Coal news and updates

Despite fierce cost cutting across the ­Australian coal sector, industry veterans are tipping more mine closures this year, as losses for a growing number of miners for the first time balloon out to exceed the fixed costs of their port and rail contracts. The industry is in survival mode.

 

Queensland Resources Council president Michael Roche says 10 per cent of miners in the state are in a “very precarious position”, particularly in lower grade coking coal and thermal coal.

 

Fresh figures from the council show a quarter of the state’s coal output is produced at a loss, including half of all production of thermal coal, used in power stations. One in 10 tonnes produced at Queensland coal mines is done so at a loss of more than $14 a tonne, Mr Roche says. Industry sources say the situation is similar in New South Wales.

 

Deteriorating prices for coal, surging costs and a stubbornly high Australian dollar are all taking a toll.

 

But the Australian industry is on track to produce and export the highest number of tonnes on record this year because producers are attempting to spread the cost burden across more tonnes.

 

BHP Billiton’s global head of coal, Dean Dalla Valle, who has 37 years industry ­experience, says there will be more short-term pain as the industry shakes itself out but his long-term outlook for the coal sector is bullish.

 

He says the fundamentals of both metallurgical and thermal coal are strong and forecasts continuing demand – particularly from Asia – for coal as an energy source.

 

The past four months alone have seen more than 10 million tonnes of metallurgical coal, used to make steel, removed from the market nationally, he says.

 

Mr Dalla Valle says productivity is a key focus for BHP and he was “safely driving” it across the business. BHP is one of the lowest-cost and most efficient coal producers and its coal business averages returns of about 7 per cent.

 

MARKED CHANGE IN VIABILITY

But for higher cost producers, Mr Roche says there has been a marked change in the viability in the past six months.

 

“About 10 per cent of producers are in a very precarious position, where their losses are more than their take-or-pay contracts,” Mr Roche said.

 

“So far you haven’t seen the amount of mine closures you might expect be­cause mines have been kept open by take-or-pay [contracts].”

 

Fixed costs for rail and port access under “take-or-pay” contracts, which require miners to pay a fixed amount for a certain tonnage of coal, regardless of whether they ship it or not, range from about $14 to $20 a tonne.

 

Many coal companies have found themselves in a cost trap courtesy of the contracts because it can be cheaper to run a mine at a modest loss than to shut the gates and keep paying for rail and port access.

 

Many “take-or-pay” contracts were struck in 2011 when coal prices were more than double current levels, with the likes of Pacific National, Asciano or Aurizon.

 

But the miners losing more than $14 a tonne – which is now 10 per cent of the Queensland industry – may be left with little imperative to stay open.

 

Analysts estimate that producers with costs at an industry average are losing about $5 a tonne, while even many of the lowest-cost producers are only making about $5 tonne.

 

The average cost of production is $US74 a tonne for thermal coal and $US101 for metallurgical coal.

 

BHP runs its operations to capacity but some in the industry have suggested the mining giant withhold some production so as not to drive prices down further, to which Mr Dalla Valle’s response is simple: “We are not playing that game.”

 

“We are not going to try to influence the market by reducing tonnes,” he says.

 

Hard coking coal spot prices have fallen to about $US120 a tonne from well over $US300 in 2011, while contract prices for the premium grade have also been settled at $US120 for the June quarter. Thermal coal prices have dropped from about $US130 a tonne in 2011 to about $US73.

 

The best Australian coking coal fetches between $US116 to $US120 a tonne, while lower-quality product, known as semi-soft coking coal, achieves about $US105.

 

About 12,000 jobs have been cut from the local coalmining sector following a string of mine closures and delays to projects, in­cluding by Glencore, Vale, BHP, Rio Tinto and Peabody.

 

This month Vale announced it was mothballing its underground and open-cut coal operation, Integra, in NSW’s Hunter ­Valley, citing “unsustainable financial losses of the operation due to the current market conditions”.

 

DECISIONS ON MINE CLOSURES

Decisions on mine closures are ultimately a question of management’s long-term view on the coal price.

 

“There is a danger of more Integras,” Mr Roche says.

 

Between 2006 and 2012, the costs of producing coal in Australia doubled, as the competition for resources intensified and drove up the price of inputs – like suppliers and wages.

 

“So it was about getting tonnes out of the ground at whatever price,” Mr Roche says.

 

But since prices have come off, all operators in Australia have attacked their site costs and overheads, but there is more cost cutting to be done.

 

“Miners have done a lot about costs they can control and they are putting the squeeze on suppliers,” Mr Roche said.

 

“The focus on costs is unrelenting and the miners keep looking for more.”

 

But some producers have cut all the fat possible and there is a finite time during which they can continue to run operations at a loss.

 

The Australian currency isn’t budging much either.

 

Historically, a substantial downturn in prices for key commodities has led to a fall in the value of the Australia dollar.

 

“The Australian dollar usually falls in line with coal,” Mr Roche says. “But we are not seeing that this time around.”

 

So is it a buyer’s market? One-time billionaire Nathan Tinkler shocked the market when it emerged this month he had struck a $US70 million ($74 million) deal to buy Peabody Energy’s mothballed Wilkie Creek thermal coalmine in Queensland. The closest underbidder was understood to have put up just $US20 million in cash, underlining the market softness.

 

 

Source: http://www.afr.com/