There’s nothing better than baring your icy feet to the warm jet of a fan-powered heater. So we were delighted when our boss walked in this morning with a spare fan-powered heater. She asked if anyone had cold feet. Our hand shot up. Our legs shot out. Our shoes flew off. Fate took its course.
Apart from our new found foot-warmth, something else is giving us a warm glow today. The coal boom isn’t over yet. You haven’t missed it. That’s reason to celebrate. A Lleyton Hewitt-style show of fist-pumping bravado might be in order.
Coal prices might be staying higher longer than anyone expected.
Dalrymple Bay terminal is one of the largest coal ports in the world. It can ship 65 million tonnes of coal in a year. That isn’t enough to feed all of China’s coal power plants. But it makes Dalrymple a focal point for Queensland’s coal production.
Babcock and Brown, infrastructure owner and not much else these days, owns the port. It heralded an ambitious expansion at Dalrymple last year. By December, total capacity would be 85 million tonnes.
Funny thing, ambition…
It won’t happen. That’s not Babcock and Brown’s fault. Rains came. Builders languished. The new expansion will be finished in March at best.
That means supply of coal to China will be a few million tonnes shorter than investors expected. That may not sound like much. China’s imported 51 million tonnes of coal last year. Who gives a hoot about an extra 3 million?
We do. We give many hoots. We’ve got a truckload of hoot coming your way. We’ll explain why in a minute.
First, a key point. We were surprised to find that Newcastle, Australia’s other big coal port, just announced an 18% fall in shipments. You’d think coal producers would be swarming the place while Dalrymple’s full.
There’s nothing wrong with Newcastle. But the same rains that hit the port in Queensland delayed the miners themselves. They simply don’t have the coal to ship.
The grand new coal expansion is certainly having a few teething problems.
Now…the important part.
This is a marginal situation. Marginal situations are a type of investment idea that often escapes the average person’s attention. They don’t look particularly enthralling on the surface. But everything happens at the margin.
A premium example is Saudi Arabia’s oil production. The world uses 86 million barrels of oil per day. Saudi Arabia produces around 9 million. It’s special because it has the ability, although limited, to add new production. Most other countries are running at full capacity.
The world oil market is stretched tight, like a fitted bedsheet on an expanding air-bed. But the bed is growing as more Asians buy cars. Saudi Arabia may be the only corner of the sheet left with any give.
But here’s the thing… it doesn’t need to add millions of barrels of new oil to have a significant affect. It announced an extra 350,000 barrels yesterday. That’s only 0.4% of world oil demand. Tiny. Miniscule. Marginal.
Well, the oil price fell US$3. More on that below.
You see, it doesn’t take a lot to move a tight market. So if China misses out of 3 million tonnes from Dalrymple Bay when it wants 50 million overall…that’s quite a lot.
Website Globalcoal keeps indexed prices of coal. It also keeps track of the prices at major ports like Newcastle. They’ve all had big movements in the last couple of weeks. One index shifted 14%.
The short story is that coal prices may just keep rising. It’s not too late to invest here. It’s still a hot asset. And there just isn’t enough of it. That’s the kind of asset you want to hold.
Saudi Arabia Responds to Oil Shock
Saudi Arabia still has a bit of grunt left apparently. It announced a production increase yesterday. Arabia will pump an extra 350,000 barrels a day. That makes 9.45 million barrels.
Putting oil in a barrel used to be like shooting fish in a barrel. You could do both with the one barrel. Yep. The olden days were good times for everyone.
Now it’s more difficult to raise new production. Apart from the Saudis, few other nations have shown themselves willing or capable to pull it off. This latest move is important. We’re about to find out how many countries have the oil to pump.
We said a couple of days ago that Saudi Arabia makes a lot more money at a higher oil price. What we should’ve also mentioned is that the higher oil price eventually destroys demand. America uses more oil than anyone, so Saudi Arabia has a vested interest in keeping America alive.
There have been signs recently that America is starting to struggle as a direct result of the oil shock. The US Federal Highway Administration reports that US drivers drove 11 billion 17.6 billion kilometers less in March. They’re recoiling from the sting of exorbitant petrol prices.
The Saudis didn’t like the sound of America using less oil. So they added new oil to the market. It’s no coincidence. And it’s now a matter of keeping the balance right. Drill enough energy to keep America on life-support…but not so much that it eats into cash-flow.
You’ll find that other OPEC nations have the same vested interest. If they’re going to add new production, now is the time. And as Gabriel Andre outlines in this month’s Diggers and Drillers, the oil price might finally be ready for a break.
A few months ago he made a similar call on the gold correction. “The bottom will be at US$860,” he rasped to us in an exotic French accent. Bullion dipped below that mark, but not for long. It’s been on the up ever since. Must be something in the croissants. Take a three-month trial to find out where he thinks oil prices will land.
Origin Energy to Become BG Property
It looks as though Origin Energy (ASX:ORG) is ready to sign off on a BG takeover. BG, one of the largest LNG exporters in the world, sweetened the deal first. Raising its bid from $14.70 per share to $15 may prove to be enough.
It’s more good news for coal-seam gas producers in Queensland. Anyone there with a coal asset is going up in price.
Engineers and Builders Enjoy Healthy Construction Demand
Every month, more roads and bridges spring up around the countryside. Australia’s construction activity grew by 2.3% in the March quarter.
The result for engineers was even better: 5.2% growth in engineering projects in the first three months of 2008. Well. We know what we’re doing this afternoon. Checking over the mining services sector to look for a cheap stock.
The Daily Reckoning Australia