An Australian Coal Update

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Yesterday, Doug Hornig discussed growing income inequality in the United States. Doug explained that one reason is the relationship between the government and private corporations. This is hard to deny, especially with a simple look at the richest counties in the U.S. Of the top 10, five are located in the D.C. area – with four of them in the top 5.

But, there’s another way that the rich get richer – it’s recessions. This might seem kind of strange, but think about it a little more. When the market bottoms out, what happens? Someone buys at the bottom to lend support to that level.

Who is that someone? Well, let’s understand who it isn’t. The middle-class guy with a $100,000 underwater mortgage isn’t buying. The guy who lost half his retirement is probably too scared to enter the market. The guy whose employer may be downsizing isn’t jumping back in. The middle-class Joe has a million good reasons to avoid the bottom of the market.

It’s pretty clear who buys at the bottom – it’s the rich. And when the market rebounds, they’re earning a very high return. The average guy always misses the rebound and jumps back into the market when the upside is limited, but the folks with excess cash come back earlier and earn the higher returns. As a result, the gap between the groups grows larger.

But it doesn’t have to be this way. It just takes some planning to gain the same edge.

In The Casey Report, we recommend holding a portfolio with one-third cash, one-third precious metals, and one-third other investments. And sure, some subscribers have asked, “Isn’t that a lot of cash to be holding?” Yes, it is. One way to look at it is as a large pile of cash sitting idly while the market makes gains. But you can also look at it like an option. If the market goes down, the cash is available for jumping in when the prices are best.

As the old saying goes, “You gotta have money to make money.” And it’s true for buying at the bottom. You don’t have to be incredibly wealthy to take advantage of this; you just have to hold extra disposable cash during the next major correction. Don’t even think of the money as a savings account. Think of it as your “bottom of the market” account.

Now, let’s get to the issue. First, the Casey Energy team will discuss the status of the Australian coal industry. Then, I’ll comment on unemployment insurance and its effects on the unemployment rate.

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Coal News: Australia’s Carbon Tax Battle and How Natural Disasters Are Pushing Prices Up

By the Casey Research Energy Team

Australia’s powerful coal industry is rocking the country’s political boat again. It was only 10 months ago that former Prime Minister Kevin Rudd lost his job over an emissions trading scheme that the mining industry opposed vehemently. Now his successor, Prime Minister Julia Gillard, is attempting to revisit the issue, and so far it is not going well.

Gillard has proposed putting a price on carbon emissions starting in July 2012. The scheme would initially operate like a tax, with polluters paying a fixed price for emissions for the first three to five years, before moving to a full cap-and-trade scheme where the price would be linked to international carbon markets. Importantly, the scheme would tax emissions from the coal mining process, rather than taxing the product itself.

But the heavyweight Australian Coal Association (ACA) is not pleased with the plan. The ACA thinks an emissions trading scheme would send investment overseas, costing the country in jobs and revenue. In fact, ACA chief Ralph Hillman said the industry told the government to “go back to the drawing board” during negotiations.

“No other country in the world” taxes emissions from the mining process, says Hillman, “because they are too hard to measure and there is no available abatement technology.” He estimates the scheme would cost the coal industry A$18 billion over the next 10 years but would fail to reduce global emissions because “the coal will be mined in other countries.”

Australia is the world’s worst polluter on a per-capita basis, largely because it relies heavily on coal-fired power. The nation also exports millions of tonnes of coal every year to Asian utilities and steelmakers. In 2010, Australia exported A$43 billion worth of coal.

And even though massive floods at the start of the year are dampening Australia’s production rates, Australian coal miners are set to rake in considerably more this year because prices for thermal and metallurgical coal are on the rise. Those floods are part of the reason: production from the Bowen Basin, which is a key metallurgical coal region but which bore the brunt of the flooding, is expected to total 170 million tonnes this year, down from pre-flood estimates of 200 million tonnes.

The problem lies with water-logged pits at some mines that are taking longer to drain than expected, and the resulting loss of 30 million tonnes is exacerbating a worldwide shortfall in met coal. Prices are now expected to stay around the US$300 per tonne level for the rest of the year.

In fact, the impact of those January floods are only starting to become clear, as miners report first-quarter production numbers. BHP Billiton is the latest miner to report production losses: the company’s coking coal production was down by 18% compared to Q1 2010. Wesfarmers and Rio Tinto also reported falls of 34% and 12%, respectively, in Q1 metallurgical coal output because of the floods.

On the thermal coal side, it is a different natural disaster that is supporting stronger prices. The earthquake and tsunami wiped out 9 gigawatts of Japan’s nuclear power, leaving the world’s third largest economy searching for alternative energy sources. Japan has already inked a deal to purchase additional liquefied natural gas (LNG), which is already a major fuel in the country, but the rest of the energy shortfall will be made up by thermal coal. Estimates for Japan’s additional thermal coal requirements range from 2 to 7 million tonnes, on top of the 102 million tonnes it imports regularly in a year.

The latest thermal coal contract on the books came from Japan, as Xstrata signed on to supply coal to Chugoku Electric Power for the next 12 months at US$129.80 per tonne. The agreement sets a benchmark for the global thermal coal industry and is a signal the market is tightening. The contract price exceeds the current spot price for Australian thermal coal, which is US$123.20 per tonne, and is 13% higher than a previous 2011 settlement between Xstrata and Japanese utilities.

The long and the short of it is: coal is heating up. Shortages on both the thermal and metallurgical fronts are pushing prices higher in trends that look certain to last for the rest of the year. Australia’s coal industry will decry carbon taxes in any form, and may yet bring down another government, but in reality the country’s miners are doing just fine. And anyone interested in investing in coal has a good chance of joining them for the ride, provided they pick the right horse.

If you’re interested in learning about coal company recommendations from the Casey Energy team, check out the Casey Energy Report. Try it risk-free for 3 full months with our 100% satisfaction guarantee: Love it or your money back. Wait till you see the gains Marin and his team have been handing their subscribers – 283% gains in 15 months with a run-of-river company… 177% gains in 12 months with an oil & gas explorer… 196% gains in 8 months with a renewable energy company… and much more. It sure is worth a try.

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The Unemployment Effect No One Wants to Talk About

By Vedran Vuk

During the recession, there have been two conflicting views on the labor reports. The conservative political analysts always try to make unemployment seem worse, while the liberals have a too sunny perspective. Both sides will often make good points. The Bureau of Labor Statistics data is hardly the most accurate representation of unemployment, so there’s a lot of room to make valid arguments.

But there’s a big factor often left unmentioned: Without the extended unemployment benefits, unemployment would be considerably lower. Hence, comparing the current level of unemployment to other periods isn’t exactly an apples-to-apples comparison. Prior to the current recession, a huge body of economic research showed that longer benefits lead to longer periods of unemployment.

In an idealized vision of the world, we want to think that everyone is trying their hardest to find a job –regardless of benefits. While this may be true for some, a person with benefits faces different incentives than one without them. Clearly, one needs to find a job quicker than the other. And guess what? When economic researchers studied increases in unemployment benefits, this difference showed up in the statistics.

Let’s see what the abstract of one of the most cited academic papers on the subject says,

This paper tests the effects of the level and length of unemployment insurance (UI) benefits on unemployment durations. The paper particularly studies individual behavior during the weeks just prior to when benefits lapse. Higher UI benefits are found to have a strong negative effect on the probability of leaving unemployment. However, the probability of leaving unemployment rises dramatically just prior to when benefits lapse. When the length of benefits is extended, the probability of a spell ending is also very high in the week benefits were previously expected to lapse.….

Unemployment Insurance And Unemployment Spells, Bruce D. Meyer

According to Google Scholar, this paper has been academically cited 1,378 times. For those who don’t know, an academic paper with one hundred citations is considered very successful. The negative effect of unemployment insurance on unemployment duration is a well-known fact among economists.

Why are so few people discussing this? The motivation for the conservatives is pretty clear. They’re not exactly trying to look at the bright side. But liberals are in a trickier situation. They strongly backed unemployment insurance extensions. So, even though pointing out these studies would reveal a slightly stronger economy, doing so would put the blame for higher unemployment on their own program. It’s a catch-22. Furthermore, admitting this would attack a basic philosophical premise of the Left. We’re always supposed to think that benefits can be distributed to the masses without any negative incentives. Well, this proves the opposite.

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Additional Links and Reads

Nomura’s Koo Interview on Fed Policy (Bloomberg Video)

Richard Koo, the chief economist of Nomura Research Institute, discusses the effectiveness of QEII. Koo certainly doesn’t subscribe to the Casey Research point of view. He favors increased government spending to get the U.S. out of the recession. However, it’s interesting to see someone with a different and more mainstream perspective also calling QEII a failure.

Audit the Fed co-sponsor list

Is your congressman a co-sponsor of the 112th Congress’s Audit the Fed bill? Check and see.

Morgan Stanley, AT&T Join Push Into Corporate Bonds Ahead Of Word From Fed (Barron’s)

If Morgan Stanley is locking in rates before this meeting, it’s definitely a good sign for higher rates. Actions speak louder than words, and a $4.5 billion bond issuance does a lot of talking. Higher rates at the current meeting would be a huge surprise, but nonetheless tomorrow could shake the market.

That’s it for today. Thank you for reading and subscribing to the Casey Daily Dispatch.

Vedran Vuk
Casey’s Daily Dispatch Editor

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avatarDoug Casey - Casey's Daily Dispatch posted Tuesday, April 26th, 2011.

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