The Pain Is Not Yet Over For Australia’s Coal Industry

Oct. 7, 2012 - PRLog -- A medium-sized coal producer has predicted spot prices for metallurgical coal have further to fall before there will be any really serious blood-letting in Australian supply. If that’s so, it will be a scary proposition for those miners that say they are producing at the marginal end of the cost curve.

“There’s another fall in this yet,” the source said, alluding to the current spot price for coking coal which some industry insiders believe has been around the $150/t FOB mark in recent weeks.

Our source points to the 2008 Global Financial Crisis when the spot price for coking coal dropped to US$129/t; worth around A$150 given the exchange rate at the time. Depending on how you do your sums, the source believes it is this A$ number which represents the floor at which point producers start to move into unsustainable territory.

While the price for PCI was set by Anglo and POSCO at $125/t FOB, sources said Japanese mills are pushing for $120-122/t for PCI, underlining again the lack of faith in the quoted benchmarks. The gap between the spot price and the quarterly price has resulted in a breakdown in perceptions about the quarterly benchmark throughout Asia.

“No-one believes the benchmark numbers anymore,” a steel mill source said recently with Asian mills pushing back on the $170 benchmark.

Semi-soft coking coal was also set, for two quarters, at $117/t by the major producers. The fact the producers were willing to lock in six months is indicative of where they think prices are headed, particularly for thermal coal.

“It’s better to take $117 for the semi-soft than take sub-80s for thermal,” a source said.

Meanwhile, if you thought Australian producers were doing it tough, it’s looking like things could get even worse, if some predictions are to be believed.

“Most producers are just covering their cash costs at the moment,” the source continued, suggesting costs range between $110-120 for an average metallurgical coal operation in Queensland. Once you add on haulage costs, you’re up around $150.

As ACR has previously pointed, the current structure of the Australian coal sector means take-or-pay commitments for access to port and rail are costs that have to be met.

As our source said, to do nothing - as in stop mining and exporting coal - would cost a coal operation about $20 for every tonne not shipped. Even selling coal some dollars below cash cost is still more attractive than servicing unutilised take-or-pay contracts.

The dilemma is, at what point does a producer stop operating at a loss and stop producing coal.

From industry feedback it would seem coal producers now appear resigned to the fact the price is not going to turn around any time soon. Just a few months ago, producers were pointing to the Q4 as the time the Chinese would be back buying up commodities, but this has not eventuated. Any foreseen ‘recovery’ is now being pushed out well into next year.

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Today, with exchange rates hovering close to parity, producers are now taking home around A$140-150/t on spot sales, with some insulation from more expensive contract tonnes.

As reported in last week’s Australian Coal Report (ACR – September 26), a new benchmark for premium hard coking coal for Oct-Dec has been set at $170/t FOB by BMA and Nippon. Major suppliers including Anglo Metallurgical Coal, Xstrata and Rio Tinto are believed to have finalised quarterly prices with key buying countries, Japan and Korea. The prices achieved are said to be close to the $170/t benchmark but are probably not being done exactly at benchmark as steel mills baulk at the ever-diminishing spot price.