The 15% quarter-on-quarter slide in the hard coking coal benchmark of $US93 per tonne for the September quarter has most recently been followed by Peabody Energy’s move to cut 20%-25% of the workforce at its Metropolitan longwall mine in New South Wales.
While more clarity over the number and type of jobs cut is expected to emerge next week JPM analysts believe there is enough breathing space for most Australian met coal operations.
“Our analysis shows that less than 20% of the Australian coking coal seaborne supply is unprofitable at $93/t,” JPM said in a client note on Monday.
“More importantly, only about 10 million tonnes of supply is losing more than $10/t which is similar to the take-or-pay obligations many miners are facing currently. With expectations of further depreciation of the Australian dollar, the miners are probably less encouraged to take tough decisions yet and hope to grow sales.”
JPM also said the Q3 benchmark should accelerate cuts outside Australia.
“Companies such as Teck, Alpha and Peabody pre-emptively announced cuts during the quarter as spot met coal traded at historical lows around $85/t,” the JPM note said.
“We feel this new lower benchmark will induce further cuts especially in the US where met coal exports are increasingly uneconomic.
“Much of last year’s announced cuts we believe have now been implemented and, along with the recent announcements, probably helped lift the spot coal price by $5/t in the past few weeks.”
The firm also expected further weak demand from China, based on how the market for pulverised coal injection-grade met coal was travelling.
“We believe PCI coal behaves as an anti-coking coal and steelmakers substitute PCI coal for hard coking coal to lower input costs,” the JPM note said.
“In the recent quarters, PCI coal has received as much as 85% of the hard coking coal price. However the recently reported $73/t PCI settlement could mark a reversal since it was only 78% of the HCC price. China is a big market for PCI coal and this could be highlighting further steel weakness there.”
JPM has forecast the Australian dollar to fall to US72c by the end of 2015 and sink to 70c by June 2016.
