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—Clyde Russell is a Reuters columnist. The views expressed are his own.—
By Clyde Russell
LAUNCESTON, Australia, June 5 (Reuters) - Indonesia appears to be doing more of the heavy lifting than Australia when it comes to cutting coal output and exports in the face of persistently weak prices.
Coal production in Indonesia, the world’s largest exporter of the fuel used in power stations, dropped 21 percent year-on-year in the first quarter to 97 million tonnes.
This put the country on track for 2015 output of about 388 million tonnes, which is near the mid-point of the 350-400 million tonnes forecast by Pandu Sjahrir, the chairman of the Indonesian Coal Mining Association.
The low end of Sjahrir’s forecast would mean a decline of 24 percent in coal output in 2015 from 2014, and would also be 75 million tonnes below the 425 million forecast by the government.
In contrast, Australia’s official forecaster expects thermal coal output to be largely steady in the 2014/15 fiscal year.
Output of power-station coal is expected to be 243.5 million tonnes in the year ending June 2015, down slightly from 245.2 million the prior fiscal year, Australia’s Department of Industry and Science said in its March quarter report.
However, it also said that 2014/15 exports should reach 201 million tonnes, up 3.2 percent from the prior fiscal year.
Exports are forecast to rise modestly to 202.9 million tonnes in the fiscal year starting in July, the report said.
But as forecasts can be proven incorrect, it’s worth looking at what data is available for Australian coal shipments.
Port Waratah Coal Services (PWCS), which operates two of the three loading terminals at Newcastle, the world’s largest coal export harbour, exported 34.5 million tonnes in the first four months of the year, down 7 percent from the same period in 2014.
However, this was mostly due to a sharp fall in shipments in April caused by severe storms that shut the port for almost two days and closed parts of the rail infrastructure feeding into Newcastle.
Stripping out the April figures, data from the first quarter showed that PWCS actually exported slightly more in the March quarter of this year than it did for the same period in 2014.
Overall, the picture that emerges is that Australia is holding its own in thermal coal exports, while Indonesia is idling output.
This is borne out by customs data from China, the world’s largest coal producer, consumer and importer.
In the first four months of the year, China’s coal imports have declined 37.7 percent to 69.02 million tonnes. Those from Australia have dropped 24.8 percent, while imports from Indonesia have slumped 48.9 percent.
If one assumes that Indonesian domestic consumption will remain steady around 90-95 million tonnes in 2015, it’s likely that the Southeast Asian nation’s exports may fall as much as 100 million tonnes for the year.
The question then becomes why is Indonesia shutting down production while Australia continues at more or less the same levels, even as prices continue southwards?
The Asian benchmark thermal coal price, the Newcastle index , was at $57.39 a tonne for the week ended May 29, down 11 percent so far this year and less than half of the post-2008 recession peak of $136.30 reached in January 2011.
On the demand side, Indonesian exports to China appear to have been hurt by Beijing’s drive to lower pollution, especially since much of Indonesia’s coal is low-rank.
Changes to Indonesian tax and royalty arrangements may have also effectively raised costs for some producers.
It’s also likely that companies had mined the low-hanging fruit in recent years as prices slumped to lower unit costs per tonne produced. The easy pickings may now be exhausted at many mines, meaning it becomes more cost effective to cut back on operations rather than strip lower grades.
In Australia, there have been some well-publicised announcements by major producers, including Glencore and Peabody, of cuts to output.
But it also appears that smaller miners have been more than willing to keep producing and make up for losses from the majors, thus keeping overall output more steady.
They have been able to do this as demand has held up at major customers other than China, such as Japan, South Korea and Taiwan.
Australian producers also need to keep mining due to “take-or-pay” rail and port contracts, which can add around $10 a tonne to costs depending on where the mine is located.
Data on these contracts isn’t publicly available, but it’s believed that many of them still have several years left to run, having been negotiated around 2011/12 when coal prices were still robust.
Given that many of the rail and port operators have been privatised by the Queensland and New South Wales state governments, these operators are less inclined to lower their fees in a downturn as they have their own shareholders to answer to and debts to service.
It’s also possible that Australian miners have had more success than their Indonesian counterparts in cutting costs, and they may have enjoyed a bigger bonus from the fall in fuel prices, given their heavier reliance on diesel in mining operations and rail transport. (Editing by Himani Sarkar)