Price and exchange rate impact on Australian coking coal export: an empirical analysis.

• Author: Ali, Md. Liakat
• Position: Report - Statistical data

1. INTRODUCTION

   Coal is the single largest foreign currency earner for Australia. According to the Australian Economy 2010, Australia has earned A$160 billion by exporting its mineral resources. The relative sectoral contribution towards this export earnings is: coal A$55 billion (around 34.37%), followed by ores A$52 billion (around 33%), other mineral fuels A$21 billion (around 13%), gold A$17 billion (around 11%), and other metals A$14 billion (around 9%) (ABARES, 2010). The volume and value of Australian coal export has increased significantly between the year 2007-08 to 2008-09 because of the prices have more than doubled during this period.

   Australia produces two types of coal--hard coal and brown coal. Australian hard coal is mostly destined for export and brown coal is for domestic use. It is important to note that the volume of hard coal is counted as the sum of the volumes of coking coal and steam coal. Coking coal (metallurgical coal) is primarily used to produce in iron and steel making, while steam coal (thermal coal) is mainly used in electricity generation.

   The world trade in hard coal (black coal) was about 941 Mt (2008-09), comprising of 211 Mt of coking (metallurgical) coal and 730 Mt of steaming (Thermal) coal. Australia is the world's largest hard coal exporter with about 30% of world total coal export and the Australian coking coal export contributes more than fifty per cent of the world coking coal trade (55% in 2007-08 and 52% in 2008-09). According to the Australian Economy 2010, the value of Australian coking coal export had increased by 150.61 per cent from A$15.64 billion to A$37.1 billion between the year of 2007-08 to 2008-09. The significant amount increase in export value because of the coking coal prices are more than doubled from the previous year. The Australian coking coal export contributes to the world market in an average 42.44% per year from 1985 to 2008. The projected global demand of coal will increase by 1.9 per cent per year over the period to 2030 and Australian coking coal exports are projected to increase by 2.4 per cent per year over the period to 2030 (ABARES, 2010).

   Findings from the comparison of World Coking Coal Export and the Australian Coking Coal Export (Table 1 above)

   * The world coking coal export increased by 1.95% on average from 1985 to 2008 and the Australian coking coal export increased by 4.57% on average from 1985 to 2008.

   * The contribution of Australian coking coal export into the world market is on average about 42.44% per year from 1985 to 2008.

   * In 2008-09, Australia had earned A$55 billion from total coal export. The value of coking coal export increased by 150.61 per cent from 2007-08 to 2008-09 and earned A$20.73 billion more than the previous year.

   * The world coking coal export increased 90.61 Mt from 1985 to 2008 and in the same period Australian coking coal export increased by 87.54 Mt.

   * In 2008, the world hard coal trade was 939 Mt and coking coal trade was 261.84 Mt. In 2008, Australia's contribution to the world coking coal trade was 136.92 Mt.

   * The global demand of coal is projected to increase 1.9 per cent per year over the period to 2030. Australia's exports of coal are projected to increase by 2.4 per cent over the period to 2030.

   * In 2008, the world coking coal export increased by 9.65% than the previous year (2007), whereas, Australian coking coal export increased by 4.35% than the previous year (2007).

   Japan remains the largest coking coal importer from Australia for the last four decades. In 2008-09, Japan imported Australian coking coal 43.3 Mt, around 32.95% of Australian total coking coal export. In 2007-08, Australia exported coking coal to Japan 50.23 Mt, around 36.68% of its total coking coal export. In 2008-09, Australia exported coking coal to Japan 6.90 Mt (around 13.74%) less than the previous year. This is because of the fall of domestic demand and international demand for Japanese steel made goods. In contrast, Australian coking coal export in China increased significantly. In 2007-08, Australia exported coking coal to China 1.53 Mt, around 1.12% of its total coking coal export, but in 2008-09, Australia exported 15.5 Mt to China, around 11.80% of its total coking coal export. India is the second largest coking coal importer of Australia since 2000. In 2008-09 and 2007-08, Australia exported coking coal to India 23.8 Mt and 24.23 Mt respectively. The Republic of Korea is the fourth largest importer of Australian coking coal. At the end of 2007-08 , Korea imported Australian coking coal 8.36 Mt, around 6.10% of Australian coking coal export but in 2008-09, it had imported 15.1 Mt coking coal from Australia. It has almost doubled from the previous year because the strong increase in steel production in Korea. Asia is the Australian coking coal main market. In 2008-09, Australia had exported its coking coal 74.35% to four Asian countries (Japan 32.95%, India 18.11%, China 11.80% and Republic of Korea 11.49%). Asia is projected to account for the majority of the increase in world coking coal consumption and trade over the next decade and Australia will continue to be a major exporter of coking coal to Asian countries.

   Key Factors Affecting the Australian Coking Coal Export

   There are fundamental advantages that have allowed the Australian coking coal export to hold its leading position in the world market. Although Australia holds the leading position of coking coal export, it has to compete with other countries around the world and the following key factors affect the Australian coking coal export to the world market.

1. Price: Australian coal was discovered in the 18th and 19th centuries. It is a relatively young player in the world coking coal market but it has made a huge contribution to the world market. Australian coking coal price has to compete with other coking coal producers around the world. Australian coking coal export FOB (Free on Board) unit value per tonne is 194.87 US$ in 2008 followed by Canada 209.5 US$ and USA (FAS) 148.39 US$ (IEA, 2009). Australian coking coal is low sulphur and has low ash content. Most coking coal produced by Australia is exported to Asia and now, as a result of the booming Asian economy, the demand for coking coal is increasing rapidly and Australia is considered a reliable supplier of high quality coking coal.

2. Exchange Rate

   The exchange rate of Australian dollar against the US$ has a big impact on Australian coking coal export because the world export price for coking coal is usually denominated in US dollars. The reality is that the Australian coking coal exporters gain more value when the US$ is stronger (i.e., A$ is weaker) and they lose when the US$ is weaker (i.e., A$ is stronger). It sounds like a paradox but this is the reality for any Australian coal exporters.

3. Demand and Supply

   In general, export depends on demand and supply. The main underlying assumption is that when the demand for coking coal increases, the export of coking coal also increases. The fact is that the world main coking coal exporters are Australia, USA, Indonesia, Canada and Russia. On the other hand, the world main importers of coking coal are Japan, India, Republic of Korea, China, Germany and France. The booming Asian economy is creating new demand for coking coal but the source of supply is not increasing as fast as demand is increasing and, as a result, the price of coking coal is going higher and higher.

4. Quality of Coal

   Australia produces high quality and high energy-content coking coal. It is a low sulphur and low ash content coal. As a result, the demand of Australian coking coal in the world market is high. In 2007-08, the world coking coal export increased by 8 per cent over the previous year, whereas, the Australian coking coal export increased by 10 per cent over the previous year.

5. Transport Cost

   Australia has fast and efficient railway links to the ports which have modern bulk loading facilities. Most mines in Australia are located close to the coast such as Qld--135km, NSW 250km while, on the other hand, the product of USA--600-1300km, South Africa--580km and Canada--1100km has much further to travel. The geographic location of Australia is close to Asia where the coking coal demand is high. The transport cost for Asian importers is less from Australia than other countries.

6. Local Consumption

   In 2008, the world coking coal consumption increases by 9.4% from 744.2Mt to 813.8 Mt, whereas, the domestic consumption of Australian coking coal is declining around 32.4% from 4.7 Mt to 3.18 Mt at the same period. Its effect goes to the export; as a result, Australia is able to export more in the world market.

7. Reserve to Production

   Australia has a huge deposit of coal under its surface. At the end of 2010, Australia had a recoverable Economic Demonstrated Resources (EDR) of hard coal (steam coal and coking coal) deposit of 76.2 billion tonnes. In addition to the EDR deposit, there is another 8.3 billion tonnes of Sub-economic Demonstrated Resources (SDR) in Australia (IEA, 2010). In fact, with total identified resources of hard coal of around 114 billion tonnes, Australia's total coal resources are substantially larger than it is estimated; that means, if Australia keeps her production at the 2008 rate of around 398 Mt (Million tonnes) per year, the EDR will be adequate to support about 191 years of supply. Thus the deposit of the coal will support Australian economy more than 191 years.

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   The world export price for coking coal is usually denominated in US dollar. The Australian coking coal exporters sell their coal in US dollars and convert the US$ proceeds into Australian dollars. The A$/US$ exchange rate plays a vital role in determining the amount of revenue for Australian coal companies. The translated value of US$ denominated export revenue is higher when the US$ is higher (i.e., A$ is lower) the revenue is lower when the A$ is higher. Thus, it...