COAL IN THE DOLDRUMS, BUT POISED FOR RECOVERYThe combination of...

COAL IN THE DOLDRUMS, BUT POISED FOR RECOVERY
The combination of rising costs and prices well off their highs is definitely making life difficult for coal producers and explorers however there is light at the end of the tunnel writes James Dunn.

Australia’s coal miners are feeling the heat of rising costs, the carbon tax and mining tax hurting their global competiveness, and a second year in three of disruptive Queensland weather, at a time when export market competition is on the rise.

From a 2011 high above US$140 a tonne, thermal (electricity) coal spot prices almost halved to as low as $79 a tonne in November 2012, as worries about a China “hard landing” gripped commodities markets. From there the price has recovered to trading at $94 a tonne.

As for coking (steel-making) coal, from its 2011 calendar-year average of about $290 a tonne - with a peak at a heady $315 a tonne - prices have slipped to about $170 a tonne.

The combination of rising costs and prices well off their highs is definitely making life difficult for coal producers and explorers, but if they are in the thermal coal market, they have one important thing in their favour: coal remains the cheapest feedstock for the generation of electricity - particularly in the developing world - and is likely to stay so for the foreseeable future.

According to the World Resources Institute, there are 350 new proposed coal-fired power plants in China. Even if not all of that number get approved or built, there is clearly a massive commitment to new coal development in China.

According to ANZ Research, China is bringing on-line about one gigawatt a week of new thermal power demand, which is about equivalent to about three million tonnes of new coal demand every week. That means about 150-160 million tonnes of new thermal coal demand every year – which is roughly what Australia exports each year.

Add to that the projections of the IEA that coal will rival oil as the world’s top energy source by 2017. The IEA anticipates an increase in coal useage in every region of the world except the USA, where the natural gas boom outweighs coal’s cheapness. According to the IEA, strong demand in China and India, particularly for electricity generation, will keep coal among the world’s main fuels for the foreseeable future.

"The medium- to longer-term outlook for energy overall is very strong, and coal will play a key role in that, because it is one of the cheaper base-load sources of power generation, which the developing economies need." Matthew Crawford, chief executive of Cuesta Coal Limited.

As for coking coal, Australia produces the highest-quality stuff going around, and the same factor - economic growth in China and India - can be expected to remain strong, dragging coking coal demand, prices and export volumes along with it.

Coal is Australia’s second-largest export earner (behind iron ore); and Australia is the second-largest exporter of coal in the world, behind Indonesia. (The International Energy Agency [IEA] says that Indonesia only usurped Australia’s number one position when the 2011 Queensland floods curtailed production - and that Australia will reclaim top-dog status over the next three to four years.) Australia is also the world's largest supplier of coking (steel-making) coal.

In the chaotic weather system that is any commodity market, the theme of feeding the Chinese economic engine remains a pretty strong tailwind. But the short-term headwinds are not lightly dismissed.

“The fundamentals of the Chinese economy tell you that they will need coal for a long time. The amount of coal that both China and India are going to have to import is well-documented, and they’re massive numbers,” says Matthew Crawford, chief executive of Cuesta Coal Limited. “I think the medium- to longer-term outlook for energy overall is very strong, and coal will play a key role in that, because it is one of the cheaper base-load sources of power generation, which the developing economies need.”

Crawford says there is “no doubt” that rising costs and the high dollar have been a negative for the Australian resources sector overall. “I think that has definitely been a bit of a negative impact from the point of view of an international company looking into Australia. I think that due to the massive resources boom, there was a rush on the part of companies to generate as much production as they could because the margins were so high.".

“Probably some of the cost control got over-looked a bit, due to the high margins. But I think we’re seeing some of the cost pressures starting to stabilise, and I think that will start to see that flowing into company profits over the foreseeable future,” says Crawford.

Theo Psaros, chief operating officer at MetroCoal Limited (MTE), which is striving to develop thermal coal projects in the Surat Basin for the export market, agrees. “From our perspective, India alone by 2030 it is going to require an additional 500 million tonnes to 1 billion tonnes a year of thermal coal. I am looking at some price projections from (Canadian broking firm) Wood Mackenzie, and there is a very large and lucrative opportunity for us. But definitely, the cost of developing these projects, and the rail and port infrastructure, to get this coal out to market is challenging.”

Costs stabilising is good, says Psaros, but the cost base “really has to go further” than stabilising. “As an industry, we can’t just keep on accepting from rail and port operators that ‘that’s your tariff.’ We’ve got to look at innovative ways, all along the supply chain, to lower our cost of doing business - we’ve really got to interrogate how we build things, at all levels,” he says.

Brendan Schilling, general manager, business development at Blackwood Corporation Limited, which is exploring and developing a portfolio of both thermal and coking coal projects in the major Queensland coal basins, is actually seeing improvement on the costs front.

“Because some majors may have taken their foot off the accelerator, we’re finding that companies like us can get access to resources at cheaper rates than say, two years ago. There is a lot more supply of things like drilling rigs and experienced people, and we can extract those efficiencies. So we’re relatively optimistic on the medium term,” says Schilling.

No-one would argue that rail and port infrastructure are not pressing issues, he says, but Schilling believes the Queensland government is being “relatively proactive” in adequately addressing capacity issues.

Crawford agrees that infrastructure has held the Australian coal sector back, but expects a “controlled expansion” of port and rail infrastructure going forward, as larger projects like those of Adani Group (the Indian company that is developing the Carmichael Coal mine, rail and port project in central Queensland) and Dalrymple Bay Coal Terminal (leased by Brookfield Infrastructure Partners from the Queensland government) expansion go ahead.