As the thermal market softens Australian producers now have their first opportunity to display the kind of discipline evidenced by South African producers who have in the past reduced production in accordance with market demand. Australia, on the other hand, has tended to focus on volume of output rather than price.
The 2001-02 benchmark Australian contract thermal coal price is US$34.50/tonne but current spot prices are languishing almost US$8/tonne below this at about US$27/tonne FOB Australia. Average estimated coal production costs in Australia are thought to be US$22- US$23/t, including a US$4/t capital cost. When the price goes much below US$25- US$26/t producers struggle to make a profit. Currently Australia accounts for about 30% of the global export thermal coal market.
Leading the charge to cut production is major thermal producer, Enex Resources, which accounts for 12% of the global thermal trade. Speaking at the McCloskey Coal Forecast 2002 Conference held in Sydney in mid-November, Enex managing director Peter Coates announced the company planned to cut its production budget by 1 million tonnes in 2002.
Earlier the company had planned to increase output in 2002 by 5Mt to 33Mt but this has been put on hold. Coates told International Longwall News that the decision would not affect major development projects (which include the Beltana punch longwall, and the United conversion to longwall mining). He said the company had around 5Mt in spare production capacity at various operations including Mt Owen, Liddell, Bulga and Ulan. This capacity would not be accessed from these operations in 2002.
"There is no way we will increase production and put more coal into soft markets," Coates said.
Lawrie Fanshaw, associate director – coal at AME Mineral Economics, predicts that this will be a test case for Australian producers.
The major restructuring and consolidation of the coal industry in recent years has resulted in fewer, bigger players with lean workforces and a greater ability to turn production on or off. In addition, recent changes in industrial relations laws have for the first time given producers the flexibility to manage production more flexibly, Fanshaw said.
Fewer workplace restrictions means operators can shift a mine’s operational focus to a host of ancillary activities such as overburden removal in open-cut operations, or increase maintenance regimes.
“The old way of increasing production as the price goes down ends in a spiral where everyone loses, particularly those on the supply side of the equation,” Fanshaw said.
Other companies likely to be considering production cuts are BHP Billiton, Anglo Coal and Rio Tinto, all of which have undergone major restructuring in recent years.
One perceived problem of exercising restraint in production output is the possibility that cheaper Chinese coal could plug the gap and steal market share. Fanshaw said that at present this threat is somewhat diminished as China goes into winter when more coal is burnt domestically. Operational difficulties during winter (transport problems due to frozen railways, for example) further reduce the availability of Chinese coal during the winter months.
China’s share of globally traded thermal coal has lifted steadily to current levels of around 10%. From January to September Chinese exports are up 63% compared with the same period a year before and are expected to reach 80Mt this year.
On the coking coal side, supply remains tight with producers anticipating price increases. Already some South American and European contracts have settled at prices up to US$53 FOB. Fanshaw is predicting a Japanese settlement with Australian coking coal producers of US$45 FOB, effectively a 5% increase on this year’s figure.
In contrast, the Commonwealth Bank of Australia (CBA) predicted a drop of 4.1% in the coking coal prices and a 4.3% drop for thermal coal prices for next year. This would reverse this year’s increases of 7.5% for coking coal and 20% for thermal coal.
