Australian coking coal mines operate at losses

Firms with Australian coking coal mines are facing an uncertain future, with prices falling again after a brief new year surge, no end in sight to Beijing's import ban on Australian coal and a reluctance to cut production due to fixed infrastructure costs.

Queensland metallurgical coal mines were largely unprofitable in July-December when metallurgical coal prices fell to their lowest in nearly five years for much of the period. There was brief relief at the start of the year but the January gains have largely been lost during February and early March, leaving the mining firms facing the prospect of another period of losses.

It is difficult for Australian producers to cut production to reflect market conditions because they are locked into fixed take or pay infrastructure contracts at the port and rail. The combined cost of these contracts are as high as A$25.22/t ($19.33/t) at the Wiggins Island Coal Export Terminal (Wicet) at Gladstone down to A$11.96/t at the Dalrymple Bay Coal Terminal (DBCT) at Mackay for central Bowen basin coking coal producers, according to Dalrymple Bay Infrastructure, which owns DBCT. This is an overhead that must be paid regardless if the coal is sent through the rail and port systems.

This level of fixed costs encourages Australian coal mines to push coal through the rail and port systems into the market even when prices are significantly depressed. For most Australian coal mines there is an extremely strong correlation between higher volumes and lower costs.

Australian hard coking coal volumes declined in July-December to 58.4mn t from 61.4mn t a year earlier, but this has more to do with safety closures of mines such as Anglo American's 5mn t/yr Grosvenor mine and the bankruptcy of some operators like Bounty Mining.

Larger operators like Anglo American and BHP can afford to stand by their high-grade coking coal operations and wait for profits to return in a higher price environment. But the next year will be critical for smaller local players like Stanmore and for multinationals with less robust balance sheets such as Peabody and Coronado.

Argus last assessed the premium hard low-volatile coking coal price at $119.85 fob Australia on 8 March, down from $139.30/t fob Australia on 19 February and from a recent high of $157.25/t at the start of February. The price was around $100-110/t for most of June-December 2020.

By Jo Clarke