Credit crunch antics

The global credit crunch is doing strange things to the country’s two main mineral exports, gold and coal. HUGH DE LACY investigates.

The world is supposed to be plunging into recession, but the price of gold is behaving oddly: it’s going down.

And the global price of iron ore has slumped 40 percent in the last three months, yet high-quality coking coal is still at dizzying heights despite steelmakers’ supposed sharp production cuts.

In the 2007-08 financial year the coking coal export revenues of state-owned Solid Energy topped $550 million – albeit it in a bad year – while gold revenues from our two main producers, OceanaGold and Newmont Waihi, hit $330 million. Since June the world has been plunging into an ever-deepening credit crisis, and the conventional wisdom is that under such circumstances coal should plummet and gold skyrocket.

Yet Solid Energy is forecasting a near-doubling of its export revenues to $1 billion in 2008-09, and the Pike River Coal Company will add a further $100 million to that from the 200,000 tonnes it expects to mine by June. By contrast, gold has fallen 30 percent from the record high of US$1033 an ounce ($1720/ounce) it hit on March 17 this year. December-delivery gold was at US$727 an ounce ($1210/ounce) in early November and showing no immediate signs of a significant recovery.

Of these two paradoxes, coal appears to be the more easily explicable, with Solid Energy’s South Island general manager, Simon Doig, pointing out that last year’s result was severely depressed by a combination of technical problems at its Spring Creek underground mine, and by cuts in production caused by save-the-snails protest action at the opencast Stockton mine.

Building on the good news that production at both coking coal mines is now back to where it should be – about two million tonnes a year – is the fact that the trebling of global coking coal prices that occurred at the beginning of this year has been locked in for the current financial year by contracts, Doig told Q&M.

“All of our contracts have a pricing mechanism that’s locked in for a 12-months term, so it’ll be from July next year before any change in pricing impacts on our revenue streams,” Doig says.

And because high-quality coking coal is a niche product in chronically short supply world-wide, it’s by no means a given that prices will follow iron ore downwards.

“Coking coal is not a fluid or transactional market such as thermal coal or iron ore, which are traded daily on a spot basis. Coking coal is only traded once a year, typically around March and April, and the annual price is set as such.”

This year the price shot up from around US$100 a tonne ($165/t) to US$300 a tonne ($500/t). Such coking coal as is traded on the spot market was in early November being quoted at US$360 a tonne ($600/t).

Doig says steel mills are certainly cutting production by as much as 20 percent, led by Indian-owned and Luxembourg-based Mittal Steel, in an effort to keep steel prices up. That, however, is being countered by the “very strong outlook” for coking coal in India, “and it’s the Indian market that will determine hard coking coal prices.”

This reflects a swing away from the influence of Japan which produces 110 million tonnes of steel a year, all of it dependent on imported coking coal.

Pike River chief executive Gordon Ward agrees that the strength of the Indian economy will help maintain coking coal prices, as will that of China which has its own supplies of coking coal.

“China and India are still growing very strongly, even though growth rates have come back: China’s GDP is forecast to come back from 11 percent to nine percent, but that’s still a fantastic growth rate. India’s GDP is running at seven to eight percent, and they expect it to come back to about six percent,” Ward says.

Less easily explained than coking coal’s apparent resilience is the weakness of gold, but both Oceana and Newmont are bullish about its future.

“The gold price on the surface may be behaving out of character,” Omar Jabara, the global director of communications for Newmont told Q&M from the Denver, Colorado, headquarters of the world’s second biggest gold producer.

“The global economic slowdown is looking as though it’s hitting other parts of the world, at least in the initial phase, harder than it is the United States, which is making the US dollar stronger relative to other currencies.”

Jabara sees that situation turning round in gold’s favour as a result of the massive infusions of US and other countries’ capital going into the financial markets. That should eventually weaken the US dollar and prompt investors to turn back to gold and away from cash, the present refuge of choice.

“We remain bullish on gold, and we see this economic and financial crisis bolstering the fundamental underpinnings of the stronger long-term gold price,” Jabara says. He notes that gold seems to have de-linked, as least for now, from oil prices, the bell-weather commodity that has such an effect on the inflation outlook.

He thinks the de-linking between gold and oil is a temporary phenomenon.

“Already they seem to be back tracking somewhat together, but they’re not as linked as they were, so people aren’t necessarily looking to the oil price to gauge where gold might go,” Jabara says. “They’re looking to the [US] dollar now, and as that weakens against other currencies the gold price goes up.”

Also underpinning gold in the medium term is chronic under-production, a factor pointed out to Q&M by Oceana chief executive Steve Orr.

“We expect to see about a 10 percent decline in production over the next few years. It’s a combined result of depletion of many of the mature goldmines – a depleting asset base – and the fact that many of the large producers like South Africa are under significant cost pressure with increasing labour costs and other inflationary factors,” Orr says.

“One of the issues that’s weighing heavily on the gold price is that many of the hedge funds which had taken speculative positions in gold and other commodities like oil and base metals have had unprecedented redemption demands.”

The under-performance of gold has been the result, but Orr expects that situation to turn around early next year, releasing gold’s up-side potential.

The bullishness of the outlook for both coking coal and gold exports is further heightened by the weakness of the New Zealand dollar, which within the last year has fallen from over US$0.82c to be currently bouncing around the US$0.60 mark.

“The Kiwi dollar has dropped close to 30 percent against the US, and that has a significant buffering effect,” Pike River’s Gordon Ward says.

Solid Energy’s Simon Doig agrees, “We think because we’ve got a quality product, and because the exchange rate’s working in the right direction, we should be able to weather the storm.”

Oceana’s Steve Orr is even more positive, “The upside potential of gold is capped for us by the fact that the Kiwi dollar’s under pressure. We’re expecting to see a record gold price in New Zealand dollar terms next year.”

And with both its main export commodities showing against-the-grain buoyancy, the New Zealand minerals industry should be able to look forward to a good year despite the strife that’s wracking the global economy.