Australian coal industry reviews expansion plans

Australia's coal industry is reviewing plans for expansion and sustaining capital expenditure as they attempt to conserve cash amid fears that coal prices will return to a long period of historical lows below those seen in 2015-16.

Australian coal quarterly production figures for January-March have been largely unaffected by Covid-19 to date, with the disruption to demand lagging supply disruptions and cushioned by existing contracts. But the outlook for both thermal and coking coal prices has mining firms worried, and most are looking at another round of cost cutting and the shelving of non-essential development projects.

Mining majors like BHP and Yancoal are keen to conserve cash. BHP will review its planned $8bn in spending in 2021 and analysts from Swiss Bank UBS forecast the company to slash the budget to around $6.6bn. This is across BHP's portfolio, but its negative outlook for coking coal and repeatedly vocal desire to exit thermal coal has to put these close to the bottom of its spending priorities.

Yancoal, Australia's largest thermal coal exporter, is evaluating contingency budgetary measures and stressed the importance of conserving capital given the uncertain global economic condition. It is focused on cost reductions to ensure that its mines can remain economically viable in the worst of price environments, and spent a lot less time talking up its growth options in its latest quarterly.

Smaller Australian coal players, like Whitehaven and South32, have been more explicit about shelving development plans and curtailing higher cost production in the face of the pandemic. Whitehaven stopped all development projects including the 8mn t/yr Vickery thermal and metallurgical coal project in the Gunnedah basin, until at least 2021.

South32 will move forward with its plans to make a final investment decision on its Eagle Downs coking coal joint venture with BaoSteel by the end of the year but flagged that the current market conditions were a concern for the future of the project. It also cut its sustaining capex and exploration budget across all its commodities by $160mn to protect its financial position.

Prices of high grade thermal coal have fallen to $58.50/t fob Newcastle for 6,000kcal/kg NAR from $67.58/t since the beginning of this month, but remained higher than the low of $49/t in January 2016. Prices of premium hard low-vol coking coal have fallen to $132/t fob Australia from $150/t since the start of April, but remained higher than the low of $75/t in February 2016.

Sustained lower prices from 2013 significantly slowed the growth of Australia's coal exports, culminating in a slight dip in thermal and hard coking coal shipments in 2016. Confidence returned in 2017-18 after sustained stronger prices, with projects restarted and shuttered mines reopened, but the pandemic appears set to reverse this trend.

By Jo Clarke