Scrambling for light at a darkened coalface

Anglo American’s Mark Cutifani had it exactly right when he told the Minerals Council of Australia conference today that Australia’s coal sector is at a critical moment in its history. With mine closures and massive job-shedding the sector is in a desperate battle for survival.

Prices for thermal coal have slumped from around $US130 a tonne a year ago to about $US85 a tonne as China’s growth has slowed and the bulk of the industry, including the higher-value metallurgical coal segment, is under water – BHP’s sector-leading met coal business lost money in the first half of this year.

With no great expectation of a rebound in price, and facing increasing competition from coal from the US displaced by its shale gas revolution as well as from Colombia, South Africa and Indonesia, the sector is being choked by the combination of lower prices, higher costs and a still-strong Australian dollar.

Given that the only one of those factors within the control of the producers is costs, they are slashing costs and jobs as fast as they can. Cutifani estimated that about 9000 jobs have already gone in Queensland and NSW over the past year and warned of a rapid increase in those numbers.

Coal has been an important export commodity and, indeed, still is. The Bureau of Resources and Energy Economics, in its latest quarterly bulletin issued today, estimates that thermal coal exports in 2012-13 will be about 182 million tonnes, or 15 per cent higher than last financial year, but that the lower prices would see the value of those exports fall.

When those lower values are poured over cost bases that have experienced in some cases a doubling over the past half-decade it isn’t surprising that even BHP’s famed Queensland met coal mines, which were once making more than $US4 billion a year, are now losing money.

Aided by the lower US dollar and pushed out of their domestic markets by the surge in shale gas production US producers have become the swing producers in the market and even with the expected continued growth in China’s economy and demand for coal (albeit at somewhat lower rates than in the recent past) there is no expectation in the sector that there can be a return to the boom era growth rates in demand or prices.

If the miners can significantly reduce their costs and improve their competiveness there are some small rays of optimism emerging.

The most obvious is that the dollar has broken significantly below parity with the US dollar, which should both boost the revenues of Australian-based producers and, for those that use the US dollar as their functional currency, reduce their Australian-dollar costs on translation. The rising US dollar also makes the US producers less competitive in export markets.

The other, referred to by the BREE, is that there is a proposal on the table from China’s Natural Energy Agency that would impose minimum standards for ash and sulphur content on coal imports – to reduce pollution and also to favour local producers, which would not be subjected to those standards.

Exporters of coal with low calorific content like Indonesia, or high sulphur content, like the US, would be handicapped relative to the producers of high quality coal in Australia, South Africa and Colombia, the bureau said.

The lower dollar and the prospect of disadvantaged rivals represent the potential opportunity for the Australian industry.

To capitalise on it, however, the coal producers face a massive restructuring task. A half decade or so ago nearly two-thirds of the Australian producers were in the lower half of the industry cost curve; today only about a quarter, if that, fall into that category. At current costs and prices most of the sector is losing money and most of the new capacity that was in the pipeline has evaporated.

The coal sector isn’t, of course, alone – the entire resources sector has been squeezed by inflated costs and tumbling prices – but it is probably the worst affected.

If it is to be restructured and stabilised there are going to be a lot more job losses and mine closures and considerable pressure for changes to work practices and entitlements as the producers look to secure their viability and competitiveness and restore some profitability.