Volatile times bring opportunity for coal producers

Coking coal exports collapsed in January and miners registered the weakest sales in more than four years. The Australian Bureau of Statistics reported the total value of coal exports fell to $4.5 billion in January from $5.6 billion in December.
While Steve Hulton has estimated that Australian coking coal shipments could fall by more than 15 million tonnes this year, he believes there are still healthy cash margins available to the large majority of coal miners.
Wood Mackenzie has found its services more in the demand in the past few months, with companies seeking to understand their position in the market better. The data available is from the “mine asset level up through to markets and what’s going on in the world scene”, according to Hulton.
“More than ever it pays to be informed,” he said.
“Those companies that are lucky enough to see themselves through the short-term and take a longer term view…this is an opportunity for them to position themselves for future.”
Hulton spoke on three key topics: coal pricing, margin and valuation.
In the period 1986 to 2004 the differential between thermal coal prices and coking coal remained relatively constant. The outcome of the negotiation of thermal coal prices would influence the coking coal price and vice versa.
This dynamic has changed in response to world demand and supply factors, said Hulton.
“We used to plot pricing charts on a scale of $80…changes in coal pricing of $5 a tonne from year-to-year were considered a big move.
“Then all of a sudden we’ve got $50 jumps, $100 jumps it’s like a new world we’ve entered into.
“Settlements last year, went into unchartered ground…this alignment of the planets, not just in coal but across the mineral sector, was really a strong bull run in everything.”
There was strength in demand, a rapid rise in the spot price. Hulton recalls, “one trade went close to the $200 a tonne level.”
Thermal coal producers in Australia have been constrained by lack of port and rail infrastructure capacity and not been able to keep pace with demand growth in the Pacific market.
To make matters worse flooding rains in Central Queensland in January placed additional constraints on exports early in the year.
Power cuts in South Africa and a prolonged wet season in Indonesia have also held back export supply.
Prices have pulled back recently in line with global sentiment but are still very strong, especially in Australian dollars. This year has seen a 44 per cent decline in price but this is still the second highest on record.
There have been reported settlements between Xstrata and Chubu Electric Power of US$71.25/t FOB for Newlands (6,400 kcal/kg GAR); and between Rio Tinto and Chubu Electric Power of around US$70-71/t.
In terms of pricing for metallurgical coal, Hulton said, “We’re seeing a lot of numbers being speculated - $100-140 mark. Even at $120 at the current exchange rate, this is an awfully big number in Australian dollar terms.”
Fundamentals of the demand for thermal coal are still good according to Hulton. “The inescapable conclusion or reality is that that demand for electricity will keep growing. There are a lot of interesting interplays between different fields and it’s a complex area but the long-term story is still positive and still up.”
“I don’t see it as a collapse in that sense but coming back to fundamental levels,” said Hulton.
“This brings us down to the areas that concern people, the companies themselves…in thermal coal at the mine site you don’t control pricing, but your coal, your production, how you mine it and costs within your ability to control.
“We’re seeing a lage number of operations, and there was a rash of new announcements throughout January, announcing larger and larger production cuts,” said Hulton.
This was primarily driven by metallurgical coal but the steel industry did “drop off a cliff almost”, producing an environment for coal producers that was a complete turn around from six months prior.
Hulton suggested that there could be a drop in production of up to 15 million tonnes, primarily for coking coal and PCI.
“Margins were so high, it didn’t matter what it cost, ‘let’s just get the coal out’,” Hulton said in relation to input costs.
There are some companies at the top of the cost curve, according to Wood Mackenzie data, around the $100 mark, however managing costs all depends on the nature of the operation.
“It’s really all about margin,” he said.
Weighted averaged total export costs have increased 65 per cent in the last five years. Queensland has increased royalty rates to take advantage of record pricing in coking coal - cash costs increased 62 per cent in just three years.
“There were some really large jumps mid last year in costs particularly for surface mines, two key drivers of that were diesel, oil prices were through the roof and the Australian Dollar was high, and explosives are a major cost.”
Hulton believes there will be a natural easing of costs and the rises that have been seen in recent years will not continue.
Wood Mackenzie has developed a model which can rank all operating Australian coal mines by margin. The company is building up data on coal mines all around the world and using it to populate its Global Economic Model (GEM), “a reasonably straight forward cash flow model but powerful in what it can do”.
According to Hulton what it shows overwhelmingly is that there is a “really healthy margin available for coal miners.”