Queensland’s coal miners are desperately seeking to cut costs, as they attempt to ride out the chastening price downturn.
Reports from China this week suggest that the government there will look to cut coal imports by up to 10% due to oversupply and in an effort to boost local producers. This comes after China slapped customs duties on coal imports, on top of quality controls. Authorities have also been attempting to cut domestic production in a bid to stabilise prices.
These policy moves would heap more misery on the plates of miners in Australia’s coal heartland, many of which are scrambling for survival in the post-boom landscape. China accounts for 20% of Queensland’s overseas merchandise trade, with coal making up 43% of the state’s total exports. In 2013-14, coal contributed A$39.8bn to the Queensland economy.
It’s impossible to overstate the importance of the coal industry to the local economy, and for much of the last decade it was viewed as the rising tide which lifted all boats.
In Mackay, a mining port in Northern Queensland, one resident tells GTR that his house dropped A$100,000 in value over the course of a week, due to the falling price of coal, while the health of the mining economy is frequently gauged by counting the number of high-visibility vests in the Qantas lounge of regional airports.
With the global markets awash with excess coal and the property sector slowdown in China, prices have tumbled and miners of all scale are seeking ways to cut costs and offload assets, but in many cases the buyers simply aren’t forthcoming.
Large corporations such as Glencore, Rio Tinto and Vale have looked to restructure their Australian mining investments in recent months. Glencore is to cut coal production by 15% this year, after previously attempting to merge its coal division with that of Rio Tinto in a cost-saving exercise. Brazilian miner Vale, meanwhile, has downgraded the value of its Australian coal assets by 71%.
There’s a sense here that in the boom years, companies were negligent when it came to balancing books (indeed, one local rag rechristened its monthly business supplement Boom in 2012. It has subsequently reverted to the more sensible Queensland Business Monthly). Instead of repairing a piece of machinery, companies would splash out on a new one. Mines became inefficient and uneconomical; their owners became lazy.
“People are looking at their capital and seeing what they can get out of it,” Keira Brennan, a resources partner at Norton Rose Fulbright in Brisbane tells GTR. “The big majors are lowering their per-unit cost, this is a by-product of the downturn. Now they realise that with a few tweaks they can get an extra 10-20% from their investments.”
Miners are looking to conduct better and more regular maintenance and to share assets among different sites. “Even though they’re pulling assets offline costs in the short term, if it works better, this provides better value in the long term,” Brennan says.
Joint ventures have also been mooted, with Glencore and Rio having discussed partnering to purchase some rolling stock mining infrastructure. Indeed, the mining downturn has had a significant impact on rolling stock sales too. Previously, where orders would have been placed 24 months in advance, they now need just 12 months’ lead time.
For junior miners, the picture is bleaker still. Accountancy firm BDO has found that just 53% of explorers had cash available to continue operational spending at their current rates in December, with just 46% of companies reporting positive cashflows.
“These are difficult times for small producers. If you’re still developing a project, it’s difficult to attract capital,” Michael Roche, CEO, Queensland Resource Council.
Distressed asset sales are yet to emerge, but this is expected to arise soon. The feeling is that miners are holding onto their assets in an effort to sell them at peak prices, despite the downturn. Those in the sector are sceptical as to the efficacy of this tactic, and also as to whether the buyers exist.
There has been a significant rise in off-balance sheet financing, with sale and leaseback transactions emerging across the resource sectors, in particular mining and agribusiness. This frees up capital for core business and is apparently more within the risk appetite of creditors and investors.
Miners are also struggling to deal with take-or-pay repayments: contracts which mean miners have to pay the rail or port operators a pre-agreed minimum fee for access to infrastructure, whether they use it or not. Wood McKenzie reported in 2012 that this was leading miners to produce at a loss – the logic being that if they’re going to incur these fees anyway, they may as well keep mining coal. With the deterioration in the intervening period, the problem has been exacerbated.
The industry is looking to India to take up the lag let by China, despite uncertainty over the Indian market. Narendra Modi, India’s prime minister, has tackled coal head-on, attempting to break up Coal India and open the sector to the private sector. Furthermore, Modi has doubled the tax on coal production in an effort to reduce carbon emissions, all while voicing support for using local coal, over imports.
“It’s unlikely India will be able to satisfy its requirements with its own coal. They’ve talked about developing it locally, but the International Energy Agency predicts that Indian coal imports will more than treble,” Roche says.
Australia’s liberal government has deepened ties with India over the past year, with the acceleration of talks over a bilateral trade agreement making news last year. Furthermore, the continued presence of the Indian conglomerate GVK in Queensland’s A$18bn Adani project suggests there may be scope to expand the trade.
“GVK is still there and while nobody’s quite sure what the state of play is, the view is that they’re waiting for the right time in the market, when the mine will be ready and they can press ‘Go’,” one source, familiar with the affair tells GTR.