Viewpoint: Australian coking coal rebound to continue

Record ship queues at the Dalrymple Bay Coal Terminal (DBCT) port in Queensland reflect a rising number of new mining projects, expansions and restarts that are boosting Australian coking coal exports, with more to come over the next couple of years.

Ship queues at DBCT, which is the cheapest and most easily available port for coal mining firms in Australia's coking coal rich Bowen basin, have been at around 45 vessels for much of the past six months — rising above 55 in early December — compared to historical levels of around 20. The queue is inconvenient and costly for shippers, but is also a sign that the Queensland coking coal industry is rebounding after years of cost cutting and belt tightening.

Australian hard coking coal shipments, which mostly come from Queensland with a small amount produced in the Illawarra region of New South Wales, are at a three-year high. Shipments in January-October 2018 were at 98.63mn t, up by 8pc from 91.29mn t in the year-earlier period and 97.94mn t in the first 10 months of 2016. Shipments in the 10-month period in 2015 were higher at 101.27mn t, but that was a record year for hard coking coal shipments from Australia, which hit 120.61mn t for the full year.

Shipments are likely to have remained strong for the final two months of 2018, barring a major weather event, with Queensland port data showing above-average exports from the state's coking coal ports in November.

Productivity improvements drive output

The rise in shipments is being driven by an increase in output resulting from productivity improvements at existing coking coal mining firms, the restart of mothballed mines by smaller companies that are often backed by private equity, and the development of new mines, sometimes in partnership with Asia-Pacific firms looking to secure supplies of high-grade coking coal.

Existing mining firms, such as the dominant producer BHP Mitsubishi Alliance (BMA), are starting to ramp up output again through debottlenecking after three years of prioritising cost cutting. UK-Australian mining firm BHP, which owns 50pc of BMA and 80pc of BHP Mitsui (BMC), expects to produce 43mn-46mn t of coking coal in its financial year to 30 June 2019, up from 42.6mn t in 2017-18. A full year of contribution from the newly commissioned 4mn t/yr Caval Ridge Southern Circuit may further boost production in the next financial year.

Smaller companies are also adding to production. US investment firm AMCI's Fitzroy Australia Resources has reopened the 1mn t/yr Broadlea coking coal mine in Queensland after it was closed by Brazilian mining firm Vale in 2009. AMCI has also extended the lifespan of the 3.5mn t/yr Carborough Downs PCI coal mine, which was due to close in April 2016, by five years. AMCI also plans to start production at the 6mn t/yr Ironbark coking coal mine early in 2020.

Australia's Bounty Mining has restarted the Cook Colliery coking and thermal coal mine in Queensland and hopes to produce 2.2mn t/yr by the end of 2019 from current output of around 1mn t/yr.

Private-equity interest

Private-equity owned Realm Resources is pushing out the mine lifespan of the 2.5mn t/yr Foxleigh PCI mine, which was sold by UK-South African firm Anglo American in August 2016. The 2mn t/yr Baralaba PCI coal mine, which was bought out of administration by US-based private-equity firm Liberty Metals, has restarted after closing in February 2016 when its previous owner was in administration.

Slightly larger producer Australian mining firm Pembroke Resources has sought approval to mine up to 6mn t/yr of coking coal and PCI grades at the Olive Downs mine in Queensland from 2020. US private-equity firm Denham Capital backs the project, which has the potential to be expanded to 15mn t/yr.

Japanese trading company Itochu has secured exclusive marketing rights to coking coal from Australian firm Vitrinite's Karin Basin coking coal project, in return for contributing funding for the project.

Private-equity firm EMR teamed up with Indonesian mining company Adaro to acquire UK-Australian resources firm Rio Tinto's Kestrel coking coal mines, with the new owners looking for options to increase production. And Switzerland-based Glencore is applying its productivity mantra to Rio Tinto's 9mn t/yr Hail Creek coking and thermal coal mine, which it acquired in August.

The new entrants are creating a more fragmented coking coal industry and starting to limit the ability of BMA to dominate Australian export markets, with other options available to buyers. The outlook for further diversification in ownership and funding models is positive, with financial institutions, overseas buyers of coking coal and private equity all becoming more interested in backing new capacity. The return of investor interest in the sector is underpinned by sustained stronger hard coking coal prices and expectations this will be sustained, as deposits of high-quality coking coal become more difficult to access.

The premium hard coking coal price has been above $175/t fob Australia for most of the past 2½ years, up from lows of around $100/t during the previous 2½-year period. Most Australian coking coal projects make economic sense at the current prices, but very few are viable at $100/t.