Australian Coal Miners Cutting Costs Not Output as Rebound Seen
Oct. 2 (Bloomberg) — Australia’s coal miners will weather a plunge in prices by cutting costs rather than production ahead of an anticipated market recovery next year, according to consultants Wood Mackenzie Ltd.
A forecast 3 percent gain in the price of coal used by steelmakers next year and a decline in the Australian dollar should help ease producers’ pain, said Ben Willacy, a Sydney- based analyst at Wood Mackenzie.
“We anticipate margins rising and profitability improving,” Willacy said in a phone interview. “We’re not forecasting closures, so our assumption is that Australian operators, even those operating at a loss, will continue to survive through the fourth quarter to be able to take advantage of better conditions in 2015.”
Producers from BHP Billiton Ltd. to Glencore Plc have cut costs amid a global glut and slowing demand growth in China, factors that have pushed prices of metallurgical coal to the lowest since 2008. With freight contracts at some mines that make it cheaper to ship at a loss rather than close, Australian production is still forecast to climb this year.
Even after this week’s announcement of the impending closure of Sumitomo Corp. and Vale SA’s Isaac Plains mine, only three steelmaking coal mines have shut this year in Australia, the world’s biggest source of metallurgical coal.
That contrasts with the U.S., where Alpha Natural Resources Inc. idled three unprofitable mines in West Virginia last week and plans to cut production at eight more in November or December. There may be only two to four “really, really” large U.S. coal producers left as the industry shrinks, Alpha Chief Executive Officer Kevin Crutchfield said in an interview.
‘Unprofitable Mines’
While about 13 steelmaking coal mines in Australia are producing at a loss, putting them at risk of closing, most producers, including larger ones such as BHP’s venture with Mitsubishi Corp., are profitable, Willacy estimated.
Costs have declined 13 percent, while prices have fallen 24 percent, he said. BHP, the world’s largest metallurgical coal exporter, said the costs at its Queensland mines have fallen 40 percent from their peak.
“Cost cutting has been really successful, particularly for big operators, but prices have fallen by more than costs,” Willacy said.
A forecast drop in the Australian dollar to 86 U.S. cents by the end of 2015 will also help after the currency averaged about one dollar in the previous two years. It’s fallen about 8 percent in the past three months to 87.38 U.S. cents yesterday.
Benchmark coal prices are forecast to increase to $130 a metric ton next year from an average of $126 a ton this year, according to Wood Mackenzie’s revised estimates. It previously expected prices of $139 a ton next year. Prices will rise to $136 a ton in 2016, it forecasts.
‘Not Enough’
Should prices fail to rebound, Australian mines would probably have to make more production cuts and closures, Daniel Hynes, a commodity strategist at Australia & New Zealand Banking Group Ltd., said by phone from Sydney.
“We’ve been surprised by the lack of cutbacks so far considering the price is eating pretty heavily into the cost base particularly of the Australian producers,” Hynes said. “We’ve seen some cuts, but not enough to balance the market.”
Glencore said earlier this week it expects coal margins to lead to more mine closures.
Miners with high fixed expenses have opted to boost production to lower their unit costs, Hynes said. That has exacerbated the slump in prices, he said.
Freight contracts known as take-or-pay contracts, which make it cheaper to ship at a loss than to cut production, also encourage some mines to keep running, Wood Mackenzie says.
Australia’s metallurgical coal production rose by 16 percent to 184 million tons in the year through June and is forecast to keep growing, albeit at a slower pace of 1.2 percent a year through to 2019, according to the Australian government’s Bureau of Resources and Energy Economics.
To contact the reporter on this story: James Paton in Sydney at jpaton4@bloomberg.net To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net Rebecca Keenan, Andrew Hobbs
