Regional Coal: Rio Tinto slashes Australian thermal coal production
Thursday, June 26 2003 - 10:52 AM WIB
Australian producers, hurting from high freight rates and a strong Australian dollar, are struggling to compete with rising thermal coal exports from China and Indonesia that are pushing down U.S.-dollar prices.
Rio Tinto and Xstrata are Australia's major producers of thermal coal. BHP Billiton Ltd. is also a big producer but its thermal production is centered mainly in South Africa and supplies markets in Europe. Its Australian coal operations produce mostly coking coal for use in steel making.
Announcing the production cuts, Rio Tinto's 75.7%-owned coal unit Coal & Allied Industries Ltd. said the low price and high Australian dollar means it now expects to only break even in the fiscal first half. A year ago Coal & Allied posted a A$104.7 million profit in the first half.
In Australian dollar terms, export coal prices are down around 25% from a year ago, Coal & Allied said. Demurrage costs, or the fee paid by exporters to compensate ships forced to wait for loading, have also increased to around US$1 a metric ton, it said.
"We are being affected adversely by the sharp movement in U.S. dollar exchange rates, lower coal prices, increased demurrage costs and the increasing proportion of lower priced spot sales for our thermal coal," Coal & Allied Managing Director Gary Goldberg said.
Coal & Allied plans to reduce costs by cutting its annual production capacity by around four million metric tons, though overall production in 2003 will be only slightly less than the 32.3 million tons produced in 2002.
Production will be cut by switching three of its mines in the Hunter Valley in New South Wales State onto a five-day working week from a seven-day week, as well as cutting overtime. The affected mines are Hunter Valley, Mount Thorley and Warkworth. Some contract labor will be laid off, though the company said it was too early to say exactly how many contractors will go.
"We believe these changes will position our operations to weather the market downturn and enable the company to respond flexibly to the demands of our customers," Goldberg said.
"These operating changes, together with the Easter shutdown earlier this year, will reduce our clean coal stockpiles by around 500,000 tons and in-pit inventories by about 1.5 million tons at year-end," Goldberg said.
Last week Anglo-Swiss miner Xstrata said it would cut its Australian thermal coal production by around 600,000 tons by the end of July.
U.S. dollar spot thermal coal prices are down about 5% from the start of the year at US$23.85 a ton and government forecaster, the Australian Bureau of Agriculture and Resource Economics, expects prices to fall further to around US$ 23.00 a ton by the end of August.
But Abare is forecasting a recovery late in the year with the spot price expected to be around US$26.00 a ton by year-end. That would bring the spot market closer into line with benchmark 2003-04 annual contract prices.
The 2003-04 reference price for sales to Japan was set at US$26.75 a ton following talks with Japan's Tohoku Electric Power , one of the country's largest coal buyers, down from US$28.75 a year ago.
"It is all a function of oversupply in the Asia Pacific markets," Sydney-based AME Mineral Economics coal analyst Greg Dean-Jones told Dow Jones Newswires.
"Both China and Indonesia, which are Australia's major competitors into Asian markets, have a fundamental advantage of geographic proximity" to key Asian buyers in Japan, he said.
China's coal exports are highly variable, but have trebled in the last five years or so from around 30 million tons in 1997 to 91 million tons in 2001. And while Chinese exports declined in 2002 to around 85 million tons, this year it is tracking to at least match the 2001 peak, Dean-Jones said.
"That is the sort of growth that destabilizes coal markets," Dean-Jones said.
And the vast bulk of China's coal exports are made up of thermal coal, meaning it is now rivaling Australia's annual thermal coal exports of around 100 million tons. Australia also exports a similar amount of coking coal that is used mainly in steel making.
Exports from Indonesia are also on the increase, hitting 73 million tons in 2002, compared with 55 million tons in 1999.
Key for Australian exporters will be an easing in freight rates that Dean- Jones said are around ten year highs. While Australia has a competitive advantage in terms of production costs and higher quality coal, the high cost of freight is eroding that advantage.
"When freight declines, Australia in general really becomes more competitive in all traded coal markets," AME's Dean-Jones said.
Paradoxically, freight rates are being supported by strong demand out of China for Australian iron ore exports. Rio Tinto and BHP Billiton are the country's major iron ore producers.(*)