The price of coking coal, the nation’s second-biggest export, is crumbling in the face of growing Australian supply and slowing Chinese imports — and the dramatic slump could cut more than $600 million of Queensland royalties next financial year and force more mine closures.
As debate rages over West Australian iron ore, on the other side of the country the fall in coking coal prices to a 10-year low is defying industry and analyst predictions that prices should rise, and will have a huge impact on Queensland’s budget if the price does not rebound.
Prices of the steelmaking coal, which traded above $US300 a tonne during the boom and were at $US113 at the start of they year, have slumped to a 10-year low of $US85 a tonne.
The steepest falls were in April on the back of sliding Chinese imports as demand slowed and new import standards dealing with fluorine in coal were applied in an uncertain manner.
On the supply side, Australian take or pay haulage and port contracts mean higher-cost mines find it more cost-effective to stay open, while increased productivity drives, most publicly by market leader BHP Billiton, are seeing costs come down and bringing extra coal onto the market.
And there is still more low-cost production at costs of $US50 to $US80 a tonne from Mozambique and Australia to come on to the market.
So while more than half of global seaborne export supply is under water and more closures are needed to balance the market, a price rebound does not look imminent.
“In the long-term, prices will need to go up but it’s going to require a rebalancing of supply and demand and I don’t think that will happen any time soon,” a senior industry source told The Australian, adding prices had fallen harder than most miners had expected.
“I think we’re in for a sustained period of low prices.”
Analysts agree more mine closures are needed to balance the market.
“Given continued growth in low-cost seaborne tonnage and the weak outlook for Chinese demand, we expect further (production) cuts will be necessary,” Citi analysts said in a report this week in which they slashed their long-term price estimate for Queensland hard coking coal by 25 per cent to $US125 a tonne.
In 2014, some higher-cost Australian coking coalmines closed, including Vale’s Integra mine and Sumitomo’s Isaac Plains mine in Queensland and Glencore’s Ravensworth mine in NSW, but there are now many mines doing it tough.
Industry sources said Chinese customers were sourcing more Chinese coking coal because the application of fluorine content restrictions on exports applied since the beginning of January 1 had left them uncertain as to what cargoes of coal they could bring into the country.
Combined with slower steel demand, this has resulted in a 20 million tonne drop in annualised Chinese imports. It is feared this could get worse after July when new phosphorous content restrictions could come in.
In September, with prices just over $US110 a tonne, BHP’s then coal boss (and now marketing head), Dean Dalla Valle, said he thought prices were bottoming.
In February, with prices still above $US100, BHP chief executive Andrew Mackenzie said the outlook was encouraging.
“In metallurgical coal, we can perhaps be a little more optimistic to the upside,” Mr Mackenzie said, partly because of potential demand from India, pressure on North American suppliers and China’s demand for the best quality coking coal. While the long-term still looks healthier, the market is not working as efficiently as many had hoped.
Current spot prices are below BHP’s 2014-15 coal cost guidance of $US90 a tonne but the company surprised the market in February by reporting first-half costs of $US71, helped by a lower Australian dollar, meaning its business is still making money.
Nearly a year ago the Queensland budget baked $US160 coal prices into its 2015-16 forecasts.
Based on Queensland’s 7 per cent coal royalty (which increases when prices are above $100 a tonne) and production of about 150 million tonnes a year, if prices and exchange rates stay at current levels, there would be a $640 million shortfall in Queensland’s budget expectations from that forecast. Queensland Treasurer Curtis Pitt said the recent softness in coal prices reflected softer demand.
“Royalty estimates will be revised in Queensland’s 2015-16 budget (on July 14) and this will take into account the latest estimates of price, volume and the exchange rate,” Mr Pitt said yesterday.
He restated Labor’s election commitment that the government would not make changes to the royalty scheme over this term of office.
Analysts say prices cannot stay this low forever with so much production losing money.
ANZ this month cut its 2015 coking coal forecast from $US114 to $US104, but said there was a risk prices could stay lower.
“Adding to the risk of further underperformance in coking coal prices is the possibility China will renew coking coal exports,” the bank said.
