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Coal trends in 2014

World Coal,

Deloitte has released its 6th annual Tracking the Trends report, examining the top ten issues affecting mining companies around the world. Topping the list for the third year in a row was the rising cost of mining, followed by low commodity prices caused by a supply/demand imbalance. The need for innovation to solve the industry’s challenges rounds off the top three.

Focus on the coal industry
But does this top three hold true when looking specifically at the coal industry? World Coal talked to Reuben Saayman, national mining leader – East Coast at Deloitte Australia, and asked what he saw as the key trends for coal were going to be in 2014. Saayman suggested the following alternative top three, swapping numbers one and two and moving up the sixth placed trend in the report:

  • Low commodity prices combined with a strong exchange rate.
  • High cost base and especially labour costs combined with low productivity.
  • Regulation combined with environmental pressure.

“I have called this the perfect storm, where increased regulation and environmental pressure makes it very difficult to be in business and justify the effort, given the very low returns (if any) on investment as a result of the low prices and high production costs,” commented Saayman.

“The risk is that miners dump growth as there are some great opportunities out there for those with cash and a different view on the supply/demand equation,” Saayman continued. “Demand has a long way to grow given the level of expansion and the base from which China is growing – and that is not even considering India as the next area of significant demand growth. If this is matched by a supply side contraction – as projects are shelved, some players find it unsustainable to continue making losses to meet take-or-pay commitments and some planned infrastructure projects are not followed through – supply will simply not keep track and we will see prices rise in the medium term.” As a result Saayman believes that demand will significantly exceed supply much earlier than 2020 – the date suggested in a recent report by Wood Mackenzie.

Saayman also suggests that environmental concerns may provide a boost to producers of quality thermal coal, such as Australia, as this will be in demand to help address concerns over pollution.

Challenges remain for the coal industry
So there are opportunities ahead – but challenges still remain. Coal miners need to address cost levels, low productivity and look at different ways of doing things through innovation and system and procedure improvements. “The low hanging fruit has been taken through retrenchments, getting rid of contractors and consultants, and suspending or significantly cutting back expenditure on areas such as maintenance,” concludes Saayman. “This may assist in staying in the game but is not a long-term model that is sustainable. A paradigm shift is required to change business models through innovation in what people do and to cope with a new norm of volatility.”

Jonathan Rowland, editor of World Coal, will take a more detailed look at the trends mentioned in this article, in a comment available soon.

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