Coal news and updates

Harry Kenyon-Slaney has seen tough times before in almost a quarter of a century with Rio Tinto, but the chief executive of the miner’s energy unit says the problems facing Australia’s coal industry are up there with the worst of them.

“It’s a perfect storm,” says Mr Kenyon-Slaney. “The sector is in the midst of quite possibly the most serious challenge it has ever seen to remain globally competitive. There’s every chance these tough times will continue for several years.”

 

Having done their best to ride out a two-year slump in global coal prices, Australian miners are shedding thousands of jobs as they mothball high-cost mines, sell non-core assets and drive efficiencies across their operations.

Last week BHP Billiton ended a A$360m contract with a contractor at one of Australia’s biggest coal mines, which will cost 427 jobs. Vale and Glencore are shedding 550 jobs at mines in the Hunter Valley and Queensland – the two big coal producing regions, where about 50,000 people work in the industry.

 

“The coal industry is undergoing a difficult transition and to be globally competitive we have to reset the cost base of the business,” says Dean Dalla Valle, president of BHP Coal, when he announced the decision to pull back activity at its Goonyella coking coal mine in Queensland.

BHP says restructuring will continue with coal producers facing challenges posed by low prices, high costs and a strong Australian dollar. Rio is on course to slash $1bn in costs from its energy division by the end of 2014.

Following a surge of mining investment over the past decade coal production in Australia is forecast to rise to 372m tonnes in 2013-14, up 11 per cent on the previous year.

Record Australian production combined with a rise in exports from Indonesia – the world’s biggest seaborne exporter – and the US is causing global oversupply of thermal and coking coal.

The price of thermal coal, which is burnt in power stations to generate electricity, has fallen 45 per cent since 2011 to $73 a tonne. The price of coking coal, which is used in steel making, has fallen from about $300 in 2011 to about $120 a tonne, prompting an industry-wide shake out.

 

“I would estimate 13,000 jobs have been lost in the past few years,” says Michael Roche, chief executive of Queensland Resources Council, an industry body.

Mining industry data compiled by the council show a quarter of mines in Queensland are losing money. Glencore estimates that one-third of mines nationwide are in the red. In response miners are squeezing suppliers and trying to cut costs.

Mining services contractors are on the front line, a fact underlined by the collapse of the Forge Group, which went into liquidation in March owing creditors A$800m.

Until recently, miners tried to ride out the price slump by cutting costs rather than mothballing or selling mines.

“A lot of the cost of production in coal is fixed in terms of port and rail access, which miners continue to pay even when they close an operation,” says Mr Roche.

These “take or pay” contracts were signed during the boom years when mining and energy companies committed to investing almost A$400m in coal, iron ore and liquefied natural gas projects. The rush to secure infrastructure to transport resources from projects, often in remote parts of Australia, on to ships to China and Japan has resulted in high cost fixed contracts that are difficult to renegotiate.

 

 

“The miners do their arithmetic on whether it costs them more to keep a loss-making mine open or to close it and continue to pay for rail and port access they aren’t using,” says Mr Roche.

But the prolonged downturn is forcing miners to act. This month US company Peabody Energy sold its Wilkie Creek mine to Australian entrepreneur Nathan Tinkler for $150m. Rio also finalised the A$1bn sale of its 50.1 per cent stake in the Clermont thermal coal mine in Queensland to a company jointly owned by Glencore and Japan’s Sumitomo Corp.

Rio and Glencore have been in talks about creating a joint venture for their Hunter Valley coal operations since at least last year, although no decisions have been taken on proposals that Credit Suisse forecasts could save $500m year.

In spite of the coal industry’s problems, Australian export volumes are likely to increase to 438m tonnes by 2018-19 as mines built during the boom come on stream and replace less efficient ones, according to Australia’s Bureau of Resources and Energy Economics.

BHP, Rio and Glencore say the medium- to long-term future for Australian coal is bright given rising demand in Asia. But attracting investors to finance new projects, including the A$30bn coal mines planned for the Galilee Basin in Queensland, will be tough and smaller coal companies will struggle.

“Smaller players rely on the share market for finance and there is little appetite from equity markets to invest in coal when the world is oversupplied,” says Daniel Morgan, analyst at UBS.

Indian companies Adani Enterprises and GVK, as well as Australian mining magnates Gina Rinehart and Clive Palmer, have proposed building huge coal mines in the Galilee Basin.

The projects are controversial because they require the expansion of Abbot Point port near the Great Barrier Reef. Conservationists say dredging and the dumping of mud within the reef marine park could harm the reef, which is protected by Unesco. Unesco is considering whether to place the reef on its list of world heritage sites “in danger”, though this week deferred a decision until next year.

Tinkler returns to the coalface: entrepreneur says assets are cheap

With coal prices under downward pressure amid global oversupply and some of the biggest mining companies busy trying to offload unprofitable mines, the commodity is looking distinctly unloved, writes Jeremy Grant in Singapore.

But for Nathan Tinkler, the colourful Australian mining entrepreneur, coal’s woes mean this is the right time to be showering it with attention – and money.

Last month he surprised the industry by buying Wilkie Creek, an idled Australian thermal coal mine, from Peabody Resources for $150m. That deal, part-financed by New York investment bank Jefferies, signalled what he describes as a comeback after two years out of the business.

 

That absence was enforced, after a disastrous A$5.3bn bid in 2012 for Australia’s Whitehaven Coal, which collapsed as coal prices fell and he was left owing millions of dollars to creditors.

Mr Tinkler has been lying low in Singapore since then, paying off creditors through asset sales – the latest being the disposal of his Patinack Farm horse stud. That was one of the last vestiges of a former high-rolling lifestyle as the richest man in Australia under 40.

Mr Tinkler, 38, now believes coal assets are cheap enough to warrant a return to the acquisition trail.

“It’s taken a while, I think, for the market to come back to where coal is really at. We’re only just starting to see people come out and say ‘we want to sell assets and we’re prepared to meet the market’,” he says.

“I think the mood seems to be right now that you’re starting to see the Chinese move in on [Australian iron ore producer] Aquila [Resources] and things like that so the long term believers in the cycle, I think, are starting to move now,” he says.

One such fellow believer would be Mick Davis, the former Xstrata chief executive, who in March secured $2.5bn for new investments in the sector.

On the demand side, Mr Tinkler’s rationale for investing now in thermal coal assets is that the commodity, which burns cleaner than cheaper grades of coal, will be sought after as China implements policies to encourage use of lower-emission fuels to clean up the environment.

“My bet is that ultimately governments and consumers will become more aware of their emissions and air quality will ultimately become paramount. Japan burn a very high quality clean coal and I think, ultimately, that’s what China will look to do where they can,” he says.

Many analysts agree Mr Tinkler’s timing may be right. But some point out that whether demand emerges as he hopes will come down whether the rate at which China’s overall energy consumption will outpace the rate at which it switches out of coal into other environmentally more friendly fuels such as nuclear and gas.

Last week the International Energy Agency said Chinese demand for natural gas was expected to almost double in the next five years.

But Mr Tinkler argues there is still plenty of scope for thermal coal in China given the lack of gas infrastructure in place. “Thermal coal is a baseline product that’s needed in the world and we have a huge cost advantage over other potential sources of energy,” he says.

Meanwhile other deals are in the works, although he declines to name any.

“Anything that comes out of the majors is obviously going to be very interesting. There’s a lot of assets out there in the thermal coal market that I think can probably be operated better.”

 

 

Source: ft.com