Producers keep the purse strings tight despite commodity’s increase
THE PRICE of coal has returned after five years in the doldrums. The perks used to lure and retain the workers mining it haven’t.
Producers are keeping the purse strings tight, even after prices exploded back this year as China restricted domestic output in a country that buys more than any other. For example, a once weekly feast of seafood is still rationed to a monthly affair at some Australian mines, according to ESS Support Services, which runs mining camps for companies including BHP Billiton and Glencore. Cable television, available at no cost during the boom, has been disconnected and replaced by free-to-air services.
With doubts remaining about the longevity of coal’s recovery, some producers may be reluctant to reinstate the employee benefits that were abolished as the last boom turned to bust. They remain focused on the sort of cost-cutting that helped BHP, the world’s biggest miner, cut expenses by a quarter over five years.
“Over the cycle there has been a very strong focus on removing costs and excess,” said John Sheridan, an executive director with ESS Support, which caters for as many as 28 000 workers at coal to iron ore operations. “Things are better now, everyone appreciates that environment, but it doesn’t necessarily translate into an immediate change in service offering. We haven’t seen our clients increase scope.”
Spot hard coking coal, used to make steel, is one of the best performing commodities this year after nearly quadrupling above $300 (R4 223) a ton. Newcastle thermal coal, used in power stations, climbed to $110.40 earlier this month, the highest level in more than four years.
Prices surged in the second half of 2016, snapping five years of declines, as China ordered miners to cut output to ease a glut and help lift its domestic industry out of crisis. The country’s imports during the first ten months of the year are up 18.5 percent to 201.74 million tons.
Liberum Capital predicts the spike will add billions to the underlying earnings of BHP. That’s after the company has already reduced absolute cash costs by a quarter since July
2011, according to a June presentation. Glencore estimates its thermal coal costs will be $39 a ton this year, a 17 percent reduction from 2014 when it was $47, according to a May presentation.
“Producers have been focused on cutting costs and improving efficiencies within the system over the past few years,” said Daniel Hynes, an analyst at Australia & New Zealand Banking Group. “There hasn’t been any significant new investment going into capacity.”
Liberum estimated in September, when coking coal prices were below $200 a ton, that almost $5 billion would be added to BHP Billiton’s underlying earnings before interest, tax, depreciation and amortisation in the year ending June 30. While the world’s biggest shipper benefits from the advance, the company sees prices drifting lower.
Miners’ operating margin, a measure of profitability after subtracting cash costs, soared to $178 a ton when coking coal prices hit $290 a ton on November 7, Robin Griffin, a research director at Wood Mackenzie in Brisbane, said. The price of $200 a ton struck for the last quarterly contract delivers coking coal producers an operating margin of $103 a ton, according to the energy consultant.
“People are still not going to lose track of the fundamentals in making sure they are managing their production levels and cost structures,” said Cameron McRae, chairman of TerraCom, a miner with assets in Australia and Mongolia.
Canadian producer Teck Resources has used the “significant amount of additional cash” generated to repay debt after producing a record 7 million tons of coking coal during the third quarter, president and chief executive Don Lindsay said in a statement last month. – Bloomberg
$300 Price per ton of spot hard coking coal, used to make steel