There’s good news and bad news afoot for ASX commodity investors owning shares or looking to add to their shareholdings.
First, the bad news.
Coal, Australia’s second largest export earner after iron ore, is coming under renewed pressure.
As you may know, there are two types of coal, thermal – burned in power plants to generate electricity – and coking, which has a higher energy content and is primarily used to make steel. Australia has an abundance of both.
Thermal coal has long been under pressure from environmental groups for its carbon emissions and other pollutants. Some nations, like India and China, are still rolling out new coal fired power plants. But the longer-term outlook sees the demand for thermal coal steadily declining as it’s replaced by renewables and electricity generated from cleaner burning LNG.
Coking, or metallurgical coal, is likely to remain in demand for the foreseeable future.
Although Japan remains Australia’s biggest market for coal, China’s continuing infrastructure and building boom demands a lot of new steel. That in turn requires iron ore and, generally, coking coal.
And herein lies the bad news for ASX coal shares.
The Middle Kingdom strikes back
Political ructions between the Chinese and Australian governments have already seen China lash out economically, hitting both Australian wine and barley producers.
In its latest move, which the Chinese Government remains mum on, Australian coal exports are being deferred by Chinese buyers. Inauspiciously, it appears other coal exporting nations are unaffected.
According to the Australian Financial Review:
Australia’s biggest coking coal exporter, BHP, said on Wednesday that Chinese customers had asked for coal shipments to be deferred, in the first public confirmation that Chinese policy was hitting Australian miners…
Senior figures in the global coal industry are increasingly convinced that political tensions between Australia and China are behind the deferrals, amid signs that shipments from other exporting nations have been able to enter China.
While BHP Group Ltd (ASX: BHP) is Australia’s largest coking coal exporter into China, it’s the ASX shares that derive most – or all – of their income from coal that could suffer the most if China keeps its ports shuttered to Australian imports.
Even companies like Whitehaven Coal Ltd (ASX: WHC), which earned less than 2% of its revenue from Chinese buyers last year, will come under increased pressure if coal prices continue to fall. Coking coal prices are already down 10% since 6 October.
The Whitehaven share price is only down 2% since 6 October. But it’s been a rough year for the miner, with its share price down 59% so far in 2020.
The declining price of coal and potential import bans from China couldn’t come at a worse time for Queensland coal miner, New Hope Corporation Limited (ASX: NHC). New Hope just announced it is laying off as much as 75% of its workforce as it struggles to gain the required approvals for its New Acland mine.
At the time of writing, the New Hope share price is down 42% year to date.
After steep falls like this, you may be tempted to believe these coal shares are at or near their bottom. And while that may be true, I believe investing in these shares today would be more akin to catching a falling knife than buying at a comfortable dip.
So, what was that about good news?
Food prices up amid booming Aussie harvest forecasts
Australia not only has an abundance of coal, it also has a huge agricultural footprint with plenty of growth potential ahead.
Last month, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) released its latest updated crop report. It revealed huge expected growth among much of Australia’s winter crop production, with wheat up 22% from its 10-year average and barley up 23%.
Moreover, noting the favourable weather conditions, ABARES forecasts a 194% increase in Australia’s summer crop output.
The International Monetary Fund (IMF) added its own bit of good news for ASX agricultural shares with its projection that food prices will rise 0.4% this year. That may not sound like much, but remember the world is largely in a deflationary period right now, with the price of most goods flat or falling.
One ASX share that’s well placed to benefit from a bigger harvest and higher prices is Graincorp Ltd (ASX: GNC). Much of GrainCorp’s revenues are derived from storing and transporting grains.
The Graincorp share price is up 11% year to date, at the time of writing. By comparison, the All Ordinaries Index (ASX: XAO) is down 7% in 2020.
Another ASX share that I believe has a lot of potential for growth in the current environment is Costa Group Holdings Ltd (ASX: CGC). Costa Group is Australia’s largest grower, packer and marketer of fresh fruit and vegetables.
The Costa share price is up 49% year to date.
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