Aug 14 (Reuters) – Australian coal miners have been in mourning over the rapid loss of profitability and expansion opportunities, but the industry is entering the final stage of the grieving process.
The five stages of grief, as described by Swiss-American psychiatrist Elisabeth Kubler-Ross on how people face events like terminal illness, are denial, anger, bargaining, depression and acceptance.
While not all of the attendees at the annual Coaltrans Australia conference this week have got past the depression stage, most were looking at how the industry deals with the reality of its myriad of issues.
These include an apparent structural shift to lower prices for the foreseeable future, rising public opposition to mining on the back of a well-funded and organised environmental lobby, lack of capital available for new projects, still high labour costs and an increasing burden of government red and green tape.
The coal miners have limited influence over most of these issues, but they appear to be making concerted efforts to change what they can in a bid to strengthen their position and make sure Australia remains the world’s biggest exporter of coking coal and number two in thermal coal.
The spot price of thermal coal at Australia’s Newcastle port , a regional benchmark, has fallen 16.6 percent this year, and was quoted at $76.94 a tonne last week, the lowest in almost four years.
More worrying for producers is that the Newcastle price is now 44 percent below its post-2008 recession high of $136.30 a tonne, struck in January 2011.
Coking coal, used in steel-making, has suffered a steeper decline, losing more than half of its value to trade around $136 a tonne, although its post-2008 peak of around $300 was boosted by widespread flooding in Queensland state in late 2009 and early 2010, which cut exports by about 40 million tonnes over the next two years.
The problem for Australian miners is that at these prices many of them are struggling just to break even, and virtually no new project can proceed as the development costs exceed the potential revenue that can be earned.
While longer term coal demand is slated to rise strongly on the back of new coal-fired power plants in China, India and elsewhere in Asia, for the foreseeable future coal prices are likely to remain relatively stagnant in real terms.
This is because the cost of seaborne coal in Asia is largely being set by the cost of production in China, where imports meet around 6 percent of total demand despite the nation being the world’s largest importer.
China’s marginal cost of production for thermal coal is around $80-$100 a tonne, according to CLSA analyst Ian Roper.
This likely puts a cap on how high coal prices can rise, as Roper points out that the Chinese are opportunistic importers, buying from overseas when the cost is below that of domestic supplies, but pulling back when it’s cheaper to buy locally.
With Australian thermal coal miners currently facing an average cost of around $77 a tonne, a figure that excludes royalties and shipping, it’s clear that many are on the breadline.
Data from Greg Sullivan, the Australian Coal Association’s deputy chief executive, show that to make an internal rate of return of 15 percent, most Australian thermal coal miners need prices above $100 a tonne and coking coal miners require about $160 a tonne.
At current prices some 68 percent of Australian thermal coal miners have a profit margin of less than $10 a tonne, Sullivan told the Coaltrans conference.
Furthermore, Australian producers have shifted higher along the cost curve than their global competitors in Indonesia, South Africa and elsewhere, with 66 percent now falling into the second-highest quartile, up from only 34 percent in 2006.
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