While the rate of increase slowed markedly in 2006, costs are unlikely to fall back to the levels experienced before 2003, Sydney-based AME revealed in its latest report.

AME predicted average FOB costs will decline in real terms by only 2% in 2007.

“The higher cost base for the world’s metallurgical coal producers will support producer claims that coal prices need to remain at their current high levels. Otherwise, the viability of higher cost operations will be threatened,” it said.

This finding has been supported by a number of US-based companies which have announced capital spending cutbacks and the closure of high-cost mines. Just last week US producer Foundation Coal said it would discontinue a $US45 million recapitalisation project in the Midwest, and reduce production from its highest cost mining units in Central Appalachia.

US giant Arch Coal also presented the same sentiment. "Based on current market demand, we are confident that leaving more tons in the ground is the right decision," Arch Coal chief Steven Leer said on curtailing production in 2007.

This trend, however, has been bucked in Australia where the majors and emerging juniors are steaming ahead with exploration and new mine developments.

Based on the costs of 143 major metallurgical coal export mines in 10 countries, AME found the average US dollar FOB cash costs for metallurgical coal mines increased 20% in 2004 and 16% in 2005 before slowing to around 2% in 2006.

The cost increases are driven by a range of factors. The historically high metallurgical coal prices in the last two years encouraged new and existing producers to ramp up production, leading to shortages of labour, goods and services.

Strip ratios have increased as producers capitalised on high prices to exploit reserves that were previously uneconomic. Tyres for mining equipment have been in short supply. Some producers have paid many times the list price to secure tyres and maintain production.

Fuel and commodity price increases have also translated into elevated mining costs. Diesel fuel prices have leapt 105-116% in countries with fuel taxation such as Australia, Canada and the US.

Countries which removed moderate fuel subsidies, such as Colombia, have seen price increases of 160-175%. Indonesia’s fuel prices meanwhile have skyrocketed by more than 250% since 2002 after the removal of subsidies in mid-2005.

Massive increases in metals prices in this period have impacted on the prices of equipment, parts and consumables.

“What effect have these price increases had on the world’s major exporters of metallurgical coal? Cost increases have hit Canadian and Russian producers harder than those in the USA and Australia,” AME said.

Russian metallurgical exporters have seen their costs jump by 17% in 2005 followed by a further 10% increase in 2006, with higher freight costs accounting for much of the increase.

Canadian costs continued to climb by 20% in 2005, and then by a further 10% in 2006. This compares with a fall of 1% in average FOB costs in Australia in 2006 following a 20% increase in 2005. In the US, a 3% increase in 2006 followed a 24% rise in 2005.

“The relative change in costs allowed Australia to take pole position in the Atlantic hard coking coal market. Australia edged ahead of Russia in 2006 with the lowest landed cost for hard coking coal into Europe. Lower ocean freight costs for Russian exporters failed to overcome higher domestic rail and other cost increases,” AME said.

In the Asian market, Russian exporters remain the lowest landed cost suppliers. However, the gap between Russia and Australia has narrowed considerably from 2004 to 2006. In 2007, both US and Canadian producers have landed costs of higher than their Russian and Australian counterparts.

Chinese and Indonesian semi-soft coking and high volatile PCI coal exporters improved their competitive margin in North Asian markets over other suppliers.

“This benefited from low FOB costs, and ocean freight cost advantages due to their shorter shipping distances,” AME said.

“Chinese producers are struggling to maintain exports in the face of booming domestic demand but have a landed cost advantage into North Asian markets over the major supplier, Australia. Expansion of production from these low-cost suppliers has significant implications for higher cost semi-soft coking/PCI producers in Canada.”