Met coal production on the rise

ROBUST steel demand from China, India and Japan will continue to drive Australia’s metallurgical production higher through 2022.
Met coal production on the rise Met coal production on the rise Met coal production on the rise Met coal production on the rise Met coal production on the rise

Demand is driving Australia's metallurgical coal production higher.

S&P Global Market Intelligence analyst Richard Foy said he expected to see Australia's metallurgical coal production increase from 182Mtpa this year to 195Mtpa by 2022.

However, he warned there was a potential threat to that.

"A potential risk to supply comes from the increase of thermal coal prices incentivising producers to switch metallurgical coal products to a premium thermal product," he said.

According to S&P's analysis of the metallurgical coal market, the increase in production will come from both brownfield developments and incoming greenfield projects.

It found growing and sustained steel demand from primary markets, alongside pollution cuts in China, drove increased coal requirements for Australian coal products.

There is modest cost inflation expected at Australian metallurgical coal mines in 2018, although it expects normalised production costs to stabilise and decline 2% from 2018 to 2022. That is attributed to the economies of scale the forthcoming new operations and expansions will bring along with the consensus forecasts expecting the Australian dollar to strengthen against the US dollar.

Another potential cost driver is the skills shortage. Wages are under pressure as a result.
A tyre shortage is also looming, which could lead to further cost pressures.

There is a fear that swing producers could upset the applecart.

The challenge for Australian producers will be to raise production in a cost effective manner without oversupplying the market.

"The decline in prices since 2011 forced Australia's coal miners to make significant cost savings to preserve margins," Foy said.

"The recovery in prices since 2015 also saw a concurrent increase in costs largely from rising oil prices and appreciation in the Australian dollar.

"Looking forward we expect costs to stabilise.

"If the prices follow the consensus forecasts for coking coal, high cost Australian operations could come under pressure to exit the market due to negative margins in 2020."