Coal’s King Canute moment

As the coal price continues to falter and major pro­ducers are hit drastic action is being taken to reverse the tide.

The commodity has faced a massive decline. It has fallen in price by more than a third in a year from December 2013 to December 2014, as Chinese demand waned and a projects came online, flooding the market and causing excessive supply problems.

The Bureau of Resources and Energy Economics (BREE) said Australia exported 181 million tonnes of metallurgical coal in 2013-14, with this expected to increase to 185 million tonnes in 2014-15, while thermal coal exports are tipped to top 196 million tonnes in 2014-15.

Queensland alone managed to export 216 million tonnes of both thermal and coking coal for 2014, setting new export records.

Making matters worse for miners in Australia is the supply coming online from other competitors such as Indonesia, Colombia and South Africa, further flooding the market, while Russia has plans to quadruple its coal output levels by 2030.

At the same time, rising natural gas production in the United States means thermal coal will be diverted from domestic American markets where it is used as an energy source, to export destinations – particularly Asia.

Added to this are closer energy ties between China and Russia and cross-border co-operation between the two nations.

At the top of the market this posed no problem for coal miners, as the margins more than supported fluctuations in demand in an undersupplied market; however China is no longer willing to pay excessively high amounts for coal.

Now as Australia's coal exports reach these new peaks for exports and lows on price, how can the coal mining industry claw back profit and create a stronger market?

For some miners it is a case of mining more, at these lower margins, to stay profitable.

According to Queensland Resources Council CEO Michael Roche: "We are seeing are Queensland coal producers replacing the high prices of a few years ago with the volumes necessary to keep their operations viable in a currently depressed market".

These operators are looking to efficiency measures, such as increased productivity and job cuts, to help "outperform competitors attracted to the export market by record prices that peaked around 2009-10".

These actions by larger players mirror those being taken by the majors in the iron ore market, where the likelihood of survival depends more and more on the ability to push out more product and operate at thinner margins.

But not all miners are looking to excess tonnages to wade through the already flooded market.

Instead some are looking to wind back their own operations to remove coal from the market and address the supply glut.

China has been the most active in this internally, shutting 2000 small coal mines in the country.

Glencore and Anglo American are two of the majors taking this route in Australia.

According to Anglo American CEO Mark Cutifani coal mines will be closed or suspended at a steady rate until reduced supply drives a price recovery, adding that globally they will most likely shut at a rate of around one every two to three weeks until the lack of supply finally affects price.

Seamus French, Anglo American Coal's CEO, at the time clarified: "Significant reductions in operating costs and reduced mining activity have failed to offset the impact of a weakening metallurgical coal price."

"As a result, we have been forced to take further action in response to the weak market conditions, so that we can preserve the long-term future of the operations."

Last year it placed the Peace River coal mine in Canada into care and maintenance for this reason.

Cutifani went on to state that other operators are likely to carry out similar operations globally.

"I suspect others will have to do fairly similar moves to keep themselves whole," he said.

Glencore has been another miner taking direct action in this vein, following its decision to halt operations at its Australian coal mines over the recent Christmas break period.

According to the miner it was "a considered management decision given the current oversupply situation".

Glencore said this will reduce the need to push incremental sales in the weak commodity price environment.

"We remain confident in demand growth for our products and believe that the supply and demand balance will be restored in the medium term," Glencore said at the time of the decision.

The Christmas shutdowns reduced Glencore's Australian coal output by a planned five million tonnes.

The question must be asked, are we set to see more periodical shutdowns in Australia to reduce current market oversupply, and how will this affect the miner at the coalface?

It remains to be seen, how­ever if no action is taken the out­come may be more painful than the preventative measures. 

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