By Clyde Russell
(Clyde Russell is a Reuters market analyst. The views expressed are his own.)
Australian coal miners have been in mourning over the rapid loss of profitability and expansion opportunities, but the industry is entering the final stage of the grieving process.
The five stages of grief, as described by Swiss-American psychiatrist Elisabeth Kubler-Ross on how people face events like terminal illness, are denial, anger, bargaining, depression and acceptance.
While not all of the attendees at the annual Coaltrans Australia conference this week have got past the depression stage, most were looking at how the industry deals with the reality of its myriad of issues.
These include an apparent structural shift to lower prices for the foreseeable future, rising public opposition to mining on the back of a well-funded and organised environmental lobby, lack of capital available for new projects, still high labour costs and an increasing burden of government red and green tape.
The coal miners have limited influence over most of these issues, but they appear to be making concerted efforts to change what they can in a bid to strengthen their position and make sure Australia remains the world's biggest exporter of coking coal and number two in thermal coal.
The spot price of thermal coal at Australia's Newcastle port , a regional benchmark, has fallen 16.6 per cent this year, and was quoted at $US76.94 ($A84.61) a tonne last week, the lowest in almost four years.
More worrying for producers is that the Newcastle price is now 44 per cent below its post-2008 recession high of $US136.30 a tonne, struck in January 2011.
Steep decline
Coking coal, used in steel-making, has suffered a steeper decline, losing more than half of its value to trade around $US136 a tonne, although its post-2008 peak of around $US300 was boosted by widespread flooding in Queensland state in late 2009 and early 2010, which cut exports by about 40 million tonnes over the next two years.
The problem for Australian miners is that at these prices many of them are struggling just to break even, and virtually no new project can proceed as the development costs exceed the potential revenue that can be earned.
While longer term coal demand is slated to rise strongly on the back of new coal-fired power plants in China, India and elsewhere in Asia, for the foreseeable future coal prices are likely to remain relatively stagnant in real terms.
This is because the cost of seaborne coal in Asia is largely being set by the cost of production in China, where imports meet around 6 per cent of total demand despite the nation being the world's largest importer.
China's marginal cost of production for thermal coal is around $US80-$US100 a tonne, according to CLSA analyst Ian Roper.
This likely puts a cap on how high coal prices can rise, as Roper points out that the Chinese are opportunistic importers, buying from overseas when the cost is below that of domestic supplies, but pulling back when it's cheaper to buy locally.
With Australian thermal coal miners currently facing an average cost of around $US77 a tonne, a figure that excludes royalties and shipping, it's clear that many are on the breadline.
Data from Greg Sullivan, the Australian Coal Association's deputy chief executive, show that to make an internal rate of return of 15 per cent, most Australian thermal coal miners need prices above $US100 a tonne and coking coal miners require about $US160 a tonne.
At current prices some 68 per cent of Australian thermal coal miners have a profit margin of less than $US10 a tonne, Sullivan told the Coaltrans conference.
Furthermore, Australian producers have shifted higher along the cost curve than their global competitors in Indonesia, South Africa and elsewhere, with 66 per cent now falling into the second-highest quartile, up from only 34 per cent in 2006.
Initial denial
The industry's first response to the declining price trend that started in 2011 was classic Kubler-Ross, denying that the lower prices were structural. But China has now brought enough rail capacity online to allow it to move domestic coal from mines in the north to consumers in the south.
Coal exporters have to compete with Chinese producers in the heavy coal-consuming provinces of southeast China, and this means an extended period of lower prices that will only end if demand across Asia does rise as much as bodies like the International Energy Agency forecast in the years beyond 2020.
Australian producers are finally moving toward acceptance of the new realities, and while they can't control the price of coal, they are desperately trying to control other factors.
One of the reasons Australia lost its competitive edge was the rapid escalation in costs, mainly labour, but also capital and other operating costs.
Several speakers at the Coaltrans conference said most miners were targeting at least a 20 per cent reduction in cost per tonne by cutting jobs, limiting wage hikes, trimming contractors and delaying or abandoning new projects.
Even events like Coaltrans aren't immune, with attendance down on previous years and many mining companies not sending any delegates, with several notable absences including companies with plans to develop new mines.
Dollar aid
While cost-cutting will no doubt help in the short term, the greatest boost to miners' profitability is likely to be delivered by a weaker Australian dollar.
The local currency has slumped 14 per cent against the US dollar since April to trade around 90.9 US cents, and many strategists are tipping further declines in the months ahead, perhaps to around 80-85 US cents.
Analysis by Westpac Banking Corp shows that almost half the rise in costs since 2006 was driven by currency appreciation, as the US dollar cost of producing a tonne of coal rose 136 per cent, while the Australian dollar cost gained 71 per cent.
The Australian dollar rose from 73 US cents at the start of 2006 to a high of $US1.10 by July 2011, and just as this appreciation cut into coal-mining profits, so too will the current depreciation boost them.
The industry is also looking to step up its lobbying of both state and federal governments, firstly to ensure no new taxes are imposed and secondly to encourage authorities to ease the approval process for new mines and mine expansions.
They may have some success on the tax front, especially if the opposition Liberal-National coalition wins the federal election on September 7. Opinion polls put the Coalition ahead of Prime Minister Kevin Rudd's Labor Party.
The Coalition has promised to scrap a controversial mining profits tax on coal and iron ore and reduce corporate tax rates, while Labor has mooted the idea of amending the Mineral Resource Rent Tax to generate more revenue even when profits are weaker.
Both major parties say they are committed to easing the regulatory burden, although translating words into action has been difficult in Australia.
It would be too early to say Australia's coal industry is finding new confidence about its prospects, but some of the doom and gloom is lifting.
The best-placed miners appear to be those with existing, low-cost operations and the reserves available to expand.
Given that many, if not the majority, of planned new mines will struggle to be built with $US29 billion of projects already deferred, the existing mines stand to benefit massively if the global coal market does go into deficit around 2018 to 2020.
Reuters