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Coal becomes commods' first victim of emerging-market woes

Source: Reuters - Thu, 30 Jan 2014 11:48 GMT
Author: Reuters
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* Emerging markets rely heavily on thermal coal

* Utilities in emerging economies slash coal orders as growth slows

* Weaker currencies make dollar-traded coal expensive to import

* Commodities markets seen having weak year

By Henning Gloystein and Claire Milhench

LONDON, Jan 30 (Reuters) - The rout in emerging markets is starting to spill into commodities, with coal prices tumbling as much as 10 percent this month as utilities in developing economies slash orders.

Commodity price developments often go hand in hand with growth in emerging economies, which consume more energy as their wealth rises.

"Commodity demand is more concentrated in fast-growing countries ... The marginal buyer of commodities is very much the emerging world and it's going through a bear market right now," said Charlie Morris, head of absolute return at HSBC Global Asset Management, who oversees $1.8 billion in assets.

"Commodities will probably have a bad time for much of this year," he added.

First and hardest hit by the turmoil has been thermal coal as it is closely linked to the industrialisation of emerging economies, being the cheapest fuel to generate electricity.

Slowing growth in recent months has reduced coal demand in many emerging economies, and the weakening of currencies such as the Indian rupee and Turkey's lira has made dollar-traded coal imports much costlier, leading to a drop in orders.

As a result, major coal exporter South Africa is seeing a sharp drop in demand from its main buyer India, pulling down South African physical coal prices by almost 8 percent in the last 10 days.

"People might see India cutting back on coal purchases and thermal coal prices might come down further," said George Cheveley, portfolio manager for the commodities and resources team at South Africa's Investec Asset Management. Coking coal prices had also been affected, he said.

Sharp currency falls and a slowdown in emerging economies are also affecting European coal markets, where prices have fallen more than 6 percent in the past two weeks as Turkish utilities slashed orders.

"Factoring in the recent fears on emerging market growth ... we believe that a meaningful (price) recovery is unlikely before Q3 2014," French Bank Societe Generale said.

The lira sank to record lows this week as alarmed investors fled Turkish assets over a high-level graft case, forcing the country's central bank to raise interest rates sharply.

CHINA IS DIFFERENT

Prices of other commodities such as iron ore have also dropped as a result of lower demand, but this is more closely related to developments in China.

"Iron ore is purely a China story whereas coal is more leveraged on emerging markets, particularly India," said Colin Hamilton, head of commodities research at Australian bank Macquarie.

Chinese coal consumption rose just 2.6 percent in 2013, one of its lowest growth rates in years, as the economy slowed and new environmental regulation that favours natural gas over coal as a fuel for electricity comes into place.

"Demand conditions in China remain relatively weak, with implied consumption disappointing," Australian bank Macquarie said on Wednesday in a research note.

As a result of slowing growth, Australian physical coal prices have dropped 10 percent since the beginning of the year to $78.75 per tonne.

The rise of China as a major economic power over the last 15 years also means the turmoil in emerging markets is seen as less of a problem than the East Asian crisis of the late 1990s.

"Turkey and South Africa are a concern, but the concerns are nowhere near what we had back in the late 1990s," said Thanos Papasavvas, emerging markets and fixed income strategist at Investec Asset Management, which oversees investments worth $107 billion.

He added that even if China's growth slowed, its absolute economic output and commodities demand had risen so much since 1998 that a repeat of that crisis was unlikely.

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