Analysis: Australia coal miners face squeeze, new mines at risk
MELBOURNE/PERTH (Reuters) - Falling coal prices and soaring costs have forced Australia's producers to start trimming output and letting go of some workers, hurting miners, rail and port operators and potentially threatening plans for more than $30 billion of investment in new mines.
Miners operating in Australia, led by BHP Billiton (BHP.AX), Rio Tinto (RIO.AX) and Xstrata XTA.L, have long been envied for their proximity to China, the biggest consumer of coal, but that advantage has been whittled away this year.
Coal producers have been hit by a triple whammy of rising wage, equipment and fuel bills plus new taxes, growing coal exports from the United States, and softer demand in China for thermal coal in power plants and coking coal in steel mills.
Thermal coal prices have fallen 20 percent this year to a near two-year low of $92 a metric ton (1.1 ton) at the Australian port of Newcastle, based on globalCOAL's index, which has left prices close to the operating cost for some mines.
"There's been such demand for gear over the last few years and mining guys get paid $140,000 to drive a dump truck. It's a joke...It's all going to come home to roost now," said a marketing executive with a producer, who declined to be named as he is not authorized to talk to the media.
New coal mines are particularly vulnerable due to the competition from other sources and soaring costs. In contrast, miners are still expected to pour funds into expanding iron ore operations in Australia, where they still make fat profit margins even with iron ore prices down from last year's highs.
Analysts say the coal projects most likely to be shelved are those in Queensland's untapped Galilee Basin, where India's GVK (GVKP.NS) and rival Adani Enterprises (ADEL.NS) are among the biggest players, while a Rio Tinto project in New South Wales is also seen as likely to be delayed.
Australia's producers are not the only ones suffering, with miners in Indonesia also feeling the pinch from drop in prices. But operators in Australia face the extra challenge of soaring labor costs plus carbon and mining taxes taking effect in July.
"There are some mines where the price is reaching their marginal cost of production, so obviously at a $92 price, there are going to be a few more," said Tom Sartor, an analyst with RBS in Brisbane.
Evidence of falling sales is emerging in export statistics from the key coal ports of Dalrymple Bay in Queensland, which largely exports coking coal, and Newcastle in New South Wales, mainly a thermal coal hub.
At Dalrymple Bay, exports are on course to fall 9 percent to a total of 50 million metric tonsfor the year to June 2012, despite the fact that the previous year's comparison export numbers were depressed by serious flooding in December 2010 and January 2011.
Port operations manager Greg Smith said the decline was due to a drop in demand for coking coal from steel makers in Asia and competition from U.S. exports of pulverized coal injection (PCI) coal and lower quality metallurgical coal.
"At this stage, steel production has been affected by poor economic conditions for most of the nations importing metcoal from DBCT," Smith told Reuters in an email.
"However, those economies will rebound, with just the timing being the unknown at this stage."
Coal exports from the United States have jumped as U.S. power stations have been switching from burning coal to natural gas, thanks to a shale gas supply boom that has sent gas prices to 10-year lows.
Exports from the United States are viable as freight rates have dropped sharply this year.
"So our geographic advantage compared to North America is no longer so strong, when you have trans-Pacific freights that are so low," said Andrew Harrington, an analyst at Patersons Securities.
Facing competition from U.S. PCI exports, Anglo American (AAL.L) recently cut 14 out of 250 workers at its Foxleigh mine in Queensland, where it is producing about 2.5 million metric tons a year of PCI coal, well below the mine's 3.3 million tonnes a year capacity.
That followed BHP's decision to close its Norwich Park coking coal mine also in Queensland, citing low output, high costs and soft coal prices.
Producers have been cutting coking coal output even as output from BHP's Queensland coal mines, shipped out of a terminal next to Dalrymple Bay Coal Terminal, has been disrupted by a long-running fight with the mining union.
At Newcastle, Port Waratah Services has seen a nearly steady drop in loadings over the past six months, from an annualized rate of around 110 million metric tons in December to 91.8 million tonnes in May.
Port Waratah user Gloucester Coal GCL.AX, whose shareholders this week approved a takeover by China's Yanzhou Coal (600188.SS) (1171.HK), warned in its March quarterly report that due to weak demand it had to consolidate cargoes into larger parcel sizes to cut freight costs.
"A large proportion of coal was sold through traders into the Chinese spot markets as a result of continued soft demand from traditional markets," Gloucester said.
PROJECTS AT RISK
In light of the weak outlook, big companies such as Rio Tinto and BHP have turned conservative about their spending plans, with Rio warning that Australia is the most expensive location in its global business in which to operate.
"We're seeing in some cases the same project that we would have built 10 years ago now costing 10 times more," Rio Tinto Chief Executive Tom Albanese told shareholders in Brisbane a month ago.
Rio is due to decide later this year whether to build the Mount Pleasant thermal coal mine in New South Wales. Analysts expect the $2 billion project, which had been slated to start producing in 2014, will be postponed.
With the big miners turning cautious, bankers are also reluctant to stump up financing for smaller companies. The projects seen most at risk are those in the Galilee Basin, which could produce more than 200 million tonnes a year.
The three biggest projects on the cards there are conglomerate GVK's $10 billion Alpha coal and Kevin's Corner projects, Adani Enterprise's $11 billion Carmichael coal and rail projects, and Australian mining magnate Clive Palmer's $8 billion China First project.
"It's difficult to get bank funding in this environment," said Gavin Wendt, an independent resources analyst. "The Indians and Chinese that might have bankrolled you in the past are pulling in a bit."
Credit Suisse analysts estimated if coal prices stay where they are, the Alpha Coal project, the most advanced of any of the Galilee Basin projects in securing government approvals, could struggle.
"In our view, with the spot thermal coal price currently around $92/metric ton and the risk that our $75/tonne cash costs are $5-10/t too low, there is a risk that the project may not be economically feasible," it said in a report this week.
GVK's local chief, Paul Mulder, was not available to comment on that assessment. The company aims to line up partners for the project and make a final investment decision later this year.
(Editing by Alex Richardson)
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