Here's Why It's Wrong To Talk About 'Australian Mining' As A Single Sector

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The mining sector has largely been credited for keeping Australia out of economic hardship with its hefty contributions to the nation’s GDP and job creation when other nations suffered the GFC’s full brunt.

Recent coal mine closures have shown the industry isn’t too big to withstand anything thrown at it. But just because one commodity isn’t faring so well doesn’t mean the whole industry is tanking. Current commodity prices are having vastly different impacts on the east and west coasts of the country – to the point where a huge divide is now emerging between the two.

The west coast is predominately iron ore operations, while the east coast is largely coal. Each commodity is at different stages of the economic cycle. Coal is struggling with a sustained price drop, heightened international competition and low margins on a high cost base. Iron ore is stabilising, coming off the back of unprecedented growth, it is currently cutting a bit of fat but remains very profitable, even if ore falls below the $100 a tonne mark.

This chart shows the ratio of the thermal coal price to iron ore and highlights the problem with talking about mining as a single industry. As you can see, coal was once many multiples the iron ore price – but not any more. The prices of the two commodities don’t move in tandem.

Chart: www.indexmundi.com

The trouble for the coal industry in this is that its cost base is higher. In Australia it costs approximately between $40 and $80 to mine a tonne of iron ore with BHP Billiton and Rio Tinto at the lower end and Fortescue and Atlas Iron at the upper limits.

Production costs per tonne of coal are more complicated with underground and open cut differences weighing in but the Queensland Resources Council this month estimated 25 per cent of coal being produced in the state was being done so at a loss. That figure jumps to 50 per cent when only including Queensland’s thermal coal mines.

A 2013 Wood Mackenzie report estimated more than 40 of 71 Australian thermal coal mines surveyed had cash operating costs over the $US87 a tonne mark.

While coal prices have been weak for a number of years now, wages and margins haven’t changed all that much. This has resulted in the closure of a number of operations on the east coast and sweeping job losses, with downstream impacts on contractors, manufacturing businesses and other mining suppliers.

“There have been solid improvements in industry productivity, but this has unfortunately meant job losses, with around 2000 direct mining jobs lost over the last 18 months, and more potentially to come. Suppliers to the industry have also had to reduce their margins in line with the experiences of their mining industry customers,” NSW Minerals Council CEO Stephen Galilee said.

“Falling global commodity prices and currency exchange rates are a continuing major challenge for the NSW mining sector. Over the last 18 months we have experienced some of the most difficult trading conditions for decades, prompting significant industry action to get through these tough times.”

It’s often remarked in the industry that if the Hunter Valley had iron ore it would be in a very different situation.

Reports last year indicated a good portion of coal leaving Newcastle was being shipped at a loss, largely driven by take-or-pay contracts which made it uneconomic to shut up shop for a finite amount of time.

However sustained lower commodity prices, a persistently high Aussie dollar and the inability to cut much more fat from operations is now driving east coast closures. Earlier this year Glencore announced it was shuttering its Ravensworth underground operation and Integra Coal has this week flagged both its Camberwell open-cut and Glennies Creek underground mines for closure.

“Despite these challenges, the medium to long term prospects for NSW mining are very positive. We have some of the best minerals deposits in the world, strong demand for our commodities, relatively good access to rail and port infrastructure, a world-class mining workforce,” Galilee said.

Meanwhile, the west is still ramping up production and continues to make relatively strong returns, while driving productivity increases to improve margins.

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