Coal news and updates

Rio Tinto to cut jobs At Australian coal mine

Move to reduce costs in subdued coal pricing environment

Rio Tinto has decided to cut up to a hundred jobs from its Kestrel coal mine in Queensland, Australia. Rio had only recently announced the opening of the Kestrel mine extension in October last year. However, continuing adverse market conditions for coal have shifted the focus towards controlling costs. This move is the latest in a series of efforts by Rio to cut costs and restructure its coal portfolio, in order to maintain the competitiveness of its coal business in an environment of subdued prices.

Coal Prices

The prevailing coal pricing environment is characterized by subdued prices of both metallurgical and thermal coal.

Metallurgical coal is a major input in steelmaking. Thus, demand for metallurgical coal is indirectly influenced by the demand for steel. China is the largest consumer of metallurgical coal in the world. There has been weak demand for the commodity by the Chinese steelmaking industry, along with subdued demand from other major consumers such as Japan and the EU. Flagging demand for metallurgical coal from China in the wake of an economic slowdown earlier on in the year, put downward pressure on coal prices. According to data from China’s National Bureau of Statistics, growth in investment, factory output and retail sales slowed to multi-year lows in the first two months of the year. A Chinese government crackdown on polluting steel plants has forced many of them to shut down. In addition, the tightening of credit by Chinese banks to steel mills that are not performing well has negatively impacted their prospects. Furthermore, the Chinese leadership has proposed structural reforms of the economy, shifting the emphasis from investment and export driven growth to services and consumption led growth. Such a transformation of the Chinese economy may negatively impact Chinese demand for steel in the long term. Chinese steel demand growth is expected to slow to 3% and 2.7% in 2014 and 2015 respectively, from 6.1% in 2013. Weak demand for steel has indirectly resulted in weak demand for metallurgical coal. Weak demand coupled with an oversupply situation due to expansion in production by major coal mining companies has resulted in plummeting coal prices. Prevailing metallurgical coal stand at around $120 per ton. These are way off their 2011 peak levels of $330 per ton.

Thermal coal is primarily used in the generation of electricity. Weak demand from major consumers of thermal coal, China and India, has put downward pressure on thermal coal prices. In addition, Chinese efforts to shift towards natural gas for energy generation may also affect demand going forward. A supply glut due to an increase in production by major coal mining companies has kept prices subdued.

Restructuring of the Coal Portfolio

In view of the prevailing pricing environment for coal, the company has made efforts to restructure its coal portfolio. The company recently announced the sale of some of its Mozambique coal assets. Earlier in the year, the company announced the completion of the sale of its 50.1% interest in the Clermont Mine for $1.015 billion. In addition, the company has invested capital in projects that would generate long term value. For example, along with the announcement to divest its stake in the Clermont mine, Rio Tinto also announced the opening of the $2 billion Kestrel Mine extension project in 2013. This extension added 20 years to the life of the Kestrel coal mine. However, with coal prices expected to remain subdued in the near term, the company has decided to cut jobs at the Kestrel mine.

The restructuring of its coal portfolio is a part of Rio’s disciplined approach to capital allocation. As a part of its Q2 2014 earnings release, the company lowered its capital expenditure guidance for 2014 by $2 billion to $9 billion. The company intends to maintain capital expenditure at $8 billion for the medium term starting in 2015. This approach to disciplined capital allocation will help Rio Tinto operate competitively in a subdued commodity pricing environment.

Source: Forbes