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Australia's Metallurgical Coal Production On The Rise Through 2022

Main driver behind increase in production points to sustained recovery in prices

Brisbane, Australia, Oct. 18 2018 — Robust steel demand from China, India and Japan, which accounted for 70% of Australia’s metallurgical coal demand in 2017, will contribute some stability to seaborne prices, according to the latest S&P Global Market Intelligence analysis presented at the Brisbane Resources Round-up 2018 conference.

Richard Foy, Senior Research Analyst at S&P Global Market Intelligence said, “We expect to see Australia’s metallurgical coal production to increase from 182Mtpa in 2018 to 195Mtpa by 2022, due primarily to the ongoing price recovery encouraging both greenfield and brownfield developments. A potential risk to supply comes from the increase of thermal coal prices incentivizing producers to switch metallurgical coal products to a premium thermal product.”

Key conclusions from the analysis include the following:

  • Declining prices caused Australian miners to focus on low cost production: higher-cost assets were suspended or shut down, capital expenditure was cut back and operations were streamlined.
  • Growing and sustained steel demand from primary markets, alongside pollution cuts in China, drove increased coal requirements for Australian coal products.
  • Increase in metallurgical coal production will be coming from both brownfield developments and incoming greenfield projects
  • Modest cost inflation is expected at Australian metallurgical coal mines in 2018 with normalised production costs stabilizing and declining by 2% from 2018 to 2022, attributable to economies of scale with upcoming new operations and expansions, along with the consensus forecasts expecting the Australian dollar to weaken against the US dollar.
  • Stable steel producer margins will incentivize continued growth in capital expenditure throughout the steel supply chain.
  • Stronger prices will encourage swing producers; the challenge for Australian suppliers is to raise production in a cost-effective manner that does not oversupply the market.

Graph 1: Normalized Total Cash Costs / Production / HCC Price

Data as of September 2018
Source: S&P Global Market Intelligence, S&P Global Platts. For illustration only.

Mr. Foy added, "The decline in prices since 2011 forced Australia’s coal miners to make significant cost savings to preserve margins, the recovery in prices since 2015 also saw a concurrent increase in costs largely from rising oil prices and appreciation in the Australian dollar. Looking forward, we expect costs to stabilize. If the prices follow the consensus forecasts for coking coal, high cost Australian operations could come under pressure to exit the market due to negative margins in 2020.”

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