The companies need to focus on slashing labour costs and improving productivity across the board to regain its status as global competitive coal producer, he said in a report.
“There are two options remaining to the management teams now: reverse the cost blowouts or sell to someone who can,” he said.
“The biggest challenge in reducing overheads further is increasing labour productivity.”
Coal accounts for 9% of BHP’s net present value and 17% of its cost base. The story at Rio is also bleak, with coal making up 7% of the NPV while generating 11% of operating costs.
“Once portfolio darlings that contributed [about] 20% of earnings, they now contribute less than 5% to group earnings,” Young noted. “Ramping costs have stripped the assets of tier 1 status and in our view they are currently non-core by definition.”
There has been widespread speculation that Rio Tinto will sell its Hunter Valley coal operations as it battles with low productivity and uncertainty over the future of its Warkworth expansion due to a legal challenge in the Land and Environment Court.
BHP has already started the process of closing unprofitable mines in central Queensland.
Operating costs at the BHP and Rio’s Australian coal operations have increased by 320% since 2005. BHP’s metallurgical coal business’s costs of production have surged from $US44 per tonne to $US161/t in that time while Rio’s Australian coal costs have shot up from $US25/t to $US94/t.
“The basis of the cost savings will be a reduction in overheads, removal of contractors and reducing their margins, changing shift rosters and reducing the workforce, lifting equipment utilisation (draglines, trucks), delivering lower cost expansion projects, and closing loss making operations,” Deutsche Bank said.
There was room for BHP to cut overheads by another $600 million and Rio $300 million.
The central Queensland coalfields in the BHP Billiton Mitsubishi Alliance stable have struggled to maintain labour cost competitiveness after a protracted industrial struggle over enterprise agreements.
Rio’s Hunter Valley mines are sub-par in the productivity stakes.
“Productivity is ‘way off track’ according to recent statements by Rio management who also said that ‘Hunter Valley employees are paid more than Pilbara Fly-in Fly-out workers’,” the report states.
“A number of Enterprise Agreements between the unions and BHP and Rio are being re-negotiated.
“We do not expect unions to disappear, however we do expect that lower coal prices and profits will be a catalysts to re-base worker entitlements.”
