RIP: Australian Coal Production Discipline

BRISBANE, Australia - Aug. 11, 2013 - PRLog -- Look no further than a lack of production discipline at Australian mines for a key reason why traded coal prices in all met and thermal categories are staying weaker for longer.

The usual suspects – including industry majors BHP Billiton, Peabody Energy and Rio Tinto – delivered their latest blows to discipline last week with statements showing mostly robust output.

But a more fatal blow was quietly aimed by the emerging Chinese controlled met and thermal producer, Yancoal.

In a classic ‘do as I say, not as I do’ moment, Yancoal’s April-June quarter report noted strong supply pressures on both met and thermal coal pricing and reached a glaringly obvious conclusion: “To return to balance will require production cuts from some producers.”

Yet paradoxically, Yancoal’s own managed production jumped to 3.13mt in the quarter ending June, up more than 47% year-on-year against 2.13mt previously.

The neat juxtaposition in Yancoal’s reporting exposes the central discipline issue in sharp relief. Not so eloquently left unsaid was that the required production cuts are someone else’s problem.

But the reality goes further. Despite concerted industry ‘sackcloth and ashes’ spin playing up hard times, falling returns, job losses and peripheral mine closures, Australia’s coal shippers remain healthy enough to pump out product with their ears pinned back.

“Ignore the hype. No-one in Australia is going to cut production, at least not much,” said a source at one major shipper. “Everyone’s fixed costs are too high. That’s not just because of take-or-pay, but there’s also expensive equipment, major plant that you just can’t have sitting idle.

“The game is about lower costs period. So you’ll see jobs go, but more tonnes coming out because the bosses are riding us for lower costs per tonne. And no-one wants to risk losing business. The quickest way to piss off customers is to tell them you can’t supply.”

Ah, more eloquence right there. And further subtext: The Australian majors – as the world’s largest source of traded met coal and second largest shipper of thermal product, know they have the resilience and long pockets to be ‘last man standing’ in any price war.

Even so, in current weak markets, increased output represents a recurring industry own-goal that’s so tarnished the discipline tradition that some younger industry types believe it was always more myth than reality. Perhaps. But in the hands of a savvy marketer, perception can almost equal truth.

And so it once was, admittedly in simpler times when Australian output dominated in Asia. Back then, major producers seemed able to ‘independently’ announce production cuts whenever prices tanked - and in the days before Indonesian (and Colombian) output grew - some price impact usually followed.

Times are now distinctly more competitive, but as with many modern trends, some broader impacts of ditching discipline have not been well thought through. Primarily, they entail a race to the bottom of the price barrel, with the industry now finding out just how deep this might be.

BHPB remains a chief architect. Not only were its April-June quarter hard coking coal sales the highest for three years, but overall Queensland met production was hiked 54% year on year, representing a record annualised managed rate of 61mt/yr.

This was despite recent closure of the company’s Norwich Park and Gregory mines. And the company boasted that its Queensland met capacity would hit 66mt/yr by the end of next year and is headed to 75mt/yr by 2015 – a 40% increase on 2012 output.

Peabody also emphasised job reductions in its operations, especially in Australia, but confirmed higher output/sales in the latest quarter and is targeting combined Australian met and thermal output as high as 36m short tons for 2013 – almost 10% higher than 2012 sales.

At Rio Tinto, hard coking coal output actually dipped in the latest quarter, but this was only to allow preparations for a replacement mine at Kestrel designed to lift capacity to 5.7mt/yr by next year. That’s a 185% increase on the mine’s calendar 2012 output of approximately 2mt.

And Rio’s semi-soft and thermal output rose 26.8% and 22.8% respectively in the latest April-June quarter on 2012 levels, despite sharply lower prices in both categories.

Anglo emerged alone among the majors showing real restraint, with export met coal output down around 9% in the quarter, with the company citing ‘strategic production cuts’ including closure of the Aquila mine.

June half shipments from Australian coal terminals, as previously reported by IHS Coal in the McCloskey Coal Report, further underline the overall trend, with total shipments for the half year to June up almost 13% y-o-y, or nearly 20mt.

In current coal markets, over-production is a worldwide issue and Australian shippers are far from the only offenders.

For met coal, Canada’s Teck is also continuing a rapid expansion programme, and for thermal, growing Colombian output, displaced from traditional US markets, is increasingly crowding Asian markets (net of strikes).

The brunt of output cuts has been borne by the US where estimates suggest total met and thermal output dipped by 70-80mt in 2012, with the downtrend continuing. Signs are this is insufficient to rebalance markets. The Australians expect more heavy lifting, stateside.

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