LAUNCESTON Australia (Reuters) - 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 maintenance.
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 2011.
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 flatlines.
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 basis.
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 labor, 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 mines.
Overall, the message is clear, either prices improve or more supply will leave the market.
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 mid-2011.
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