GOLDMAN: The Coal Price Drop Is Putting Pressure On Australian Mines

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If you live in the Hunter Valley region like I do you know full well the importance that coal plays in the Australian economy.

Coal is Australia’s second biggest export after iron ore with a value of around $50 billion dollars per annum and the Port of Newcastle is one of the world’s biggest coal export hubs shipping 150 million tonnes last year, record throughput.

But even at a time of record setting global sales Hunter Valley miners along with their global counterparts are under pressure from a market for coal which is heavily oversupplied.

A report from Goldman Sachs Commodity Research team shows that globally miners are struggling with the price of production versus what they are receiving for the coal they are shipping. Indeed just last month Glencore announced it is going to close the Ravensworth underground mine in the Hunter Valley this year due to it becoming uneconomic.

They are not alone with Goldman Sachs noting that:

Operational losses caused by low prices (15% and 20% below our current marginal production cost estimates for thermal and metallurgical coal respectively) are gradually forcing out high-cost supply out of the market…we see every closure as a small step towards a more balanced market. However, these incremental cuts have not been sufficient to lift coal markets from the current oversupply.

Prices Well Below Production Costs

The bad news for miners, Australia’s export earnings and terms of trade is that Goldman Sachs see the situation getting worse before it stabilises because the operational closures are not closing the supply overhang fast enough. As a consequence they have adjusted down, 2014 “price forecasts for thermal and metallurgical coal to $US77/t (down 7%) and $US124/t (down 8%) respectively”.

The market is expected to find equilibrium some time in 2015 a little higher than the forecast trough.

But with Rio Tinto today reporting strong coal volumes which are expected to remain, the situation looks like one where record production volumes mitigates the falling prices and also causes it.

So on balance while prices are falling there are some significant volume benefits to help even out the losses in price – although unlikely all of them.

Turning back to the Hunter the good news is that even though local mines are under pressure with some pits closing and jobs harder to find in the sector the demise of the BHP steelworks in the late 1990’s gave Newcastle and the surrounding region an opportunity to undertake the kind of transformation that RBA Governor Glenn Stevens wants for the rest of the economy.

So this is one community that should be able will be able to weather the storm of lower prices for coal reasonably well.

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