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High cost logistics hit Mozambique coal producers hard

Given current market prices, which are expected to remain subdued for the short and medium terms, at current rail and port costs, no company mining coal in Mozambique is profitable.

Mozambique’s major coal producers, Vale, Rio Tinto, Jindal and Minas de Moatize need lower logistics costs to become profitable, participants were told this week at the Coaltrans Mozambique conference in Maputo.  

"In order for Mozambican coal producers to be sustainably profitable and not go out of business, the all-in logistics costs component of a Free on Board (FOB) per tonne coal price (i.e. rail access and operations, and port charges) need to be below $35 per tonne. Given current market prices, which are expected to remain subdued for the short and medium terms, at current rail (and even worse by road) and port costs, no company mining coal in Mozambique is profitable," Henrique Pinheiro from Ariy Consulting and Advisory said.

International thermal coal prices have been subdued as measured by the Argus Price Index 4 (API 4). This is compiled daily by the UK-based Argus and is the benchmark price reference for coal exported out of South Africa’s Richards Bay Coal Terminal (RBCT) and used in physical and over-the-counter (OTC) contracts. This is calculated as an average of the Argus FOB Richards Bay assessment and the IHS McCloskey FOB Richards Bay marker.

Mozambique’s thermal coal price uses the API 4 as the reference price, while Mozambique’s coking coal uses the API C1 price, which is the benchmark price for Australian coking coal, the world’s largest exporter of coking coal.

“There has been an oversupply situation in the thermal coal market for most of this year with prices some 5% lower than 2012. There were brief price spikes in February and November this year due to supply disruptions from Colombia,” Eva Stepniewska, the deputy editor of Argus’ Coal Daily International said.

She said that possible supply disruptions in Colombia and South Africa would be balanced by a 10% increase in Indonesian exports in 2014, which was likely to keep thermal coal prices subdued.

In the first ten months of this year, the Mozambique state-owned railway owner CFM earned $53m from allowing the mining companies to ship 3 million tonnes of coal on the 580 kilometre Sena line between the Moatize coal fields and the shallow port of Beira. That is $17.66 per tonne just for access to the line. The mining companies then need to provide their own rolling stock and locomotives, as well as the operating personnel.

As floods put the Sena line out of action earlier this year, the cost of this was spread over less than 4 million tonnes this year instead of the earlier forecast of 5 million tonnes. The 20% reduction in throughput probably meant that railage costs are near $45 per tonne. In addition mining companies need to pay a 3% royalty irrespective of whether they are making profits or not, as well as paying extra freight charges as Beira port cannot accommodate large ships, which would reduce the freight charge per tonne.  

"The railway owner, CFM, and the coal companies need to spell out clear rules of usage for the Sena line as otherwise there could be problems in the logistics chain next year when Jindal and Minas de Moatize are expected to join Vale and Rio Tinto in using the line," Pinheiro said.

One way of reducing railage costs is to boost throughput, but that has been talked about for several years now.

"Achieving a coal export annual tonnage capacity of anywhere near 20 million from Beira by February 2015 is a pipe dream. The port master plan study, which is underway, needs to be concluded and approved, taking into account whatever common usage capacity is set out for the proposed berth 13 which has still to be built, and taking into account all other commodities and real capacity for the entire port of Beira. As my Mozambican friends say, there are various 'bottlenecklaces' that have to be overcome such as increased rail stockyards, bigger coal stockpile areas and improved ship loading facilities, before the propagated 6 million tonne annual capacity attributed to berth 8 is reached and exceeded to accommodate any additional tonnes, possible through skip loading at berth 9, or through the proposed berth 13. All of this will take a lot longer than the next 18 months,” he said.

The low capacity on the Sena line is the reason why Brazilian mining company Vale is investing in the far longer 912 kilometre railway between Moatize and the northern deep water port at Nacala. This railway line could be ready by September 2014 as the route through neighbouring Malawi is well advanced, even though the terrain there is more challenging because it passes through mountains requiring the building of 20 bridges and two viaducts in the 136 kilometres Malawian section.

The Nacala line will be able to transport over 11 million tonnes of coal a year by the end of 2015, rising to 13 million tonnes in 2016 and 18 million tonnes in 2017. The deep water port at Nacala is currently under construction and will be able to handle 18 million tonnes of coal per year.

Unlike the Sena line, which is designed mostly to haul coal, the Nacala line will be multi-product with the aim that the so-called MMZ growth triangle of northern Mozambique, central and southern Malawi and eastern Zambia will benefit from the import of lower cost intermediate goods and be able to export value added farm products. Landlocked Malawi has one of the highest differentials in the world between the cost of imports and the FOB cost of exports as the cost of transport is so high due to the long delays created from using poor quality roads.

Source: www.mineweb.com