Russia, first act on the triple-trouble list, is bad news because it has dramatically increased coal exports as it chases hard currency in the form of US dollars to bolster its recession-hit economy.
The Yanks are a problem because coal mining companies in the US are suffering from the flipside of the currency issue in that their exports have become uncompetitive but miners continue to pump out coal because closure costs are too high.
Rio Tinto is the third act on the bad news list because it has just settled its annual benchmark thermal coal contract with Japanese customers at what seems to be a bigger-than-necessary discount of 17% on last year’s benchmark.
Each of those factors is worth considering in a little more detail because collectively they spell out the immediate future of Australia’s coal industry which, as we all know, isn’t too bright.
The Russian problem first because it is connected to a factor which is affecting everything, the value of money as reflected in rapidly-changing exchange rates.
In Russia’s case the big change is the collapse of the country’s currency, the rouble, as result, of Western world sanctions on key parts of its economy and the big fall in the price oil.
Because most commodities are traded in US dollars the Russians have found an easy way to boost their economy and that’s by exporting more raw materials to earn hard currency because a tonne of coal sold by a Russian mining company today is worth 50% more than yesterday on conversion to roubles.
Snippets of news about Russia cranking up coal exports have appeared before but what was initially seen as a trickle of extra coal now appears to have become a flood.
What makes the Russian situation annoying is that it was predictable and because it is affecting other natural resources for which Russia is famous such as nickel, aluminium, potash, and coal.
Ironically, Russia’s sharply depreciated currency has made it the world’s most competitive exporter of minerals and fuel, at least in the short term.
One of the best examples of what’s happening is in the financial results of Rusal, a big Russian aluminium producer, which has just reported its first profit in three years thanks to the currency effect which has made its exports super-competitive.
In theory, the same currency effect ought to be killing US coal exports though as International Coal News reported last week a truly bizarre set of circumstances are playing out in that country’s coal sector where it makes sense to stay in production until you go bankrupt rather than close unprofitable pits.
Some of the numbers compiled by the coal industry consultancy Blackacre make for sobering reading such as Arch Coal being valued on the stock market at $US208 million ($A271.19 million) but facing a closure cost liabilities of $418 million. Alpha Natural Resources is said to be valued at $207 million while facing closure costs of $640 million.
The net result is that companies which should be thinking seriously about cutting production keep producing to avoid closure costs in much the same way Australian coal miners produce to satisfy rail haulage and port costs.
More coal from Russia could have been a factor in prompting Rio Tinto to accept a benchmark thermal coal price of $67.80/tonne with Tohuku Electric of Japan rather than hanging out for the $75/t which its chief rival, Glencore, had hoped to get.
The fact that Rio Tinto settled first, rather than Glencore, surprised Japanese power utilities perhaps because they haven’t been following a related corporate event – Glencore’s attempts to takeover Rio Tinto.
It might be The Hog’ vivid imagination but it does seem that Rio Tinto’s acceptance of what seems to be a big discount might have been partly affected by the threat of a fresh move by Glencore.
By accepting a low-priced coal benchmark Rio Tinto, which earns most of its profits from iron ore, has heaped pressure on Glencore, which has traditionally earned most of its profits from thermal coal.
While Rio Tinto and Glencore engage in a game of predator and prey, which is how all takeover tussles are played, out the real victims will be other coal-miners with higher cost structures than those big two exporters.
As Macquarie Bank noted, coalminers not exposed to the certainty of the Japanese contract will be under increasing pressure for the rest of 2015 – which is not what anybody wanted to hear.
