Photographer: Lars Baron/Getty Images

The Dirty Commodity Powering Australia's Economy

The deficit could be wiped out in `months'.
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Former Australian Prime Minister Tony Abbott was derided for praising coal as ``good for humanity,'' given the environmental harm the fossil fuel causes. He may feel partly vindicated after its recent price spike.

Australia's second-largest export has surged this year, with coking coal up a staggering 240 percent, and was the star factor behind the narrowest trade deficit in 21 months in September, data released Thursday show. Capital Economics Ltd. projects the figures could get even better.

``If coal prices stay at current levels, the deficit could be wiped out in a matter of months,'' said Paul Dales, chief Australia and New Zealand economist at Capital Economics in Sydney, referring to what would be Australia's first trade surplus since March 2014. ``But that’s a very big `if.' ''


Dales, like many analysts, sees the jump in the coal price as unsustainable. But there's some evidence that provides optimism: analysis by Bloomberg New Energy Finance shows Asian demand is likely to increase for years to come even though China, Japan and India -- Australia's biggest importers of coal -- have agreed on steps to limit fossil-fuel pollution.

A common refrain is that China builds two new coal-fired plants a week. That’s still true despite efforts by policymakers to rely less on the commodity for power generation and as growth in demand for energy slides. BNEF sees China’s rate of building such power stations falling from two to one in the next five years.

Japan, meanwhile, is pushing ahead with new coal-fired plants based on an assumption that power growth will continue for the next 15 years, according to BNEF.

Since the start of the year, the price of coking coal has risen from $78.20 to $265.50. Iron ore, Australia's largest export, has also rebounded. The steel making material has climbed from $43.57  to $65.31, a 50 percent rise over the period.

The price increases are all about China, again underscoring Australia's dependence on the world's second-largest economy.

Coking coal has surged after output from China, the world’s biggest miner, tumbled under government pressure to cut overcapacity -- skeptics expect that to correct after Chinese authorities asked miners to lift output before winter to ease supply curbs. Iron ore has risen as Beijing authorities injected stimulus into their economy, spurring infrastructure and apartment construction.



Suddenly, some of Abbott's two-year-old comments look prescient. ``Coal is good for humanity, coal is good for prosperity, coal is an essential part of our economic future, here in Australia and right around the world, '' the then-prime minister said at the 2014 opening of the $3.4 billion Caval Ridge Mine in central Queensland.

Coal's resurgence is also a fillip for Abbott's successor, Malcolm Turnbull, who is struggling to rein in a budget deficit. The increase in national income from higher commodity export prices flows through to corporate profits, wages growth and government coffers via increased tax revenue.

It also signals even less likelihood of the Reserve Bank of Australia cutting interest rates any further from the current record-low 1.5 percent.

Coal's comeback might not be a good thing for humanity, but it certainly helps Australia's economy.

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