Coal division feeling pinch
Mr Goyder said the Curragh metallurgical and thermal coal mine in Queensland's Bowen Basin was highly competitive on the cost curve, adding "if we're hurting, there are a lot of others hurting as well".
Last October Wesfarmers announced cost-cutting measures that included a shift from seven-day to five-day rosters and enforced staff leave during a planned shutdown. He blamed low coal prices and a high Australian dollar.
The finance director, Terry Bowen, said Wesfarmers was not making money on lower-grade metallurgical coal after state and private royalties were factored in, and in the current environment for many operators "profitability would be very questionable".
At the former state-owned Curragh, in addition to state government royalties, Wesfarmers is obliged to pay a substantial trailing royalty to government-owned generator Stanwell Corporation. It is linked to export coal prices and akin to a profit-sharing arrangement. The royalty was still being paid on the basis of higher coal prices a year ago, due to the lagged effect.
In a swipe at the Queensland government, which increased coal mining royalties last year, Mr Goyder said: "A lot of costs have been added, state government royalties have increased, there are a lot of fingers in the pie at the moment."
Mr Goyder denied coal was a problem division for the company, saying Curragh was a "very, very good asset". But producers could not continue to supply coal below-cost, he said. "Ultimately I think there will either be a demand or supply-side response."
Analysts yesterday said coal producers were doing it tough, but one said while Curragh was an efficient mine, after the Stanwell royalty was factored in "we wouldn't consider Curragh a low-cost operator".
Wesfarmers lowered its production guidance for 2012-13 to 7.5 to 8 million tonnes, down from 8 to 8.5 million tonnes, partly due to the Curragh shutdown and partly due to recent high rainfall and flooding in the aftermath of ex-tropical cyclone Oswald.
"This revised forecast is subject to no further significant wet weather and the satisfactory recommencement of rail and port operations," said Wesfarmers Resources managing director Stewart Butel.
Wesfarmers said it had concluded price negotiations with most export customers for the March quarter for metallurgical coal, and the weighted average price across all grades (hard coking, semi-hard coking and PCI) would increase by about 2 per cent, after falling 26 per cent in the previous December quarter. But the price Wesfarmers obtains for its best hard coking coal fell in the quarter, from $US165 to $US160 a tonne.
Frequently Asked Questions about this Article…
According to Wesfarmers' managing director Richard Goyder, the resources (coal) division is barely profitable at current coal prices. He defended the long‑term value of the Curragh and Bengalla mines but acknowledged low coal prices and a high Australian dollar have put pressure on profitability.
Wesfarmers says Curragh is competitive on the cost curve, but analysts note that once state royalties and a substantial trailing royalty to Stanwell are included, Curragh is not necessarily a low‑cost operator. The Stanwell payment is linked to past export coal prices and can materially affect operating cost competitiveness.
Wesfarmers faces increased state government coal royalties and a substantial trailing royalty to government‑owned generator Stanwell Corporation. The Stanwell royalty is linked to export coal prices and is lagged, meaning payments can reflect higher prices from an earlier period.
Wesfarmers introduced measures including a shift from seven‑day to five‑day rosters and enforced staff leave during a planned shutdown. These were announced last October as part of efforts to reduce costs amid weak coal prices and a high Australian dollar.
Wesfarmers lowered its 2012–13 production guidance to 7.5–8 million tonnes from 8–8.5 million tonnes, citing a Curragh shutdown and recent high rainfall and flooding after ex‑tropical cyclone Oswald. The revised forecast depends on no further significant wet weather and satisfactory recommencement of rail and port operations.
Wesfarmers' finance director Terry Bowen said the company is not making money on lower‑grade metallurgical coal once state and private royalties are factored in, and he suggested profitability for many operators would be very questionable in the current environment.
Richard Goyder warned that producers cannot continue to supply coal below cost indefinitely. He expects either a demand‑side or supply‑side response over time — implying potential production cuts, industry consolidation, or eventual price adjustments if low prices persist.
Wesfarmers said it had negotiated prices for the March quarter that lift the weighted average across metallurgical grades by about 2% after a 26% fall in the previous December quarter. However, the price for its best hard coking coal fell from US$165 to US$160 a tonne in the quarter.
Call 1300 880 160
Start a chat
Schedule a call
