THE DISTILLERY: Miner headache

Jotters feel the pain of the resources sector as one finds many coal sites unprofitable on a fully-costed basis.

Queensland has lost hundreds of coal mining jobs within 24 hours of an expected hike in coal royalties as part of the state’s first budget under Premier Campbell Newman. A few commentators believe the two might be linked. Proximity might reveal the political savvy of the miners, but that shouldn’t obscure the reality that coal’s plunge has revealed our sector to be terribly uncompetitive on a cost basis. It wasn’t always like this.

Firstly, The Australian Financial Review’s Matthew Stevens says coal industry royalty, including Rio Tinto’s Tom Albanese, BHP Billiton’s Marius Kloppers, Peabody Energy’s Greg Boyce and Xstrata’s Peter Freyberg have visited with Premier Newman over the last month to voice their concerns about a royalty increase.

"Along with Albanese, each of the Rio man’s competitors warned the premier that a royalty increase risked being counterproductive in the short to medium term, because it would contribute to further erosion of Queensland coal production. It can surely be no coincidence then that, only 24 hours before Queensland’s budget, BHP and Xstrata confirmed, in that order, a mine closure and broadly targeted job cuts. Those cuts came but four days after Peabody’s Boyce confirmed an indefinite delay to the proposed three mtpa Codrilla pulverised injection coal project south-west of Mackay. Condrilla was one of the expansion jewels in the Macarthur coal crown that Peabody paid $5 billion for just last year. Just incidentally, the metrics of that deal must have been made to look very shaky indeed by coal’s price plight.”

Like Stevens, The Australian’s Barry Fitzgerald isn’t unmoved by the timing of the announcements. But the News Limited writer goes on to say that the coal price plunge has left many sites unprofitable on a fully-costed basis.

"That's an alarming statistic as it does not seem all that long ago that the thermal coal producers got by on $US40 a tonne and the coking coal boys $US60 a tonne. So something has gone horribly wrong. While the price falls obviously hurt, it has been the insidious rise in costs that is really behind the job loss drama. The cost pressures are real. They are not imaginary stuff whipped up for a new job cuts/investment threat campaign by the big three miners, and Mitch Hooke at the Minerals Council, so they can have their way with government. UBS has had a look at the issue in a research note on the impact on the Australian gold and copper producers. Its finding, that costs in those sectors have experienced significant inflation during the past 10 years, is just as applicable to coal and iron ore mining.”

In the same spirit, Business Spectator’s Stephen Bartholomeusz looks back at where Australia used to be in the iron ore and coal space on a cost-basis, compared to where we are now.

"There was a time, before the super-cycle element of the resources boom kicked in, where Australian iron ore and coal producers regarded themselves as almost cycle-resistant because of their high quality and low costs relative to global peers and proximity to their markets. Production from other higher-cost jurisdictions would be displaced before they were under real pressure. Soaring capital and labour costs have, however, increasingly turned the Australian resource sector into high-cost producers and a succession of industry leaders have warned that Australia was beginning to price itself out of the market, certainly where new investment was concerned.”

And for those who are interested in airline competition or planning a European holiday, The Australian’s John Durie flicked through Qantas’ submission to the Australian Competition and Consumer Commission about its proposed tie-up with Emirates. He found that the earnings downgrade from Standard & Poor’s last week could not have been more sweetly timed.

"Further, Qantas's submission said: ‘Australians will lose the benefit of Qantas operating a strong locally based international network airline. This is not in the national interest.’ That is a big call, but Qantas backed its argument by noting how it helped the country in times of distress and Emirates would do likewise, so there was a public benefit in approving the deal. The local Flight Centre agent will tell you that if you want to fly Sydney-London return next month on economy, it will cost you $2825 on Qantas and $2383 on Emirates. Any increase in the Emirates fare after eliminating its major competitor, Qantas, is what will worry the ACCC.”

In other company news, Fairfax’s Adele Ferguson explains that a tie up between Andrew Forrest’s Fortescue Metals Group and Gina Rinehart’s Roy Hill deposit "might not be out of the question”.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says that Boral’s new chief executive Mike Kane has a reputation for innovation in the building materials industry, something that will is desperately needed for his new role.

Fairfax’s Eric Johnston finds the Australian Securities and Investments Commission warning fund managers to increase their risk management focus.

And finally, Johnston’s colleague Tim Colebatch takes us through the well established argument that Australians need to work longer as our lifespans extend and our demographics become more weighted to older age brackets.


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