Commodity Focus: Metallurgical Coal
Momentum is building in Australia’s metallurgical coal sector. Prices are up and producers are taking note, with plans to fast-track a number of new projects – particularly in QLD. But will supply disruptions in the State hurt long-term exports?
AFTER a turbulent couple of years, metallurgical (coking) coal is back in the black.
This year prices floated around the $US200 per tonne mark; positive times when compared to 2015 lows of $US90/t.
The rally is largely attributed to strong demand in China, India and Japan for steel, of which coking coal is a key, non-substitutable ingredient.
India alone, relies on about 50 million tonnes of coking coal imports per annum, predominately from Australia, and analysts predict this will grow to more than 90mtpa in coming years.
Positive chatter around coking coal has encouraged miners and investors across the country to pour capital into new projects or revive closed operations.
According to the Department of Industry’s Office of the Chief Economist, in 2017-18 Australian coal exports (both coking and thermal) were expected to earn $60.2 billion in revenue, the highest-ever annual level.
And in 2018-19 coal is forecast to be Australia’s largest export earner at $58.1 billion, overtaking iron ore.
Judging by the majors’ FY18 success, the Chief Scientist’s findings were not surprising.
In FY18, BHP’s metallurgical coal production was 7 per cent higher at a record 43 million tonnes thanks to high production at its Peak Downs, Saraji, Caval Ridge, South Walker Creek and Poitrel operations.
Chinese-owned Yancoal’s metallurgical sales also rose 31 per cent year-on-year after strong performance across its mines, while South32 had beaten its metallurgical coal output guidance with better than expected production at its Illawarra mine, NSW.
Anglo American had success too, increasing production by 33 per cent in the June quarter to 5.3mt due to strong performance at the Moranbah and Grosvenor mines in QLD.
Market Fundamentals
The Chief Scientist’s June Resources and Energy Quarterly stated that Chinese demand, which was long expected to ease, had not fallen as “swiftly or as sharply as expected”, however prices were likely to drop over the next two years.
“The metallurgical coal spot price is forecast to decline from an average of $US193 a tonne in 2018 to $US148 a tonne in 2020, with the impacts of improved supply combined with weakening demand from China expected to outweigh growing demand from India,” acting chief economist David Turvey said.
Mr Turvey said Australian export volumes were forecast to grow from 173 million tonnes in 2017 to 201 million tonnes in 2020, reflecting a steady recovery after Cyclone Debbie in 2017, and modest production growth from new capacity.
“Australia’s metallurgical coal export earnings are estimated to have reached a record $38 billion in 2017–18,” Mr Turvey said.
“Earnings [metallurgical coal] are forecast to decline to $32 billion in 2019–20, as lower prices offset rising export volumes.”
EMR Capital, which picked up Rio Tinto’s Kestrel mine in the Bowen Basin this year for $US2.5 billion, had a more optimistic outlook.
“We believe coking coal has a bright future because if you look at the GDP growth of all the emerging economies that’s really a proxy for steel, which then is a proxy for coking coal,’’ EMR Capital chief executive Jason Cheng told The Australian earlier this year.
“The reality is the capital markets cannot simply walk away from hard coking coal, which is needed to create steel, which is needed to support GDP growth and rising incomes and rising lifestyles, so that can’t change overnight.
“There is no replacement for coking coal. We see demand increasing.”
Companies Making Moves
While many of the big players – like Rio Tinto – made the decision to exit coal in recent years, an emerging group of producers was building momentum.
QLD, which produces about 50 per cent of the world’s seaborne coking coal, is where many new production sources would come online.
Near term developments included QCoal’s 10mtpa Byerwen mine; BHP’s Blackwater and Caval Ridge Southern Circuit infrastructure projects; Sojitz’ Gregory Crinum reopening; South32’s Eagle Downs project; and Pembroke Resources’ Olive Downs project due to open in 2020.
Byerwen and Eagle Downs alone would add an additional 14mtpa of combined output to State exports.
Then came news Peabody would extend its North Goonyella coking coal mine life until 2026.
Queensland Resources Council (QRC) chief executive Ian Macfarlane said the new mining area of North Goonyella South would secure more than 230 jobs for the region.
“It again demonstrates the strong demand for Queensland coal especially metallurgical coal,” Mr Macfarlane said.
“Peabody has longstanding relationships with Indian steelmakers and a recent report from the Office of the Chief Economist highlighted the growth in metallurgical coal exports to India – increasing by 22 per cent over the last 12 months and forecast to overtake China as the world’s largest importer of metallurgical coal by 2020.
“The Indian steel story will continue to grow along with its urbanisation story.”
Anglo American also plans to increase production at its Grosvenor mine, extend life at Capcoal by bringing its Aquila longwall out of care and maintenance, and has a near term opportunity for Moranbah South.
Juniors, such as Vitrinite and coking coal pure play Bounty Mining were picking up pace too.
In March, Vitrinite signed an agreement with Japanese company Itochu to accelerate the development of its Karin coking coal deposit, and in June Bounty Mining relisted on the ASX after an $18 million IPO that gave it a $120m market value.
Earlier this year, the State Government had also granted a mining lease for Bengal Coal’s planned 1.9mtpa Dysart East mine in central QLD, where 200 operations jobs will need to be filled.
Derailing Growth
However, positive news has been dimmed by concerns over the reliability of QLD’s coal haulage network amid a conflict between the State’s biggest rail operator Aurizon and the QLD Competition Authority (QCA).
The stoush, stems back to QCA’s release of its 2017 Draft Access Undertaking (UT5) in December capping Aurizon’s revenue for the next four years at $3.9 billion; $1 billion shy of what Aurizon said it needed.
Aurizon would also receive a $100 million reduction in allowances to operate and maintain the network, despite the increase in forecast tonnages and the asset base.
As a result, Aurizon made the controversial decision to alter its maintenance program to reduce costs, which is estimated to impact the movement of at least 20 million tonnes of coal per annum, and leave a $2 billion hole in the State budget (about $500 million in QLD Government royalties each year over the next four years).
Mr Macfarlane said the Aurizon threat would “have a bigger impact on coal exports than Tropical Cyclone Debbie”.
Many miners have expressed concerns over the matter.
Several months back, BHP, Glencore, Rio Tinto, Anglo American, Peabody, Yancoal, Idemitsu and Jellinbah joined forces, penning a letter to Aurizon’s chairman, urging him to revert back to the company’s original maintenance plan, as changes had already created “significant disruption and uncertainty” for customers.
In BHP’s June quarterly report it said it continued “to engage with stakeholders and encourage Aurizon to ensure infrastructure productivity is maximised while they await the Queensland Competition Authority’s final decision in respect of Access Undertaking 5 (UT5)”.
“There is no replacement for coking coal. We see demand increasing.”