Analyst predicts coal decline in 2014


Some four-million tonnes of coal production was subject to loss, as coal miners cut back on production, advisory firm Wood Mackenzie reported on Tuesday.

The firm noted that Australia's coal production had continued to grow, despite lower coal prices in 2013.

Wood Mackenzie estimates that in 2013, only four-million tonnes of coal production in Australia was at risk of closure even though 32-million tonnes of coal would be produced at negative margins, including sustaining capital.

The firm noted that the decision to continue production instead of shutting it down, could mainly be attributed to transport and port contracts in Australia, otherwise known as 'take-or-pay' contracts.

Coal analyst Viktor Tanevski noted that there have only been two mine closures so far in 2013, compared to seven in 2012.

“Despite the low coal price environment and current margin squeeze, take-or-pay contracts are incentivising coal producers to increase rather than reduce production, even if additional production is generating negative cash margins. This is because the fixed cost of infrastructure capacity makes the cost of shutting down even more expensive than the cost of maintaining production.”

Tanevski estimated that only four-million tonnes, or just over 1% of Australia's coal exports in 2013, were at risk of closure based on an average hard coking coal (HCC) price of $171/t and an average thermal coal price of $92/t.

He said that this was not a significant volume of output; however, he added that the amount at risk increased significantly under a lower price scenario.

Wood Mackenzie deduced that if average prices fall to $122/t for HCC and $77/t for thermal coal in 2013, then 45-million tonnes, or 13% of Australia's coal exports in 2013 would be at risk of closure. At that price, a total of 204-million tonnes of production would be suffering negative margins.

“Our expectation is that there will not be a significant dent in Australia's production this year. However, if prices do fall below expectations, the risk of closure for mines producing at negative margins will increase, reducing output,” said Tanevski.

Source from : Mining Weekly