Viewpoint: Australian thermal coal rebound faces snags

Australian thermal coal exports are expected to rebound in 2023 from a 10-year low in 2022, but will have to overcome a likely wet start to the year, climate change concerns, rising costs, domestic price caps, labour shortages, underinvestment and supply chain issues.

Australia is on track to export 184mn t of thermal coal in 2022, down from 199mn t in 2021 and peak of 212mn t in 2019, according to the latest report by the Office of the Chief Economist (OCE) in Canberra. The OCE expects this to jump to 201mn t in 2023 and 203mn t in 2024, but warns that an apparent slowing in ocean cooling could see wet weather persist beyond the forecast end of the La Nina weather pattern in March.

The 2022-23 La Nina is the third such event in a row, bringing above-average rainfall to the east coast of Australia. The 2021-22 La Nina persisted until June, and flooding in July cut exports from the key port of Newcastle to the lowest monthly level in at least five years. A similar pattern in 2023 would derail a rebound in exports to above 200mn t/yr, particularly as water storage facilities are full and the ground is saturated.

Australia is grappling with skill and labour shortages, with the unemployment rate at a 50-year low of 3.4pc in November and many skilled immigrants caught in an overwhelmed visa approval process that has not recovered from the Covid-19 border closures of 2020 and 2021. At the same time the Labor government, which came to power in May, is introducing more worker-friendly industrial relations laws and the union movement is emboldened. This has led to strike action and mining firms like BHP agreeing to wage increases and other union demands to maintain production.

Higher wages, energy costs and consumable prices, sustaining capital expenditure on ageing mines and lower volumes sold have all contributed to higher costs across the industry. For example, in November last year Thai-owned Australian coal producer Centennial reported a near doubling of costs over the past two years to an average of around $97/t.

Cost concern

High costs are not a problem while export prices are around $400/t fob Newcastle for NAR 6,000 kcal/kg coal, but prior to April 2021 this price was usually below $100/t and fell to around $50/t in June 2020. At these prices many thermal coal mines in Australia would be losing money and investment in cost reductions could be difficult given the long-term outlook for coal in the face of climate change.

Most coal-mining firms have strong balance sheets after 18 months of strong prices and will have the capacity to invest in their thermal coal operations, but major conglomerates like BHP and Glencore have emission pledges that include ramping down thermal coal production. Smaller firms will still need some finance to maintain or increase production and this is becoming increasingly difficult.

Australian coal exports also face some governmental headwinds, with environmental approvals delayed by legal challenges and higher domestic power prices leading to intervention in the coal market. The New South Wales government passed legislation on 21 December 2022 allowing it to cap coal prices, direct who coal can be sold to and control its use. This is aimed largely at the relatively small domestic coal consumption market, but it could impact mining firms' investment and production decisions with flow-on impacts on Australian coal exports.

Despite these headwinds, Australian thermal coal exports are likely to increase in 2023 from 2022, unless there is an unprecedented fourth La Nina in a row in 2023-24.

By Jo Clarke