Prices must rise to save Australian coal mines
Cost-cutting strategy to try to survive falling prices is running out of steam, writes Clyde Russell
COAL miners in Australia have spent the past two years desperately cutting costs in a bid to survive falling prices, but this strategy is running out of steam.
While coal miners have been successful in lowering costs, they still have not managed to do it anywhere near as fast as prices have declined, and now the scope for further reductions in costs is limited.
It is likely that mining costs will start to rise again in the next year or two, as the current round of costcutting has led to underinvestment and a focus on extracting the easiest, or cheapest, to mine coal.
While coal miners are by nature a tough bunch, the prevailing sentiment at this week’s Coaltrans Australia conference in Brisbane was that prices needed to increase soon or more mines would have to be shut, or placed on care and maintenance.
Data from consultants CRU illustrate the problem for coal miners in Australia, which is the world’s largest exporter of coking coal used in steel making, and number two in thermal coal used in power plants.
This shows that mining costs have fallen, but only marginally, with site costs in New South Wales dropping from about $65 a tonne in 2012 to $63 a tonne this year, while those in major producer Queensland fell from about $61 to $60. At the same time, the price of spot thermal coal at Newcastle port in New South Wales, an Asian benchmark, has dropped 19.3% this year to $69.59 a tonne in the week to August 8.
The Newcastle price has rallied recently from its year-low of $67.89 a tonne on July 25, but it is still down a large 49% from its post-2008 recession peak of $136.30 in January 2011.
The situation is worse for coking coal, with spot cargoes currently going for about $114 a tonne, which is down from about $133 at the start of the year, and almost two-thirds below the mid-2011 high of about $330.
The dramatic slide in prices was mainly because miners reacted to the post-2008 rally by putting on more supply, a situation that has persisted
Miners reacted to the post-2008 rally by putting on more supply, a situation that has persisted as they try to lower unit costs by boosting output
existence of “take-or-pay” contracts, which force miners to pay charges of up to $25 a tonne to use rail and port infrastructure, whether they ship the coal or not. But more mines are reaching the point where it makes more sense to idle output and service the “take-or-pay” than it does to continue to produce.
There is a glimmer of hope in the recent price increases for both thermal and coking coal, but these would have to be sustained to provide any real relief.
There is also the possibility that the Australian dollar will fall against its US counterpart, especially given the likelihood that the US currency will receive a boost from expected interest rate increases, while, if anything, rates may be lowered in Australia as employment growth stumbles.