(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Aug 13 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 haven't managed to do it anywhere near as fast as
prices have declined, and now the scope for further costs
reductions is limited.
It's likely that mining costs will start to rise again in
the next year or two as the current round of cost-cutting has
led to under-investment 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 need to increase soon or
more mines will have to be shut, or placed on care and
Data from consultants CRU illustrates 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 state dropping
from around $65 a tonne in 2012 to $63 a tonne this year, while
those in the other major producing state, 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 percent this year to $69.59 a tonne
in the week to Aug. 8.
The Newcastle price has rallied recently from its year-low
of $67.89 a tonne on July 25, but it's still down a massive 49
percent from its post-2008 recession peak of $136.30 in January
The situation is worse for coking coal, with spot cargoes
currently going for about $114 a tonne, which is down from
around $133 at the start of the year, and almost two-thirds
below the mid-2011 high of around $330 a tonne.
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 as they try to lower unit costs by
boosting output, even as demand growth from top importer China
This has led to a significant amount of coal production
being loss-making, and while there are slight variations between
analysts, the overall consensus is that at least 30 percent of
Australian output is currently loss-making on a cash-operating
This becomes higher if additional costs, such as sustaining
capital, are added in, with CRU data showing almost 50 percent
of Australian coking coal miners are in the red.
While there have been some mine closures, the industry has
tried to overcome the low prices through cost-cutting,
cancelling or curtailing capital expenditure, exploration and
developing new projects.
But they've probably come close to the point where there
isn't much fat left to trim, and any further cutting will merely
act to lower productivity and boost costs in coming months.
Multi-factor productivity, which measures the efficacy of
labour, capital and technology among other things, is already a
weak point in Australia's mining industry, having declined 5.2
percent a year in the 10 years to 2010-11, according to data
from the Australian Bureau of Statistics.
Cost-cutting may have boosted productivity since then, but
the industry is now staring at higher costs given the need to
invest in new equipment and deal with declining grades at many
Overall, the message is clear, either prices improve or more
supply will leave the market.
"TAKE OR PAY"
To some extent, Australian supply has been kept in the
market by the 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 U.S. counterpart, especially given
the likelihood that the U.S. currency will receive a boost from
expected interest rate increases, while, if anything, rates may
be lowered in Australia as employment growth stumbles.
The Australian dollar was at 92.72 U.S. cents in midday
trade in Sydney on Wednesday, up about 4 percent so far this
year, although it's down about 16 percent since it's peak in
In contrast, the currencies of other major coal exporters
have declined against the U.S. dollar, with Indonesia's rupiah
down 3.9 percent this year and South Africa's rand
slipping by 1.8 percent.
While Australian producers may yet get some currency relief,
it's not a sure thing and certainly can't be banked upon when
deciding whether to continue mining at a loss or shut down.
(Editing by Richard Pullin)