Coal miners are taking advantage of the tumbling Australian dollar, boosting production even as a glut of the power-station fuel drives prices to the lowest in almost four years.
While the cost of shipments from the port of Newcastle, which are priced in U.S. currency, has dropped as much as 16 percent this year to $76.10 a metric ton, the lowest since 2009, prices fell only 5 percent in Australian dollar terms, according to data compiled by Bloomberg. That’s helping buoy revenue for producers, encouraging them to increase supply, according to CIMB Group Holdings Bhd (CIMB) and Australia & New Zealand Banking Group Ltd. (ANZ)
Rising exports from the world’s biggest producers have created a coal surplus of as much as 20 million tons, or about 2.5 percent of global trade in 2012, according to UBS AG. Australia, the second-largest shipper, is increasing output even as miners such as Glencore Xstrata Plc and Peabody Energy Corp. (BTU:US) fire workers to reduce costs. Citigroup Inc. and Goldman Sachs Group Inc. have cut forecasts because of the glut.
“The falling Australian dollar is likely to be a negative for thermal coal prices,” said Daniel Hynes, the head of commodity strategy at CIMB in Sydney. The currency drop is “reducing costs even further and holding back any production cutbacks that the market needs,” he said.
The Aussie fell as low as 88.48 U.S. cents on Aug. 5, the weakest since August 2010, as the U.S. Federal Reserve signaled it may taper economic stimulus and the Reserve Bank of Australia cut interest rates to bolster the slowing domestic economy. The currency, trading at about 90.03 cents today, is projected to end the year at 89 cents, according to the median of 49 analyst estimates compiled by Bloomberg.
Output from Peabody Energy, the largest U.S. producer, rose 5 percent at its Australian thermal and metallurgical coal mines in the second quarter of this year as the weakening currency helped reduce costs by 6 percent from 2012 levels, Michael C. Crews, the chief financial officer of the St. Louis-based company, said last month.
“For the first time in a number of years, we would note that the Australia dollar is also providing some relief to our cost position,” he said on a July 23 second-quarter earnings conference call, according to a transcript. Australia is looking increasingly competitive given its improving cost structure, proximity to the best markets and favorable currency movements, Gregory H. Boyce, the chief executive officer and chairman, said on the call.
Metallurgical coal is used in the process to make steel. Thermal coal is used to generate power.
Coal shipments from Australia have increased 13.5 percent year-on-year to 88.2 million tons, according to an Aug. 13 research report from Macquarie Group Ltd. June exports of 17.6 million were a monthly record, it said.
Port Waratah Coal Services, the operator of two of the three export terminals at Newcastle in Australia’s New South Wales, shipped a record 10.3 million tons in July, the company said an Aug. 2 statement.
Output reductions from Australia are unlikely while Newcastle prices remain above $75 a ton, according to Macquarie. U.S. production cuts aren’t enough to provide greater balance to the market, the bank said.
Coal at Newcastle slid 10 percent in June to $77.75 a ton, the biggest monthly drop since February 2009, according to IHS McCloskey, a Petersfield, England-based data provider. Prices gained $1.15 to $77.25 in the week ended Aug. 16 after averaging $76.63 in July, the lowest monthly mean since October 2009. They slumped 19 percent in 2012.
‘Swimming in Coal’
Goldman Sachs lowered its 2013 price forecast by 7.6 percent last month, while Citigroup reduced its estimate by 6.7 percent. The power-station fuel at Newcastle may average $85 a ton this year, according to the median estimate of five banks in a Bloomberg News survey. Prices have averaged $85.87 to date, according to McCloskey.
“We’re swimming in coal and the situation in the short term looks to persist,” said Daniel Morgan, an analyst at UBS in Sydney. “Real production cuts, what we haven’t seen yet, must be looming.”
Sustained demand for coal is being offset by rising supply, Yancoal Australia Ltd. (YAL), a unit of China’s Yanzhou Coal Mining Co., said in its half-year results Aug 19. Many producers are increasing output to reduce operating costs through the benefit of scale, Yancoal said.
Exports from Australia are projected to increase by 7 percent to 183 million tons this year, according to a June report from Australia’s Bureau of Resources and Energy in Canberra. Indonesia, the world’s biggest exporter, may sell 6 percent more, the report showed.
Take or Pay
The drop in the Aussie dollar is “certainly easing the pressure on Australian producers to cut” production, Colin Hamilton, the head of global commodities research at Macquarie Group in London, said in an e-mail.
Producers in Australia are also locked into long-term rail freight and port deals, which are required to finance the export infrastructure. Under the so-called take-or-pay agreements, suppliers must pay a fee regardless of whether tons are shipped.
“It’s only been in the last couple of months that some relief from the stubbornly high Aussie dollar has arrived,” Greg Sullivan, the deputy chief executive of the Australian Coal Association, said at the Coaltrans conference in Brisbane on Aug. 12, predicting about 11,000 jobs have been lost in the coal sector. “The dollar accounted for about 30 percent of cost increases over the past four years.”
Producers are in “survival mode” and more cost cutting is inevitable, Michael Roche, the chief executive of the Queensland Resources Council, said at the conference. About 8,000 jobs have been lost in the state since last year, he said.
Projects valued at more than $29 billion have been shelved as producers and port operators rein in spending amid escalating costs, Wayne Calder, the deputy executive director at the Bureau of Resources and Energy said at Coaltrans.
“The Aussie dollar is going to be a key player in profitability and competitiveness in the industry going forward,” Gordon Sparrow, the head of trade sales at Westpac Banking Corp. (WBC), said at the conference on Aug. 13. “The outlook for the demand side of the equation is very positive.”
Australian miners have managed to cut their cost base by 15 percent, according to an Aug. 13 presentation at conference by Bede Boyle, the chairman of AustCoal Consulting Alliance. They will need to cut by 20 percent by 2017 to put themselves in a competitive position, he said. The group provides advice on mergers, acquisitions and the development of mines and infrastructure to the coal industry.
“The drop in the Aussie would be helping lower costs,” said Mark Pervan, the head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne who reduced his 2013 Newcastle price projection by 5.7 percent to $85 a ton last month. Cutting production is a “last mover advantage, nobody wants to go first,” he said.
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