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One-sixth of Australian thermal coal mines 'uneconomic': Morgan Stanley

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One-sixth of Australian thermal coal mines 'uneconomic': Morgan Stanley

Perth — Roughly 16% of Australian thermal coal mines representing around 33 million mt of production is classed as uneconomic at a current spot price of around $59/mt FOB for Newcastle 6,000 kcal/kg NAR, said a team of mining analysts at Morgan Stanley in a report released over the weekend.

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This percentage falls to only 3% or about 7 million mt of production for Australian thermal coal mines covered by Japanese financial year contracts that were settled from April for around $69/mt FOB basis 6,300 GAR (6,000 NAR), the report said.

The Australian dollar's falling exchange rate was cushioning coal producers to a certain extent against the fall in US dollar coal prices, and some Australian miners have carried out swinging cuts to their costs.

As a result, the mining analysts said they estimate the weighted average cost for Australian thermal coal miners at $53/mt this year, down from $80/mt in 2012, and $72/mt for metallurgical coal from $186/mt.


The report titled Australian coal: Well Placed in the New World Order warned that demand for seaborne-traded coal was set to decline further in 2015.

This is because of a structural change in China's coal consumption that has sent coal prices reeling to pre-global financial crisis levels.

For example, around 19% of Indonesia's coal sector representing 74 million mt was uneconomic at current spot prices, the report said.

"Miners operating with comparative disadvantages, [geography, currency, resource nationalism] are more likely to bear the burden of supply discipline in an oversupplied market, i.e. the US and Indonesia," the report said.

Morgan Stanley analysts stated that Australian rail haulage companies were well placed in the low-priced market as they could benefit from take-or-pay contracts.

Australia's two largest rail companies, Aurizon and Asciano, transport coal from mines to ports and are seen as having some risk exposure to unprofitable producers, but this was being minimized the report said.

"At current spot prices, Aurizon is exposed to 42 million mt of uneconomic production (20 million mt of thermal coal, 22 million mt of metallurgical coal), or around 20% of 2016 fiscal year volumes," the report said.

New South Wales-focused Asciano has exposure to 20 million mt of "uneconomic production" -- 13 million mt of thermal coal and 7 million mt of metallurgical coal -- or about 12% of 2016 fiscal year volumes, it added.

Although, checks with industry participants led Morgan Stanley to estimate the volume risk exposure for the rail companies nearer to 10%, which it described as "manageable, particularly in the context of take-or-pay contracts for rail."

Take-or-pay contacts now cover almost the entire contract base for Asciano and Aurizon, and have mitigated some of the risk exposure to low margin coal producers, the report said.


That said, the bank's analysts reckoned that US-based coal producer Peabody Energy, which has 30 million/ mt of coal production in Australia, could "aggressively push for a portfolio-wide restructuring of coal haulage contracts for its mines" in the near term.

"With fixed costs [transport, port] increasing, their proportionate share of C1 cost [at the mine site], miners still have an incentive to maximize production over sticky fixed costs," the report said.

"It is unclear how such a contract discussion could play out, particularly with the only restructure precedent being Asciano's Whitehaven Coal contract," it added.

Some high-cost coal producers have exited the seaborne market for coal, and others have successfully executed cost reduction programs to stay in the business.

"Since 2012, we have tracked 47 million mt of output cuts in thermal coal and 27 million mt of output cuts in metallurgical coal [affecting the seaborne markets]," the report said.

--Mike Cooper,
--Edited by E Shailaja Nair,