–Before we get into today’s regular reckoning, we again send our thoughts and prayers up to everyone in Queensland and New South Wales dealing with torrential rains and flooding. From all the staff here at the Markets and Money headquarters, we send our best wishes. Stay safe.
–For readers outside Australia who are not familiar with the country’s geography, Brisbane is a city of about 1 million Australians on the north east (Pacific) coast. It’s about 2.5 hours north of Melbourne by airplane. Steady rains all summer have saturated the ground in Queensland. Heavy rains in the last 10 days have led to the flooding you see on TV. The flooding is expected to peak today and tomorrow as it hits Brisbane and its suburbs.
–If you’re from overseas and feel compelled to contribute to humanitarian or relief efforts, we suggest the Australian Red Cross. The Red Cross does relief work all over the world and will surely be on the scene in Queensland in the coming weeks. There will probably be more local relief efforts you can contribute to. And if you’re affiliated with one or know about one, let us know and we’ll pass it along (after making sure it’s legitimate).
–Since our beat here is finance and economics, let’s take a look at the impact the flooding may have on the Australian economy and the world. Granted, it’s not the most urgent story at the moment. But the flooding IS going to have an impact economically. What will it be?
–You can see from the table below (via the Wall Street Journal) that Queensland accounts for a large percentage of Australian exports. In dollar terms, thermal and metallurgical coal are the two big bread winners. But it accounts for quite a bit of food production too, which you will probably notice in the coming weeks as the price of certain fruits and vegetables goes up in Australian stores.
–Australia is the world’s top exporter of metallurgical coal (steel making, or coking coal) and the world’s second largest exporter of thermal coal (power plants). Queensland exporters alone account for 60% of global seaborne coking coal exports. The Financial Times reports that the spot price for coking coal is now around $295 per tonne. That’s a 30% premium to the quarterly contract price for coking coal.
–Coal prices (both thermal and coking) have been trending up since the middle of last year. Thermal coal now sells for $140 per tonne, a 40% gain in the last twelve months. For Queensland right now, though, the biggest worry is not the reduced volume of thermal coal exports in the rest of this quarter. It’s the supply of thermal coal for Queensland’s own power plants.
—The Australian Financial Review reports that the floods could disrupt the supply of coal to the government’s 1440 megawatt power station at Stanwell. The operators of the station say it usually has between 26–30 days of coal stockpiled just in case. However, thermal coal supplies to another power station at Swanbank might be affected after a landslide blocked the rail line that links the station with the coal mines that supply it.
–These sorts of emergencies don’t happen often. But when they do, it reminds you of how much we take modern, industrial-scale, coal-fired power for granted. The margin between convenience and emergency isn’t that big, is it? Coal as a source of electric power is not going away any time soon.
–Meanwhile, outside Australia, the disruption of coking coal exports is obviously going to drive prices higher. It should drive steel prices higher too. But will it drive Chinese steel production lower, leading to a dip in Chinese fixed-asset investment? Or will this spur the Chinese and others to look for non-Australian sources of high-quality coking coal?
–Substitution happens when prices get too high. You can’t make steal with mud. But you can find your coking coal somewhere else. This is the geographic kind of substitution. And politicians who take Australia’s mineral wealth for granted and believe it can be the engine for infinite income redistribution should keep this in mind.
–When it comes to individual companies and what to do about your investments, the Stock Doc-Diggers and Drillers editor Dr. Alex Cowie-is already on the case. And of course D&D readers will know that Alex tipped an Aussie-listed but African-based coal company last year. We’ll let you know what he finds when we hear from him.
–While the commodity story plays out here, the debt story plays out in Europe. As we mentioned earlier this week, Portugal is set to auction a heap of new government debt today. And the papers are full of stories about Portugal’s impending bailout from its equally broke European neighbours.
–What is the lesson? When a nation has unpayable debts, it seeks to “pay them” with currency debasement. This debasement leads to inflation. And if the debasement prompts repudiation of the currency by investors, it can lead to hyperinflation. Europe take note. America take note. Australians prepare.
–Currency debasements have dietary consequences too. Algeria’s government announced overnight that it was putting price controls and cutting prices on food staples. This came after big price increases for cooking oil and sugar. Reuter’s has the full story.
–You might wonder how the world’s fourth-largest exporter of natural gas could have a food crisis. This is proof that the real crisis today is not that there isn’t enough food in the world. It’s that there are too many U.S. dollars. If you think there will be less of them in the future, think again.
–The food crisis stems from the world’s monetary crisis. And the world’s monetary crisis stems from the fact that the U.S. dollar is losing its status as a world reserve currency because of the monetary and fiscal policies of the worst generation of American leadership in that country’s history.
–China knows this. Yesterday we learned that Chinese foreign exchange reserves—a huge part of which come from trade with the U.S.—are now just shy of $3 trillion. It was a 20% increase over last year. China makes. The world buys.
–This creates an inflation problem for China domestically. It also creates pressure on China to revalue its currency and let it appreciate against other currencies. And just yesterday, various news outlets report that the Bank of China will begin allowing customers in New York to trade the Chinese currency.
–“We’re preparing for the day when remnimbi becomes fully convertible,” said the New York branch manager Li Xiaojing. The first step to internationalising China’s currency—so it can replace the dollar—is to let people trade it freely. This is one step closer to that.
–But we’re not there yet. And in the meantime, non-paper currencies like gold and silver and not financial assets like oil and energy are going to gain value against paper money. Floods, food crises, and debt crisis only highlight the distinction between financial and real assets. This is the year to migrate your wealth and definancialise your life. More on that tomorrow.