Coking coal prices have slumped to six-year lows, many Australian mines are not making money and the industry is set to close more of the mines that produce the nation’s second most valuable export.
A dramatic fall in quarterly contract prices for the steelmaking raw ingredient has caught industry players by surprise and led coal giant Peabody Energy to declare it is considering the closure of Australian mines it recently indicated were safe.
As boom-time-approved expansions continue to increase supply, the June quarter coking coal contract price has fallen from $US143 a tonne to $US120 a tonne, which is close to typical cash costs for the east coast coking coal industry, according to Credit Suisse analysts.
This means when things such as corporate, financing and sustaining capital are added in, most producers would be losing money.
Peabody chief Greg Boyce revealed the St Louis-based company, which has already cut jobs and shut down some mines here in recent years to stay profitable, was considering closing more Australian mines.
“With the change in the metallurgical coal environment in the last quarter, we’re having some pretty serious looks at a couple of operations,” Mr Boyce told US investors after the release of the company’s first-quarter earnings last week.
“These operations are getting significant scrutiny because at this lower price horizon, they’re much more challenged,” he said when asked if more mine closures were coming.
In January, Peabody told investors that a decision to close its Wilkie Creek thermal coal mine should not be taken as any indication that closures of the rest of its operations were being considered.
Coking coal, mainly from Queensland, is the nation’s second-highest export earner after iron ore and brought in $22.4 billion of export revenue last financial year. Thermal coal, used primarily in power stations and mainly from NSW, raised $16.1bn.
Contract coking coal prices that peaked at $US330 per tonne in late 2011 have fallen steadily since then as the US and Australia exported more.
Despite the price drop, BHP Billiton (whose Queensland mines make it the world’s biggest coking coal exporter), Anglo American, Whitehaven and Peabody have all brought on or are bringing on new mines that were approved when nobody saw prices plummeting as low as they have.
As well as the new supply, Chinese steel mills have recently stepped away from buying imported coking coal as uncertainty continues around the Asian powerhouse’s economic growth.
Spot prices have fallen further than contract prices, with the Platts price index slipping as low as $US105 per tonne earlier this month before recovering to about $US110.
“For the second quarter, we have assumed that $US120 will become the benchmark and this will mean that most Australian metallurgical coal producers will be loss-making at the profit and loss level, with FOB (free on board) cash costs typically in the range of $US110 to $US115 per tonne,” Credit Suisse said in a client note.
The second-quarter settlement for Queensland coal, which was reportedly signed by Anglo American last month, has led Credit Suisse to cut its 2014 coking coal forecast by $US20 a tonne to $US133.
Most Australian miners have been on a year-long campaign to cut costs, meaning there may not be too much more that can save mines that are losing money.
Even BHP, one of the world’s lowest-cost miners, is making little if any money from coking coal at these prices.
“While costs might be squeezed a little lower, we think the majority of cost-saves have now been made in Australia,” Credit Suisse said.
The bank said BHP generated $US17 per tonne of earnings before interest and tax from its coking coal operations in the first half of 2013-14.