Cost reduction a ‘business imperative’ for coal industry

By Paula Wallace

There are a number of factors creating this urgency said Boyle, from Synergy Management Consulting Group: the global financial crisis; capital constraints; and rising operating costs.
He told attendees of the NSW Coal & Energy Conference, on September 29th, that these factors have seen companies and contractors look to Lean Six Sigma capabilities to improve their performance.
Barnett, of Minec, told the conference, “You have to control your costs if you’re a domestic producer because you get bugger all for the coal that you sell to the power plants so if you can’t control your costs you don’t stay in business.”
While cost reduction is a business imperative, Boyle said this shouldn’t be at the cost of quality, “…the objective is to achieve sustainable process improvement.”

Is there a cost-price squeeze?
According to Barnett this is akin to asking ‘how long is a piece of string’, depending on the price and exchange rate being entered into the equation.
And, in the last 15 months the Australian Dollar has wandered between lows of 67 cents and highs of 95 cents.
“If you just take the straight economics and the movement of exchange rates you find that steam coal at a low Australian Dollar, the margin on average…is A$46 per tonne,” he said referring to an operator’s margin above costs.
By using a higher Australian Dollar of 95 cents the margin drops down to about A$8 per tonne – these figures are calculated at this year’s contract coal prices.
“Now for hard coking coal it’s different and without putting additional taxes on this you’d say there’s no problem for hard coking coal.”
Barnett has put together his own cost figures based on tracking four Australian coal producers – Coal & Allied, Macarthur Coal, Centennial Coal and Gloucester Coal – over the period June 2003 to June 2009.
What it shows is a 100 per cent cost increase on average over the period.
“If you just take the export mines, in other words leave Centennial out, there’s a 120 per cent increase. Centennial has had a 42 per cent increase,” said Barnett.
“So, there is no question that costs have gone up substantially and…we don’t have enough data to be able to indicate whether costs are significantly reducing from the high in the second quarter of 2008.”
He said that it is clear that royalties are coming down and that royalties for hard coking coal mines in Queensland seem to have peaked in the second half of last year.
What Barnett also highlighted is the difference between those operations which are using what he called ‘established’ systems of infrastructure and those which are going to require new systems – the latter incurring a significant cost penalty.
“Abbot Point is going to have a big cost rise between the existing cost of getting coal, around $10 a tonne, to the system to around $20…
“Wiggins Island is also an expensive system…it does have economies of scale so the bigger it gets the cheaper the rail becomes but it’s still expensive.”

The ‘greenhouse gas situation’
In a twist, Barnett suggested that if you add the impact of a methane fugitive emissions tax, the cost-price situation crosses a tipping point.
“…if we add a methane fugitive emissions tax…on average the impact is about $12 per tonne.”
He suggested that adding $12 per tonne to his earlier calculation of costs, in conjunction with a high Australian Dollar, could mean that “a new steam coal facility is going to be in trouble.”
“But if you take a situation where you’re going to have a new mine with new infrastructure facilities and they have the average fugitive tax…then it’s going to have dire consequences for thermal development.”
Barnett said that under such a scenario a new hard coking coal project that has all the high costs associated with it could also become “not a very attractive investment.”
“You can draw all kinds of scenarios with this sort of thing but the end message is that if we’re not lucky, and to date Australia has been very lucky, but if we’re not lucky new developments may be not very economic and may even simply not be feasible.
“And whatever the Federal Government is doing with fugitive emissions etc. etc. is certainly not going to help. So, for all the wrong reasons they might get their 20 per cent reduction but I mean one shouldn’t be too pessimistic about this.”
Barnett said that future cost estimates are always working in the unknown but that the “greenhouse gas situation” has brought another level of uncertainty.
“If you wanted to be really pessimistic you could say the Galilee Basin won’t be economic under the current greenhouse gas situation.
“Of course, the trouble is that I have no idea what their emission rate is and I’d be surprised if anybody actually does know what the emission rate is from an area such as the Galilee Basin.”
Bede Boyle said, “All you’ve got to know about the Carbon Pollution Reduction Scheme is it’s actually a carbon pollution tax scheme, when you mentally frame it that way you understand what’s going on. It’s the Federal Government’s opportunity to tax the export coal industry…”

Click here to view data on coal costs compiled by Minec.