What Coal and the Aussie Dollar Tell You About This Market

In today’s essay, I’m going to show you just how badly the Aussie economy is travelling right now. It’s part of the reason why I believe what you’ve seen over the past month or so is a very powerful and convincing bear market rally, rather than a new bull market.

To explain what I mean, I have to take you on a slight, but relevant, detour first…

Last week, the planned Rocky Hill coking coal mine, situated in NSW’s Hunter Valley, was rejected by the NSW Land and Environment Court. The judge, Brian Preston, said the project will be a ‘material source of greenhouse emissions and contribute to climate change’.

The NSW Environmental Defenders Office (EDO) fought the mine on behalf of a group of local residents. It just so happened that the presiding judge was formerly a principal solicitor at the EDO.

This is the first time a coal mine, or any mine, has been rejected on the grounds of climate change. And while it doesn’t set a precedent, it does tell you about the rising risks faced by Australia’s coal industry.

Coal is a Crucial Export for Australia

This is madness. The virtue signallers and climate change zealots have a death wish for this country. Coal is a crucial export for Australia and a huge money spinner. You can’t just pull the pin on the industry without dragging the whole economy down.

In the current (2019) financial year, the Department of Industry, Innovation and Science expects total coal exports to come in at $67 billion, beating iron ore shipments (of $64 billion) for the first time in nine years.

Metallurgical coal (coking coal) is the largest earner, with expected receipts this year of $41.1 billion. Thermal coal (used to provide electricity) is expected to generate nearly $26 billion of export income.

That’s a lot of money. But not all of it stays in Australia. The primary producers of coal are multinationals with majority foreign shareholders. So a decent chunk of the profits (after wages, royalties, reinvestment etc) tend to flow offshore.

But according to the Minerals Council of Australia, the industry supported nearly 50,000 direct jobs, and 120,000 indirect jobs across Australia in 2016/17. The directly paid jobs are highly paid too, with an average annual salary of $155,000. In addition, the coal industry also paid around $5 billion in royalties to state governments in 2016/17.

Clearly, coal is a pretty big deal. Without it, we’d be an economic basket case. Yet there is a growing and increasingly vocal group looking to undermine the coal industry. If they had their way, they would destroy it.

In case you’re new to The Rum Rebellion, let me point out that I’m not beholden to coal. If something else could match it in terms of reliability and cost, I’d support it, no problem.

But this is not about ideology. It’s about doing what’s right for this country. And trying to sabotage coal, because you believe that climate change poses an existential threat and that we need to generate all of our electricity from renewables, is just stupidity of the highest order.

In the case of the Rocky Hill mine, the coal is coking coal, used in the steel making process. Which makes the judgement even dumber.

Even if Australia has a mass wave of virtue signalling delusion, and decided to stop to coal export industry, what would happen? The rest of the world would get it from elsewhere…Indonesia and South Africa, Canada and the US. Their coals are not as high quality as Australia’s coal. The end result would be even greater amounts of pollution.

That pretty much sums up the A-grade level of stupidity going on amongst our elite/intellectual class. But they are smart…they clearly know best.

What’s this got to do with the Aussie economy and the bear market?

Well, this year, Australia’s mineral exports are tipped to hit a record high of $264 billion. With iron ore prices much higher than forecast, it could well be even higher than that figure. Coal and iron ore are leading the charge in supporting the economy via their export earnings.

This allows us to sustain our $1 trillion net debt position and ensures foreign creditors keep lending to us.

When commodity exports bring in the dollars, the Aussie dollar is normally strong. But not this time. The dollar is actually very weak.

Have a look at the chart below, which shows the Aussie/US dollar exchange rate…

Australian Dollar/US Dollar 11-02-19

Source: Optuma

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The Aussie dollar peaked in early 2018. It has since been in a persistent downtrend. It tried to rally with global stock markets as 2019 got underway. But thanks to the Reserve Bank’s economic growth downgrades, the dollar is again under pressure.

That tells you a few things…

It says despite the large inflow of commodity dollars boosting the economy, it’s not enough to promote decent growth and result in interest rates rising from historically low levels. It tells you the rest of the economy (very much dependent on house prices) is weak. Very weak.

It also tells you a lot about the global economy. The Aussie dollar is a proxy for global growth. The lack of a sustained bounce tells you that global growth prospects remain weak.

It also tells you that the big rebound in the stock market is unsustainable. Stocks are acting like we’re in a normal growth phase, the Aussie dollar is acting like we’re in a slowing global growth phase.

As the chart of the ASX 200 below shows, momentum indicators are now stretched to the upside (see the lower panels). That means from a purely short-term trading perspective, the market needs to correct and consolidate.

ASX 200 11-02-19

Source: Bigcharts

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From there, let’s see how things play out. Remember, it’s good to have a view. But it’s more important to be flexible in your thinking and change that view when the facts change.

Good investors keep an open mind and let their views adapt to the market. Average investors have a view and find facts to constantly reinforce it.


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

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