Australia's Ongoing Coal Boom Could Provide a Safe Haven for Investors

Investors spooked by three years of global recession have nervously scanned the globe for failsafe, sure-fire places to park their surplus capital.

The rise of the non-Organization for Economic Cooperation and Development countries is fundamentally altering the world's energy markets, which underwent a historic shift in 2007 when non-OECD demand surpassed that of OECD. Demand growth outside traditional OECD markets is now the driver in the world's energy, with fossil fuels continuing to account for 88 percent of global energy demand and for over half of the annual increase in total energy demand. Another historic shift occurred last year, when China became the largest consumer of energy after surpassing the U.S.

By 2035 China will consume almost 25 percent of world energy after just 9 percent in 2000. The Energy Information Administration trend predictions in future consumption patterns still put liquid fuels at the top for the next twenty-five years but coal is still to grow strongly to almost catch up over this period. Accordingly, China will provide the largest share of future growth in the global energy market, and it is here that Australian energy fortunes will be made.

China is now Australia's largest trading partner, with bilateral trade topping $100 billion last year.

Coal is the second most important energy source making up almost 30 percent of global energy consumption. For Australia coal is a "dual use" product, as it meets 43 percent of Australia's energy requirements and just over 70 percent of those of China. Over 5 billion tons of coal are consumed worldwide each year. Most coal is used as thermal coal but the extraordinary growth in Chinese steel production since 2001 has boosted demand for metallurgical coal. Demand for coal in the Asia-Pacific region has steadily risen and now accounts for 66 percent of total global coal consumption. China is the world's biggest consumer of coal and Australia is the region's biggest exporter. Thermal coal is used in electricity generation, while metallurgical coal is used for steel production. Current Australian metallurgical coal exports are almost twice as large as thermal coal exports.

According to Australia's Department of Foreign Affairs and Trade, between 1999 and 2009 the value of Australia's coal rose from $8.4 billion in 1999 to $39.4 billion in 2009, an increase of over 370 percent.

This symbiotic producer-consumer relationship is already reflected in bilateral Australian-Chinese trade.

Scoring a watershed agreement from Chinese utility China Power International Development to supply 30 million tons of thermal coal per year for 20 years, Clive Palmer's privately held Resourcehouse has cleared the way for an ambitious $8.9 billion project to export thermal coal from Queensland's Galilee Basin. Resourcehouse's "China First" mine is predicted to begin production in 2013. While the Resourcehouse investment is the most high profile, there are many other success stories of Australian energy companies interacting with China.

The economy of Australia is a developed, modern market economy with a GDP of approximately $1.2 trillion. In 2009, it was the 13th largest national economy by nominal GDP.

There are however, some storm clouds on the otherwise sunny horizon of Chinese-Australian relations. Given its growing prominence in the Australian economy, China has taken upon itself to critique some of Canberra's economic policies. Recently Cheng Ouyang, a junior diplomat at the Chinese embassy told a business forum that Australia's "dual-speed and patchwork economy" needed fixing, with Chinese help, commenting, "Australia's dual-speed (basically, the growing mining sector, while manufacturing and other economic areas are depressed) and patchwork economy would not only hurt its own economic development, but also influence China and Australia's long-term economic co-operation" before opining that China's strengths in these areas could be utilized to "help accelerate Australia's economic development." Given that Beijing's diplomats are hardly known for expressing independent opinions, Cheng's observations can be taken as reflecting official Chinese government thinking.

Despite official concerns about Australia's "patchwork" economy, Chinese interest in Australia is not limited to its raw materials.  Now 120,000 Chinese students study in Australian schools and universities. Further impacting Australia's economy, China is a major purchaser of Australian debt. Seeking further involvement in Australia's mining sector, in 2009, offers were made by state-owned Chinese companies to invest $22 billion in Australia's resource extraction industry.

Such policies undoubtedly produce unease in Canberra, which doubtless would be happy to see a diversification of investment in Australia.  China is not Australia's sole export market for coal - Indian demand is expected to rise sharply as well due to large-scale coastal power projects now coming online.

Massive supplies of raw materials, a guaranteed market, and booming exports of over 370 percent in a decade - it doesn't get much better for investors than this. Accordingly one with surplus money could do worse than investigate Australian energy stocks.  But remember, in a world of globalization, China's yuan is just as "green" as the US dollar or euro.

By. Dr. John C.K. Daly