Macquarie: Bullish Outlook for Coking Coal

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"Even with slower growth, supply constraints remain."

Macquarie held its second 2010 China Commodities Conference last week in Beijing and Shanghai. It was well attended by institutional investors and industry experts with more than 20 experts presenting outlooks on the macro economy and commodities.

A clear takeaway was that Chinese growth in 2011 would be a little slower than in 2010—nothing alarming—with the majority assuming GDP growth of 8.5%–9.0% next year. There was some concern over the government's policy on the residential property market in the coming months if property prices were to stay high. Property transactions are expected to fall 10% in Q 410 before rebounding in 2011 on solid fundamental support from middle-class upgrade requirements and fresh buying from people moving from rural to urban areas.

One of the key themes was the government's desire to increase efficiency. The noise out of Beijing is that growth for growth's sake will be less of a priority over the next five years. The presentations projected a bullish market for copper (high-efficiency motors, consumer appliances) and hard coking coal (as steel mills become larger) and a bearish one for aluminum supply (aluminum costs in China are set to rise and aluminum's main inputs are in domestic-based energy, so there would be little benefit from the rising Renminbi in terms of import cost reduction).

It was widely agreed at the conference that the Chinese economy and key commodities demand are set for slower growth next year but not to the point of collapsing. However, limited new supply, including iron ore, coking coal and copper from the Western world should drive prices much higher next year from the 2010 level. The thermal coal market should be bullish in the near term but mixed in the medium term on a potential supply response to mine consolidation.

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