at the National Association of Manufacturers as saying, “The US worked very hard to build a rules based trading system and if we were to say we need to play with it here and there the rest of the world will do the same thing and it will all come apart”. Vargo’s warning against protectionist action follows by an acknowledgment that, “Fundamentally we aren’t enough of an exporter.” Others were more strident Scott Paul, executive director of the American Alliance for Manufacturing is quoted as saying, “The widening trade deficit is not only an alarming trend, but also represents wealth and jobs heading overseas.” His organization will not be alone in calling for a tougher line to be taken with China in particular as this recession drags on and the long awaited recovery proves slow to come.

–Stuart Burns

It is widely assumed that metal production capacity in developing countries will continue to grow as demographics drives rising domestic demand. This assumption is what has fueled much of the faith in China’s never ending appetite for iron ore, coal, bauxite and non-ferrous metals like copper and nickel. India is seen as the lesser brother to China, driven by the same upward only long term trend as those 1 billion inhabitants, many of them living rural lifestyles gradually urbanize and a rising population seeks work and advancement.

An interesting analysis of India’s position appeared in a press release in advance of a New Materials research report from Business Monitor International. The June report looks both short and long term with, interestingly for us, a specific focus on the Indian steel and aluminum industries expressing growth prospects and some of the risks attached to their projections. Although broadly positive about the prospects for steel and aluminum production, saying producers will continue to find a healthy domestic market for new capacities coming online, they rightly also express concerns that a market imbalance may push prices down if they are unable to offload surpluses onto the international market; saying India will need to expand its export markets if it is to maximize capacity utilization.

In the first quarter ,India’s crude steel output was up 20% year-over-year to 16.1mn tons, reflecting the country’s steady return to form since the second half of 2009. The report believes the momentum to be sustainable, with monthly output remaining above 5mn tons for four successive months in March – the first time India exceeded this level was in December 2009. Expanding capacity meant that March represented a new high at 5.5mn tons.

Consumption is expected to grow at more than 10% over the next five years, driven by the construction, real estate and infrastructure sectors. In April 2010, consumption grew 9.6% y-o-y to 4.14mn tons and output grew just 5.3% to 4.9mn tons, leading to a 47.9% surge in imports to 660,000 tons. The automobile, household goods and capital goods industries also contributed substantially to the growth of the market. BMI forecasts average annual growth in finished steel consumption of 14% in 2010-2014. This is based on a forecasted average real GDP expansion of 7.6% per year over the coming 10 years, ultimately driven by the Indian consumer. To what extent India manages to continue with this level of growth remains to be seen, much will depend on continued moves to liberalize the domestic market, wider global growth helping steel exports and India’s ability to control inflation not now but a couple of years down the line. By 2014, based on BMI’s forecast model, finished steel consumption should reach 100mn tons, which is nearly twice the amount consumed in 2008 and only 6mn tons behind the US.

Government projections should be taken with a pinch of salt, a point BMI is not slow to point out. Steel minister Virbhadra Singh stated in May 2010 that India would double steel production to at least 120mn tons by 2011/12 even without the planned POSCO and ArcelorMittal projects which have been mired in land rights disputes. BMI forecasts 87.5mn tons output by 2012 but even this may be overly optimistic as new capacity has been slow to be added. The country may have 100 mn tons by 2014 and utilization at about 90% would see production at a still respectable 90 mn tons per year. Inevitably some sectors will see over capacity and some under resulting in exports and imports across the product range. Capacity utilization rates will depend on producers ability to secure exports in an increasingly protectionist world.

Although Indian aluminum producers enjoy some of the lowest costs of production in the world, growth in the industry could still be tough in the years ahead. Indian aluminum producers can produce aluminum at a cost of US$1,000-1,200 – half the cost of Chinese production – due to the country’s plentiful bauxite resources and subsidized power costs. As a result, India has been a significant exporter of primary metal to China as Chinese smelters have idled capacity again last year in the face of low metals prices. This is unlikely to be a long-term trend and the industry could face overcapacity if all three major producers continue to add capacity. The downstream market has limited ability to absorb excess primary metal as finishing capacity is only gradually being added so exports are the most likely outlet for excess metal if all the current projects come to fruition.

The road from developing to developed is never smooth so we should not be surprised to see countries like India go through periods of excess capacity resulting in a global increase in metal supply. A more consumption orientated China could provide a home for some of this capacity but a more likely outcome is the two rising powers will slug it out for business on the global stage.

–Stuart Burns

All eyes are on China it seems. Certainly for the metals markets the health of the Chinese economy and likely Chinese demand are high on the agenda for buyers trying to gauge where prices are going in coming months. The steel market is no different, although the US is not as reliant on the spot iron ore market as consumers in Europe and Asia. China’s exports of steel products have almost as profound an impact on the finished steel market as their purchases of iron ore do on the raw material costs for the industry. Either way you look at it, China matters.

So a recent report by Credit Suisse deserves more than a casual glance coming as it does from one of the originators and largest players in the iron ore swaps market. Credit Suisse has a significant role in setting price and risk management for the seaborne iron ore market and knowledge in depth as to what drives demand and price. Whether you agree with all their findings or not the analysis is interesting.

Not surprisingly the bank is anxious about what they term China’s “negative growth first half 2010 macro and micro policy adjustments which are only just beginning to be felt and will certainly feed through into the second half of the year. Specifically they highlight the following:

  • Reserve ratio tightening
  • Reduced property lending availability
  • Currency appreciation
  • Steel export rebate cuts

In addition there is the possibility of an interest rate increase to curb wage and food inflation, and a tail off in the 2008/9 local government spending which has now peaked.

On the plus side the government has recently announced:

  • Various social housing stimulus measures, particularly for the western provinces
  • A reduction in corporation tax for businesses in western provinces
  • A continuation of the car scrapage scheme
  • Rural white goods incentives
  • State Bank re-capitalizations reducing concerns about bank balance sheets

Balancing these various drivers the bank has drawn up a projection for likely growth which shows a welcome drop from the breakneck growth of Q4, 2009 and Q1, 2010 to a more sustainable sub 10% level through to the second half of next year.

If they are correct then iron ore demand should hold up reasonably well and steel prices will be set more by the ability of the mills to manage supply than the risk of a collapse or surge in demand. So far the mills have managed steel inventories relatively well, but stockpiles have still increased up to 10.4 days of cover, still below March’s 11.17 days but the mills will need to reduce production further to prevent this from rising more. Steel mill production has fallen this year. The bank estimates by 4 million tons/month during June, largely due to earlier over production forcing up inventory levels. This has resulted in sharp cut backs in iron ore which have driven down prices. Fortunately for the mills, margins have held up well as a result as iron ore prices tumbled. If steel demand picks up as expected after the summer slow down then iron ore prices could rally again in the latter part of the year.

The most important developments observers should watch in the bank’s opinion are, on the upside Chinese construction industry activity once the seasonal monsoons over southern China abate, and on the negative side the extent of infrastructure spending cuts. The bank feels residential property is actually quite robust with housing supply more limited than the 2008 peaks and western regions in particular receiving a lot of government support. A fall in eastern tier one city prices may actually increase overall demand as it brings affordability within reach of more potential buyers. More of a risk in the bank’s opinion is a reduction in the level of lending to provinces, municipalities and counties through shell companies, known as Urban Development Investment Corporations. These were a major conduit for investment in and source of construction lead growth in 2009, amounting to some $450 billion according to this article. New restrictions by Beijing could reign in this source of funding and probably represents the greatest potential risk to continued strong steel demand in China.

On balance though the bank is relatively bullish on both steady GDP growth sub 10% per year and on iron ore demand on the basis of solid if no longer spectacular steel production growth.

–Stuart Burns

Earlier this week we presented a couple of points of view regarding the role of urbanization in China and how that trend relates to growth of aluminum end use markets. In that post we cited three speakers from the recent 3rd Annual Harbor Aluminum Conference here in Chicago. Two of the speakers we covered and today we’ll endeavor to cover the third, the host presenter, Jorge Vasquez of Harbor Aluminum. For those of you who have never seen or heard Jorge speak, I have to tell you, he is quite a speaker. I have not seen anyone conduct the type of technical analysis that Jorge conducts. That isn’t to say that we agree with all of his findings but if anyone has sliced and diced the aluminum market, it’s Jorge. Jorge points to the notion of resiliency within the Chinese market to help explain that country’s growth story. He cites a variety of indicators from plain old strong domestic growth to a central government that acts swiftly and doesn’t “dither [our words, not Jorge’s]. In addition, he points to a high household savings rate of 40%, low public debt levels (despite the story we ran yesterday to the contrary), the fact that China remains a net external creditor and China’s huge international reserves.

All of these factors, Jorge believes, have allowed China to remain strong. In addition, and perhaps most controversially, Jorge takes an alternative point of view when it comes to China’s housing bubble. In particular, he believes that rising home prices in China are due to sales (not housing starts) and that China has put in place a number of measures to curb the speculative aspects of the housing bubble. He specifically cites the fact that banks have been banned from providing loans to speculative developers (those holding back sales of apartments in the hopes of waiting for higher prices or hoarding land), a new 5.5% tax has been levied on a buyer if a house was sold within the last five years, the announcement of a prohibition of banks providing loans for third home purchases and a couple of other measures designed to curb speculative behavior within the housing market. Jorge believes these measures have all lead to a bear property market in Shanghai since last year. He goes on to suggest that China has in fact chosen to pursue a path of more sustainable, moderate growth and the data seems to support that conclusion.

So what does Jorge conclude about China’s aluminum market? He summarizes three trends as follows: the first is that China is a net importer of raw materials and scrap. The second trend is that China is more or less balanced in primary aluminum despite astronomical output growth rates and China has become a net exporter of downstream products (e.g. bars, rods, profiles, wires, tubes, pipes, sheet, plate, strips and foil). He also points out that China remains one of the highest cost producers of primary aluminum at $2300/ton primarily due to China’s energy dependence but also the revaluation of the RMB. That cost structure creates difficulties for China to compete in primaries on the global stage. The Chinese government has put in place a range of export tax VAT schemes to promote the exports of semis. These include full 13% VAT rebates on tubes and pipe and foil and an 11% VAT rebate on plate, sheet and strip. These rebates neutralize any taxes, thereby giving China producers a leg up in export markets.

In sum according to Jorge, China appears to be moderating growth, promoting semi exports (and will gain market share), will continue to urbanize and drive up commodity prices and will remain a bullish factor on the LME.

–Lisa Reisman

The Chinese, ever the adroit political animals have side-stepped criticism at the approaching G20 summit in Canada by announcing it will introduce a more flexible exchange rate policy. China’s central bank appears to be reverting to the foreign exchange system it introduced in July 2005, when it abandoned an explicit dollar peg. ¨A recent Financial Times article explains the managed float system links the Renminbi to a basket of currencies of its main trading partners. In practice, economists say, the currency has mainly tracked the US dollar. ¨Every day the central bank sets a reference rate for the Renminbi against the dollar. The Renminbi is then allowed to rise or fall 0.5% around that mid-point, although daily fluctuations have tended to be much smaller.¨ This Monday’s mid rate was set the same as Friday close, dashing any hopes for an early or fast adjustment. Previously the Renminbi rose gradually by about 21% against the dollar from 2005 to mid-2008 and the start of the financial crisis, but since then it has remained stable.

It is not expected to move as far this time although based on purchasing power parity the Renminbi is still undervalued by about 24% even after the dollar has weakened as much as it has over the last 18 months. China’s exchange rate against the euro has already appreciated 15% in recent months, raising worries about slowing exports to China’s biggest market.

In the short term, the currency may not move much at all. The timing is almost certainly intended to spike the US guns at the forthcoming G20 conference where China would have faced a barrage of complaints over its currency peg. China did the same last year raising the idea of replacing the US dollar as the international reserve currency in a carefully timed series of announcements to deflect attention from its policies in the run-up to the first G20 summit in April of last year. That proposal has been little discussed since, but it did have the desired political effect of shifting the focus back to the US economy.

Most economists agree China has to allow revaluation to boost domestic consumption and reduce growing inflation by bringing down real import costs. China though is concerned about damaging a still recovering export industry. Although the trade deficit has dropped in recent months many believe it will rise again late in the year if nothing is done about the currency. Indeed if the currency is not allowed to adjust appropriately then China may yet have it both ways a marginally higher exchange rate and continuing growth in export led surpluses. No doubt that is what Beijing intends.

–Stuart Burns

Last week we wrote in MetalMiner about electricity demand in China and how rising power production was a strong indicator that growth in industrial production was still robust. A number of recent reports in Reuters looking at the coal market and in particular, China’s production, consumption and imports support the power generation numbers showing strong growth. China’s coal imports in 2009 jumped by 212% from a year before to 125.8 million tons, prompting some analysts and exporters to forecast imports could easily grow some 30% this year to reach 170 million tons, the article said. That would make China the largest producer, largest consumer and the largest importer of coal in the world, overtaking Japan’s status as the world’s largest coal buyer.

Import figures although impressive are a shadow of production and consumption. Some doubt surrounds the latest exact numbers because unusually the National Bureau of Statistics has not released April numbers but estimates by Wu Chenghou, a consultant and former deputy director of the China Coal Transportation and Distribution Association, speaking at a conference in Shanghai said that China’s output of raw coal in the first four months of this year totaled 1.009 billion tons, up 27.7% from the same months of 2009. Without official NBS figures that number is possibly out by a few million tons but it still puts annual production at some 3bn tons. Last year, China moved from being a net exporter to a net importer as a combination of surging demand and mine safety fears restricted output.   China has contracted heavily for supplies from Indonesia, the world’s largest coal exporter for the second half of 2010, creating a tight spot market for thermal coal in Asia.

BHP and Japanese steelmakers are in the process of concluding Q3 coking coal pricing and appear to be agreeing on a further 12.5% increase for coking coal to about $225 per ton, representing a 75% rise from a year earlier. As economic expansion continues in India, China and other Asian markets demands on coal supplies will only rise. Producers are scrambling to invest in expanding production but increasingly supplies in Australia, Indonesia, South Africa, Columbia, Russia and even the US will come under pressure. The question is will it continue at this pace? The answer is no probably not. Part of China’s surging demand has been because of reduced hydro-electric power production due to droughts and a reduction in domestic coal production following mine fatalities. This has resulted in a tightening of safety standards and the closure of many small mines. The rise in coking coal demand has been driven by surging steel production a trend the authorities are trying hard to restrain and early signs of a cooling steel market may apply its own restraint in the short term. So it is possible coking coal volumes and prices could level off in the second half of the year. Thermal coal imports will depend more on domestic Chinese coal production. Electricity demand as we said last week is likely to rise into the peak summer season but then drop going into the fall. Much of this trend will have been priced into current forward buys but the reality is even if China’s GDP growth were to cool from the current 11%+ to a more sustainable 8-9% later this year pressure is likely to remain on the thermal coal market. Meanwhile the rest of Asia is growing strongly again and will maintain their own demands on the market. Coal looks like a good commodity to have been long in this year.

–Stuart Burns

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