Decoding Australian Coal Export and Port Congestion Roadblock

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 |  Includes: ACIIQ, BHP, BTUUQ, CCOZF, EWA, FCL, KOL, NCOC, PKOL, RIO
by: World Market Pulse

The old saying that when it rains, it pours seems to be coming true especially for the Australian mining sector with repeated negative news and trends emerging every day. Just as the Australian mining industry was bracing itself to evaluate the possible repercussions of Australia's Mining Tax Submissions, another bad news has hit the Australian coal industry as severe congestion problems at the world's biggest coal shipping port, Newcastle in Australia is likely to constrain the country's coal exports for at least two years.

The rising demand from Asian giants India and China have forced BHP Billiton (NYSE:BHP) , Rio Tinto (RTP), and other mining companies to expand operations to keep up with the huge demand, in turn overstretching the capacity of Australia's Newcastle port by almost 10 million MT on an annual basis as it battles with bad weather and congestion.

Coal is Australia's second biggest export earner after iron ore and rapid growth in China and India have kept global coal markets tight. Increased demand for coal is already being seen in China, which accounts for nearly half of global coal demand and being used for power generation and metallurgical coal to produce steel. Now with an increase in demand in neighboring India, the two Asian neighbors can consume a lot of coal put together to fulfill their economic dreams of industrialization and growth.

India on the other hand which is Asia's third largest economy is bracing itself for a huge import of coal in order to fulfill a part of its ever increasing energy requirements as the country plans to add a capacity of 100,000 MW of power during 2012-17. India faces peak hour power shortage of nearly 14 % as of today and sector firms have lined up to raise funds as they expand generation and transmission capacity to satisfy a rapidly urbanizing population and rising industrialization.

The Port Waratah Coal Services (PWCS), which operates export terminals at Newcastle, has also urged miners to cut coal exports from the port because it could not cope with contracted volumes. PWCS has secured coal producer contracts for 106.7 million MT this year, but the company said it was only able to load around 97 million MT.

In what can be termed as a definite bad sign for the Australian mining sector, Lawrence Li, a shipping analyst at UOB Kay Hian, said:

China may have to look more to Indonesia or Vietnam if Australia cannot meet their demands.

Ports Expansion Plans: Although among projects approved by port authorities is a new terminal expected by the first quarter of 2011, which will slowly increase annual capacity to 163 million MT but a reduction in supplies from Newcastle could provide short-term support to coal prices and freight rates for dry cape size vessels.

ETFs in Focus

  • Australia ETFs

Although the most popular Australian ETF, iShares MSCI Australia Index Fund (NYSEARCA:EWA) allocates more than 40% of it assets to financial stocks, it also maintains a large allocation to industrial materials, which comprise about a quarter of assets. Top holding BHP Billition (BHP) , the world’s largest mining company, makes up about 15% of the fund, while mining giant Rio Tinto (RTP) accounts for another 3.5% of EWA.

  • Coal ETF Options:

Although a recent drop in the natural gas prices has had some short term impact on the prices of coal exchange traded funds, but an increased demand from Power hungry India, the world's second largest populous nation is set to trigger a rally in the coal ETFs in the coming weeks. Some of the options for investing in Coal ETFs include:

  1. Market Vectors Coal ETF (NYSEARCA:KOL): The Index provides exposure to publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. As such, the Fund is subject to the risks of investing in this sector.

KOL Top Ten Holdings

1. Peabody Energy Corporation (BTU): 7.81%
2. China Shenhua Energy Company Limited (01088): 7.74%
3. Alpha Natural Resources Inc (New) (ANR): 7.59%
4. China Coal Energy Co. Ltd. (01898): 7.50%
5. Consol Energy, Inc. (NYSE:CNX): 6.72%
6. Yanzhou Coal Mining Company Limited (01171): 5.73%
7. Joy Global, Inc. (JOYG): 4.51%
8. Bucyrus International, Inc. A (NASDAQ:BUCY): 4.43%
9. Arch Coal, Inc. (ACI): 4.29%
10. PT Bumi Resources TBK: 4.26%

Expense Ratio: 0.62%

  1. PowerShares Global Coal Portfolio (NASDAQ:PKOL): The Index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the exploration for, and mining of coal, as well as other related activities in the coal industry.

PKOL Top Ten Holdings

1. Peabody Energy Corporation (BTU): 8.78%
2. Cameco (NYSE:CCJ): 7.93%
3. China Shenhua Energy Company Limited (01088): 7.42%
4. Consol Energy, Inc. (CNX): 6.54%
5. Inner Mongolia Yitai Coal Company Limited (900948): 6.27%
6. Coal & Allied Industries Limited (NYSE:CNA): 4.32%
7. Alpha Natural Resources Inc (New) (ANR): 4.06%
8. Adaro Energy Tbk: 4.02%
9. PT Indo Tambangraya Megah: 4.01%
10. China Coal Energy Co. Ltd. (01898): 3.92%

Expense Ratio: 0.75%

Disclosure: No positions