After working in the resources industry for over 20 years, Yancoal boss Reinhold Schmidt acknowledges conditions for coal miners are among the toughest he has seen.
“The whole commodity space is quite depressed and in the coal industry all producers whether you’re large or small are facing a lot of pressure because of the amount the price has reduced.”
As the chief executive of Yancoal, a locally listed but Chinese-majority owned coal miner, Schmidt knows the prospects for coal producers remain very challenging.
Prices for metallurgical or coking coal have slumped to just $US110 a tonne from more than $US300 a tonne in 2011 while the price of thermal coal has been cut in half to $US62 a tonne over the same timeframe.
For a miner like Yancoal – which produces both coking and thermal coal – that intense squeeze on prices has led to some big losses.
For the 2013 financial year, Yancoal revealed an $832 million loss while in March of this year its full year loss narrowed to $353 million as it continues to navigate weak demand from Asia and a glut of supply.
Yancoal at least has a parent in China’s state owned Yanzhou Coal Mining which is prepared, for now, to wear some of the huge losses in exchange for some control over the supply chain in Australia.
However, many other miners have either shuttered production completely or at least curtailed some of their supplies in a bid to limit their ongoing exposure.
Intention to slash production
Glencore, Australia’s largest exporter, in February said it would slash coal production in Australia by 20 per cent in 2015, equating to a cut of 15 million tonnes.
Other major mining companies in the sector have also been following suit.
Vale confirmed that it had impaired the value of its Australian coal mines by 71 per cent during 2014, and said there was little hope of coal prices improving in the near future.
Meanwhile, locally listed mining giant Rio Tinto’s new coal boss Jean-Sébastien Jacques, says it will likely take three or four years before there is “a light at the end of the tunnel” for the depressed thermal coal price.
One of the central levers keeping prices at such depressed levels is China’s recent pledges for greener sources of energy as it deals with rising pollution.
Last year China placed an absolute cap on its coal use for the first time ensuring annual consumption growth will not exceed 1.5 per cent over the next seven years. That followed moves by Beijing to impose a tariff on imports while also raising quality standards.
The moves are starting to have some impact. Capital Economics says China’s coal consumption fell by 1.6 per cent in 2014 despite economic growth of 7.3 per cent.
Against a backdrop of China’s coal use growing at an annual rate above 10 per cent for much of the last decade, imports could eventually be slashed as the country prioritises cleaner energy sources.
Experts do however appear dividend on just how big an impact the moves by China will have on Australian coal.
China imports to fall drastically
Credit Suisse concluded that China’s coal imports will fall “drastically” with growing supply surpluses requiring years of low prices to progressively close greater production each year.
“The depressing conclusion for coal producers is that flat output is not sufficiently disciplined and more needs to be done to curtail production,” Credit Suisse analyst, Matthew Hope said. “Another lengthy bout of awful pricing will be necessary to get there.”
However, respected UK consultancy Wood Mackenzie noted in a February report that Australian producers are well positioned to capture market share of coal exports from higher cost producers.
“The scaleability of Australian mines and their high coal quality has enabled the displacement of major competitors in US, Canada and Indonesia,” Wood Mackenzie’s principal Asia Pacific coal analyst, Rory Simington said.
Yet Wood Mackenzie admits that uncertainty over China’s policies towards coal use is likely to keep a lid on prices in the short term.
“As China makes up 22 per cent of seaborne trade and is expected to see continued domestic oversupply, the country will be a major cause of depressed global import demand this year,” the consultancy wrote. “Market fundamentals outside of China also remain uninspiring, for both metallurgical and thermal coal. Under such circumstances a material price recovery is unlikely this year.”
While Rio’s coal boss, Mr Jacques, agrees after saying it could be up to four years before the industry sees a price recovery in coal, Mr Schmidt remains upbeat about the prospects for Australia’s coal industry despite pressures in China, which accounts for around 40 per cent of Yancoal’s exports.
“Quite clearly there is a drive within China for people to move away from really poor quality coals in order to manage pollution and Australia is in a fortunate position in that we don’t really have that poor [quality] coal,” said Mr Schmidt. “My view is we might potentially see a recovery in prices toward the end of 2016 but no earlier.”