Glencore has officially restarted its coal mining operations, after closing all of its Australian operations over the Christmas break.
The miner announced the decision to shut down Australian coal mines in early November, stating that the time 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 5Mt and cut the need to push incremental sales in a weak commodity price environment.
Following the three week break Glencore yesterday announced it is now the process of resuming production, as planned, across our Australian coal business.
The decision to shutdown the operations and address the issue of a building coal glut came in the wake of continually depressed coal prices, allowing it to recover ground and bring supply back in line with demand.
Fellow coal miner Anglo American late last year pointed to an industry need for actions such as the one Glencore took.
According to Anglo American CEO Mark Cutifani coking coal mines will be closed or suspended at a steady rate until a reduced supply drives a price recovery.
He stated that the mines, globally, will most likely shut at a rate of about one every two to three weeks until a lack of supply affects the price.
Around 30 million tonnes of supply will need to be removed from the market “to have any sort of meaning,” he said.
“I think everybody is doing it tough in met coal, even the markets and our customers are saying there needs to be a higher met coal price, but people keep throwing volume into the market.
“So, at the end of the day, production that is not making money starts to be turned off, prices will remain tight.”
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.
However it's the values that are important. Metallurgical coal is expected to remain steady at around $23.2 billion.
Thermal coal's value is expected to decline by 9 per cent to $15.1 billion.
This is because there is an oversupply of both products on the world market, and countries like China are not willing to pay close to previous highs of $180 a tonne.
"Globally, production over-took demand in 2012-13, resulting in a strong drop-off in the world prices for steaming and coking coal," IBISWorld explained.
Making matters worse for miners in Australia is the supply coming online from other competitors such as Indonesia, Colombia and South Africa.
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.
This will all work to keep a lid on prices, especially if China can get a handle on its production capacity and costs.
IBISWorld said this means the focus on cost structures will continue, with wages and employment to come under pressure as the capital-intensive industry seeks additional productivity gains.
It said employment is expected to decline at a compound annual rate of 3.9 per cent over the next five years as other areas of the industry's cost structure are less flexible.
Companies are also assessing their place in the market, the consultant firm said, with many mine stakes thought to be on the market and assets like Clermont coal mine in Queensland.
However, despite the gloom Australian producers who can restrain their costs are expected to remain competitive in the global market as the local currency continues to weaken against the U.S dollar.
BREE said a rapid price rise in coking coal prices was unlikely, and forecast the commodity to decline by 2.6 per cent to an average US$123 a tonne in 2015.
But there is an upside.
From 2016, the market balance is expected to tighten as China's real estate sector begins to recover and a prolonged period of oversupply comes to an end through the closure of high-cost operations. The metallurgical coal contract price is projected to rise modestly to US$130 a tonne (in 2014 dollar terms) by 2019.
However thermal coal is expected to remain weak and decline by 6 per cent to settle at US$77 in 2015.