One-third of Australia’s coal mining operations are operating at a loss, according to internal estimates from mining major Glencore.
Over the past 18 months the east coast coal sector has been closing mines, shedding jobs, and engaging in other cost cutting measures as it attempts to deal with the relentlessly high Aussie dollar and falling coal price.
But in a supreme irony, China’s clean air policies which are coming down the pipe, could be one element that will stop the haemorrhaging in Australia’s coal sector.
Within China, there is growing unrest over intense air pollution, with recent protests putting pressure on government to implement regulation that will bring the choking smog problems, especially in Beijing, under control.
This chart, obtained by Business Insider from Glencore, combines internal data with other industry information and shows about one third of Australia’s coal mines are operating at a loss.
Each vertical line represents a mine and shows the size of its marginal loss. Across the bottom are cumulative tonnes produced in Australia.
The chart shows a good portion of operations are teetering just above or below the line and are the ones most sensitive to movements in the Aussie dollar or coal price, while the smaller portion which are making good returns, on the right hand side, Glencore said are mostly newer, open-cut operations which are easier to mine.
Reports have circulated in the industry that many operations have been running at a loss for some time in the hope the coal price would bounce back, with a number of miners in the past saying it was cheaper to mine through the loss than cop take-or-pay bills.
But this strategy only works for a limited amount of time and adding to the storm are the high operating costs which make low-margin Australian mines uncompetitive in the global market. It means the times of carrying loss-making operations are over.
Glencore’s Ravensworth underground coal mine in the New South Wales Hunter Valley is one site which was put into care and maintenance mode earlier this year as cost-cutting measures weren’t enough to make the economics of coal mining work.
The graph shows that Glencore isn’t alone when it comes to making tough operating decisions, with most of the majors writing down coal assets, selling off operations or shelving expansion projects and making sweeping jobs cuts in the past 18 months as they try to improve profit margins.
BHP Billiton this month axed its $360 million pre-stripping contract with Downer EDI at the Goonyella coking coal mine in Queensland, signalling the company is making big moves to end loss-making activities at the operation. Downer shares closed down 11.15% on Wednesday after the announcement.
Pre-stripping is one of the first activities done to prepare new mining zones in existing operations and BHP coal president Dean Dalla Valle said the decision was “a further measure to ensure the long-term viability of BHP Billiton’s coal business”.
“Further measures to address wage and other costs are being undertaken at all mines in Queensland and NSW as we continue our detailed reviews of every aspect of our coal operations to ensure every operation remains operating cash positive,” he said.
“The coal industry is undergoing a difficult transition and to be globally competitive we have to reset the cost base of the business. This will continue to play out over the near term and coal producers face challenging decisions to find the necessary step changes to create value for shareholders.”
Coal miners have been dealing with the impacts of margin squeeze as the coal price continues to trend downwards, especially as more supply comes online from around the world, servicing Australia’s traditional export markets.
The hard-coking coal price has dropped to $US133 a tonne in the September contracts, which are currently the most active, while the thermal coal spot price has fallen to about $US72 a tonne.
But with China moving to clean up its air pollution problems, Australia’s coal sector could benefit.
Last month China struck a deal with Russia to buy natural gas for the next three decades as it attempts to clean up its smog problems. The government is forecasting its natural gas market will grow 14.5% this year, compared to coal consumption which it expects will only grow 1.6%.
EY global mining and metals leader, Mike Elliott told Business Insider: “There’s still going to be an increase in coal consumed it’s just not going to be as fast as gas”.
Refining its focus on carbon polluters, China is looking to tighten up regulations around coal-fired power stations and is floating the idea of carbon policy which if it goes ahead, will push coal-fired power generation to seek greater efficiencies.
One efficiency is expected to be around raising quality targets set on coal imports, favouring low ash and sulphur content products.
This policy could bode well for Australia’s coal mines with high quality reserves but would be bad news for lower quality coal producers who rode the coal price highs when Chinese demand was seemingly insatiable.
Elliott said capping tonnes or raising import coal quality levels could be good for Australian miners, “we’re already starting to see the pricing gap open up between high energy and low energy coal”.
“Some of Australia’s coal is twice the amount of energy compared to Indonesia,” said Elliott, adding Indonesia produces low energy coal per tonne compared to what’s being shipped out of Australia but Indonesia’s shorter travel distances and smaller cargo bills have been a big advantage in the last few years.
Indonesia’s advantage could change if China gets serious about cleaning up its skies, Elliott said. “You want as much energy per tonne”, he explained.
Falling Chinese coal demand has many people thinking Australia’s coal miners who have invested billions of dollars in operations banking on steady growth from the Asian powerhouse spells out doom.
But Elliott argues while China is a big importer, it isn’t the only option with Japan, Korea and Taiwan also big markets for high quality coal.
“It’s a sizeable piece but the whole industry isn’t dependent on it,” he said about China.
Elliott said if India implements emission control policies Australia would be well placed to take advantage of a substantial growth opportunity.
Waning demand could be a problem for Australia’s coal sector for now but for emerging economies – particularly in Asia – coal is one of the lowest cost fuel sources and if Australia’s coal miners can ride out the tough times unprofitable players will continue their exit and markets should rebalance.