Australia is on track to usurp Indonesia as the world’s top coal exporter by the end of the decade. Yet despite the positive outlook for the AUS$70 billion industry, aided by growing demand from India, falling prices due to oversupply have sparked job and output cuts, with environmental activism adding to recent pressures.
Responding to claims of coal’s reported demise, Adani Australia’s Samir Vora told the Australian Financial Review: “Coal is definitely the main source of energy – you can’t deny it. It is growing every year no matter what anyone says. India is investing in new generation technology to make coal more efficient to bring down the carbon footprint. There is a balance for everything [such as renewables] but coal will undoubtedly remain the main source of fuel for decades.”
The Indian energy giant has remained bullish on the prospects for its US$16 billion Carmichael mine in Queensland’s emerging Galilee Basin. Despite opposition from activists, the ‘mega-mine’ is set to become Australia’s biggest new coal project should it receive the final go-ahead, anticipated later in 2015.
Yet despite Adani’s optimism, Australian coal miners have struggled to slash costs fast enough to cope with falling prices. From more than US$300/t in 2011, prices for metallurgical coal dipped to US$90 in early July, while thermal coal prices have halved to US$60, amid slowing demand from China, the world’s biggest coal consumer.
“Volumes and being the largest exporter are not really impressive. What impresses me is profit margins and returns on invested capital,” Morningstar Senior Resources Analyst, Mathew Hodge, said. “I don’t see any reason to be excited about coal right now, other than it’s cheap and returns are low. That can’t go on forever, but I think we’re in for an extended period of pain.”
Announcing in June the axing of 70 workers from its Curragh coal mine in central Queensland, Wesfarmers said: “pricing does not support investment in new mine capacity,” although the long-term outlook remained solid.
The move by the diversified conglomerate to cut workers followed the loss of 210 jobs at Peabody Energy’s North Goonyella mine in the same month along with a 1.5 million t production cut, with another 80 jobs slashed from Glencore’s Collinsville mine in May.
“The whole commodity space is quite depressed and, in the coal industry, all producers, whether you’re large or small, are facing a lot of pressure because of the amount the price has reduced,” Yancoal CEO, Reinhold Schmidt, told the Australian Financial Review.
Australia’s largest coal exporter, Glencore announced plans to cut coal production in Australia by 20% in 2015, equating to a cut of 15 million t.
Brazil’s Vale wrote down the value of its Australian coal mines by 71% during 2014, while Rio Tinto’s coal boss, Jean-Sebastien Jacques, said it would take up to four years before “a light at the end of the tunnel” appeared for thermal coal prices.
In a 3 July report, MiningNews said major miner, Anglo American, was eyeing further cuts to its Australian coal operations, having already reportedly put four Australian coal mines up for sale as part of a AUS$3 billion divestment plan.
In its June quarter report, the Australian government’s Department of Industry and Science said the nation’s resources and energy export earnings had declined by an estimated 11% in fiscal 2015 to AUS$174 billion, with softening prices expected to weigh on export earnings.
While it forecasts a 2.2% rise in export earnings in fiscal 2016 to AUS$178 billion, it said this would be achieved through increased volumes and a depreciating Australian dollar.
The report said metallurgical coal spot prices declined substantially in 1H15, “reflecting surplus supply, lower demand and lower production costs that reduced the price required for operations to remain viable.” Spot prices averaged around US$95/t in the first six months of 2015, down 18% on their level in 2014, with contract prices also dropping.
Despite announced plans of reduced output, “the market is forecast to remain oversupplied until demand growth recovers and announced production cuts materialise,” it said. The department said global trade of metallurgical coal would contract by around 3% in 2015, driven by lower import demand from China, but should recover to rise by 1.4% next year.
Nevertheless, Australia produced an estimated 188 million t of metallurgical coal in fiscal 2015, up 4.3% on the previous year. Despite announced mine cutbacks, increased production from recently completed projects, such as Maules Creek, is expected to see production rise by 2.8% in fiscal 2016 to 193 million t. Exports are predicted to rise by 3% to 191 million t, but earnings could fall 7% to AUS$20 billion, the department said.
The department was similarly bearish on thermal coal, describing it as “plagued by oversupply despite announced reductions in capacity worldwide.” Newcastle FOB prices began 2015 at around US$62/t but steadily declined to US$54 in mid-April, before rallying to around US$60 amid surplus supply and reduced import demand from China.
Despite some announcements of production cuts, the forecaster said spot prices would remain “under pressure” in 2015 and into 2016. While benchmark prices for the Japanese fiscal 2015 year settled at US$67.80/t, well up on the then spot price of US$57/t, the department said it would likely slip to US$62/t for the following fiscal year, “underpinned by continued oversupply and an assumed depreciation of the Australian dollar.”
Australian thermal coal production is estimated to have barely changed at 246 million t in fiscal 2015, with a 1.4% increase to 249 million t forecast for the following fiscal year. Exports are expected to rise by 0.4% to 202 million t in fiscal 2016, helped by resilient demand in key markets, including Japan, South Korea and Taiwan, although earnings could fall 6% to nearly AUS$15 billion on lower prices.
The eastern state of Queensland has led Australia’s coal charge, with exports anticipated to have set a record high of 220 million t in fiscal 2015, up 5% from the previous year on the back of solid demand from China, Japan, India and South Korea.
Further south, the state of New South Wales (NSW) grew exports by 5% to 133 million t in fiscal 2015, with lower Chinese shipments but rising exports to other Asian countries, along with its biggest market: Japan.
Wood Mackenzie Analyst, Brent Spalding, said there had been a “significant” reduction in Australian coal projects amid weak prices, although a number were still going ahead. “Some of the larger thermal coal projects we see being developed in NSW’s Sydney Basin over the next five years include Yancoal’s Moolarben surface and underground mines and Anglo American’s Drayton South,” Spalding said.
“In Queensland, Adani is also progressing its Carmichael Galilee Basin coal project, which will have a combined marketable production rate of approximately 40 million tpa. The Galilee Basin still needs rail and port infrastructure to be developed before coal exports can proceed. We expect there will only be sufficient global thermal demand to bring on Galilee Basin coal by 2020,” he continued.
“For metallurgical coal, we expect Q Coal to develop its Byerwen project and anticipate further production increases at some of the BHP Billiton Mitsubishi Alliance Queensland mines in the Bowen Basin.”
On 8 July, the AUS$1.2 billion Shenhua Watermark mine in NSW won federal government approval, despite political opposition. Worryingly for the industry’s future, exploration has slumped from a peak of AUS$227 million in 3Q11 to just AUS$81 million in 2Q14, according to Morningstar’s Hodge. In 1Q15, coal exploration dropped by more than 44% to just AUS$34 million, with drilling contractors, such as Boart Longyear, noting “historically low levels” of activity.
Meanwhile, the industry’s battle with environmental activists has been manifested in highly publicised divestments of resources shares by organisations, such as the Australian National University, along with a public relations war over the fate of national icon, the Great Barrier Reef. In July, the Queensland Resources Council (QRC) welcomed the decision by UNESCO’s World Heritage Committee not to place the Reef on its ‘in danger’ list following a campaign by environmentalists against further coal exports.
Earlier, in March, the recently elected Queensland Labor government brokered a compromise deal with Adani and GVK concerning the Abbot Point Coal Terminal – a major flash point in the debate over the Reef and the impact of the new Galilee coal projects. Adani’s Carmichael mine and related rail and port projects are expected to inject AUS$22 billion into the Queensland economy, a major boost to cash-strapped state coffers.
India to the rescue?
While Morningstar’s Hodge warned of a “slow grind” of rationalisation, mergers and closures to balance supply, other analysts were more upbeat concerning the industry’s prospects, particularly due to the rise of India and other Asian demand.
According to Australia’s Department of Industry and Science, India’s plans to rapidly expand steel production should see imports of metallurgical coal rise by 13% in 2015 and another 2.7% in 2016 to reach 53 million t, outpacing China’s forecast imports of 45 million t.
Similarly in thermal coal, India is set to overtake China as the world’s largest importer of thermal coal this year with imports of 174 million t compared to China’s 157 million t. With the vast majorty of Chinese domestic production reportedly unprofitable at current prices, Chinese imports have slowed due to measures supporting the domestic industry, along with falling economic growth and increased hydroelectric output.
In contrast, India’s coal production has failed to keep pace with rising demand, with 113 GW of new coal-fired capacity either under construction or approved.
The QRC’s Roche has highlighted India’s growing demand as a positive factor for both metallurgical and thermal coal: “From 2017, India’s new coal-fired projects require high-energy low-ash coal. India’s domestic coal is largely high-ash low-energy,” he said in a statement. “There are 300 million people in India who don’t have access to basic electricity and the Indian Government has been clear it wants to change that.”
Wood Mackenzie’s Spalding said rising export demand would outpace output from existing mines by the end of the decade.“We expect that marketable coal production capacity of existing mines will peak in 2020 and decline steadily thereafter. New projects will need to be developed to support longer-term production growth – we estimate an additional 40 million tpa of output by 2020 and 127 million tpa by 2025,” he said.
“Indonesia remains a significant exporter of thermal coal, while Australia is strong in both thermal and metallurgical coal. If you combined thermal and metallurgical seaborne coal exports, we will expect Australia to replace Indonesia as the top exporter by 2020.”
The Minerals Council of Australia’s Greg Evans, Executive Director for Coal, also noted the industry’s positive long-term prospects: “The demand for Australian coal is expected to continue to grow in Southeast Asia as the demand for inexpensive and reliable electricity sources increase,” he said. He pointed to India’s growing coal-fired power capacity, along with its push for new plants to use “supercritical technology” or better, which requires higher-quality coal.
Recent free trade agreements with major Asian trading partners China, Japan and South Korea are also set to eliminate a range of tariff and other barriers to Australian minerals and energy trade, worth more than AUS$120 billion annually, he said.
Balance Advisory Director, Michael Ryan, said another boom was unlikely, but the industry was in a much better position for an upturn. “Will we see massive investment in infrastructure? Perhaps not – but you’ll see smarter ways of doing things, incremental investments and add-ons to existing ports and railways. You’ll see the Galilee take off and the Surat […] it’s a generally positive outlook after a very difficult few years,” he said.
For an industry struggling to overcome pricing pain, stronger demand from India and ASEAN could yet prove the perfect tonic.
Edited by Jonathan Rowland. This article first appeared in the August issue of World Coal.
Read the article online at: https://www.worldcoal.com/special-reports/12082015/australian-coal-seeks-indian-pain-relief-2699/