* Coal producers face too much supply through 2020
* Will be forced to make deeper cuts, shed more mines
* Big firms best placed to weather downturn
* Junior miners struggle to get funding
By Rebekah Kebede
PERTH, May 24 Australian coal miners are
steeling themselves for years of production cuts, job reductions
and asset sales as swelling shipments from international rivals
lower hopes of a recovery in prices for coal.
Prices have slumped around 30 percent since their peak two
years ago as coal flooded global markets, especially from the
United States where cheap gas has cut domestic demand and led to
a nearly 50 percent jump in thermal coal exports last year. Even
robust Chinese and Indian demand growth is failing to soak up
the plentiful supply.
To boost their thinning margins, miners in Australia such as
BHP Billiton, Rio Tinto, Glencore Xstrata
and Peabody have trimmed output and laid off
thousands. Clinging to barely profitable operations, coal
producers now face the prospect of further cost-cutting, which
they fear could benefit rivals when the market recovers.
"Everyone is waiting to see who blinks first," said Tom
Sartor, an analyst with Morgans Stockbroking in Brisbane. "You
don't want to be the one curtailing production knowing that it's
going to benefit your competitor."
Australia's coal industry has become a victim of its own
success. In its rush to meet growing Chinese demand, producers
churned out more and more coal, and miners are now stuck with
more than they can sell.
This has been compounded by the dramatic ascent of shale gas
production in the United States, whose displaced coal has headed
to the rest of the world.
About a fifth of the United States' 56 million tonnes of
thermal coal exports in 2012 went to Asia, Australia's main
market, according to the U.S. Energy Information Administration.
Australian thermal coal exports could even fall this year
and growth rates are likely to remain weak in the next few
years. UBS expects Australian coal exports to drop around 5
percent to around 162 million tonnes, after increasing 31
percent to 171 million tonnes in 2012.
"The market is chronically oversupplied at the moment ...
current supply capacity is adequate enough to take care of
demand growth over the next couple of years," said Prakash
Sharma, Wood Mackenzie's senior coal markets analyst for Asia
As a result, analysts estimate Australian thermal coal
prices through the end of the decade to range from
around $90 per tonne now to $105 per tonne, with a $130 per
tonne record high in 2011 seen as an anomaly.
TOUGH FOR JUNIORS
While top miners have big balance sheets to help them
weather the storm, junior miners face a bleaker outlook, with
the funding environment the worst in a generation.
"The market's pretty much dead. For many of the small coal
companies, it's just not going to happen unless you have very
deep pockets and even then nothing is certain," said Warwick
Grigor, executive chairman of Canaccord BGF, a stockbroker
specialising in the emerging mining sector.
Aquila Resources was dealt a blow last month when
Japan's Sumitomo Corp pulled out of their coal
exploration partnership, in one of the latest examples of a
setback for smaller miners.
And global companies are bracing for more cutbacks as well,
with BHP last week announcing its capital and exploration
expenditure would be slashed, while Glencore Xstrata stopped
work on a planned 35 million tonnes-per-year Australian coal
Rio Tinto is looking sell of part of its stake in
its Coal & Allied subsidiary, which produces mostly thermal
coal, as well as several other mines.
According to the Australian Coal Association, the country's
coal industry directly employs 50,000, and the downturn is
already clear in its eastern coal towns.
Just a year ago it was nearly impossible to rent an
apartment in Queensland's Blackwater, whose name had become
synonymous with the boom in coal as workers rushed there for
jobs in mines run by firms such as BHP.
But rents have since plummeted around 75 percent after the
wave of miners and contractors receded, leaving the boom years a
fast-fading memory to many of the permanent residents of the
town of 5,000.
'TAKE OR PAY'
Efforts to reduce supply and slash costs have been hampered,
however, with some producers locked into long-term contracts
with port and rail companies.
Under 'take-or-pay' agreements, miners must either ship a
minimum amount of coal or pay a hefty fine.
"I don't see the supply-demand dynamic changing quickly,
particularly in Australia with so many companies with
take-or-pay commitments with ports," Whitehaven Coal Managing
Director Paul Flynn told Reuters in an interview last month.
"That really is an impediment to a rebalancing of the
supply-demand equation in the short term ... You'd have to be
losing more than your take-or-pay commitments to shut a mine
The good news for miners is that appetite in China and
India, the two biggest drivers of global coal demand growth,
will cushion the sector's decline.
The two nations currently account for around 30 percent of
the world's global coal demand, with that figure remaining
relatively steady through the latter part of the decade,
according to a UBS forecast.
"We'll never really go back to the bad old days because
(China and India) are two new kids on the block that aren't
going away," said Tom Price, an analyst with UBS in Sydney.
But as substantial producers of coal themselves, the two may
also add volatility to the market as they swing between domestic
supplies and imports, depending on price differences.
China, the world's largest producer as well as consumer of
coal, dug a whopping 3.1 billion tonnes of thermal coal in 2012,
and had to import more to meet demand.
"People forget just how much coal China produces. You're not
getting that continuing stream of buyer demand," said Don
Barnett, whose AustCoal consultancy has worked with numerous
Australian coal producers.