Daily Update: July 19, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Australia To Reap Mixed Benefits from Lifting of China’s Coal Import Ban

Leading figures in the Australian coal industry quietly rejoiced earlier this year when China’s unofficial ban on Australian coal imports was lifted after more than two years. 

China has long been a major customer for Australian coal. China's imports of metallurgical (met) coal from Australia averaged 42 million metric tons per year between 2017 and 2020, according to S&P Global Commodity Insights data, until political tensions led China to unofficially halt shipments in late 2020.

The end of the restrictions is helping to boost Australia's resource and energy export revenue. The country’s Department of Industry, Science and Resources expects the figure to reach a record A$464 billion in fiscal year 2022–23, which ended in June. This number was driven by higher earnings from met coal and iron ore, plus a weak exchange rate for the Australian dollar versus the US dollar. The Australian government forecasts that annual exports of met coal will hit 172 MMt by fiscal 2027–28.  

However, a close look at the rapidly evolving Asian coal market indicates that the effects of the rapprochement with China could be more complicated. 

“China's return to buying Australian metallurgical coal since January is not expected to open the floodgates for higher volumes in 2023, indicating a major rejig in met coal trade flow in Asia is not yet imminent,” wrote Rohan Somwanshi, head of agriculture and Asia metals news, and Claudia Seah, associate editor for metallurgical coal, of S&P Global Commodity Insights.

Imports of Australian met coal in China are expected to reach 8 MMt to 10 MMt in 2023, according to S&P Global analysts — a fraction of the total in 2020, before the trade halt began. 

Among the factors limiting the potential bonanza are unfavorable price spreads, flagging steel markets that have weakened Chinese demand for met coal, China’s push to develop domestic alternatives to imported coal and alternative suppliers who have made inroads into the Chinese market. The worldwide drive to produce “green steel” by lowering carbon emissions from steel production and Australia’s goal of achieving net-zero emissions by 2050 will also pressure coal exports. 

For now, much of the growth in coal exports is happening in South Asia instead of East Asia. India, which is the second-largest steel producer behind China, is now the largest customer for Australian coal. Australia exported just under 50 MMt to India over fiscal 2022–23, according to S&P Global Commodity Insights data. India also signed a free trade agreement with Australia, which came into effect in December 2022, that eliminates import duties on met coal. 

The geopolitical implications of this shift will be profound. The GDP of India, Asia's third-largest economy, is forecast to expand by about 7% in fiscal 2023-24, according to economists surveyed by Reuters. This is a rate of growth that China’s leaders can only envy. Additionally, closer economic and diplomatic ties between Australia and the Indian government led by Narendra Modi represent a nascent challenge to China’s status as the preeminent superpower in Asia. 

In any case, the revival of the Chinese market and increasing sales to India have put Australian coal on an upward swing: Investment in coal exploration surged 30% year over year to A$70 million in the fourth quarter of 2022, according to the Australian government. Production of thermal coal, burned in power plants to generate electricity, is expected to increase over the next two years, according to the government's June 2023 "Resources and energy quarterly" report, but the price per metric ton will still be relatively high by historical standards, reducing the competitiveness of thermal coal over other energy sources in the longer term.

Today is Wednesday, July 19, 2023, and here is today’s essential intelligence.

Written by Richard Martin.

Economy

Cooling Inflation, Nearing End Of Fed Hikes Send US Dollar To New Lows

Cooling inflation and expectations that the Federal Reserve is nearing the end of one of the most aggressive hiking cycles in the central bank's history have pushed the dollar to a new low against its peers. The US dollar index, which measures the greenback against a basket of six G10 currencies, has fallen nearly 13% from its September peak, as the Fed has slowed its hiking pace. In June, the Fed did not hike rates for the first time since March 2022, although it is expected to enact another 25 basis point increase at its next meeting later this month.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Banks Hesitant To Invest In The Bond Market Amid Higher Rates

US banks continued to trim their securities exposure during the first quarter as rising interest rates pushed investment portfolios underwater and put pressure on bank liquidity. Total securities at US banks were down 4.6% quarter over quarter to $5.611 trillion as of March 31, according to S&P Global Market Intelligence data. The balances peaked during the first quarter of 2022 at $6.260 trillion, up about 49% from the first quarter of 2020, but have since declined for four consecutive quarters, falling 10.4% from their peak.

—Read the article from S&P Global Market Intelligence

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Global Trade

Supply Chain: 2023 So Far In 10 Data Points

S&P Global Market Intelligence’s core scenario is that 2023 is the year that supply chains return to normal and companies turn to long-term supply chain strategies. It identifies 10 data points that show supply chains mostly returning to normal, though there are notable areas of concern. It also flags what's next for each measure.

—Read the article from S&P Global Market Intelligence

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Sustainability

Listen: Battery Metals Wanted: The US' Race To Decarbonize (Part 2)

Amid global efforts to decarbonize, US President Joe Biden's administration has set an ambitious goal to have 50% of all new vehicle sales in the US be electric by the end of this decade. However, making this shift will be heavily reliant on securing supply of battery metals. As countries around the globe are racing to electrify, Latin America, with its rich mineral reserves, is set to play a critical role. In the second episode of this special two-part series, S&P Global news and analytics experts Justine Coyne, Jared Anderson, Adriana Carvalho and Jay Hwang discuss Latin America and the role it can play in the US reaching its decarbonization goals.

—Listen and subscribe to Future Energy, a podcast from S&P Global Commodity Insights

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Energy & Commodities

Pakistan's FY 2022-23 Oil Consumption Declines Amid High Prices, Industrial Slowdown

Pakistan's consumption of petroleum products fell by a sharp 27% year on year in the fiscal year ended June 30 on the back of a sluggish industrial cycle, illegal imports and surging global oil prices, with the trend unlikely to reverse anytime soon, according to official data, analysts and industry sources. Consumption fell to 16.61 million mt in 2022/23 (July-June) from 22.6 million mt in the previous year, showed data collected from oil companies and Oil Companies Advisory Council.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Industry Top Trends Update Europe: Media and Entertainment

AI presents risks and opportunities. It is still too early to tell how AI will reshape media. It will require hefty investments to develop and acquire technology, so smaller players that don’t already own it or that lack capacity for M&A could miss out. Over the long term, AI could enhance efficiency and reduce costs, for example, in content creation and editing. Still, wider implications for the industry, including the regulation and evolution of copyright, remain highly uncertain.

—Read the report from S&P Global Ratings

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