A reduction in labour numbers and lower rail freight charges have given Australian hard coking coal producers a significant advantage with cash production costs falling to an average of US$24 per tonne FOB in 2000.

The AME report estimates cash costs of export coal production to 2005 on a mine-by-mine basis, encompassing 151 mines around the world and advanced prospects located in Australia, Indonesia, South Africa, Colombia, Canada, the United States and Venezuela. In 1999 these mines together produced 390 million tonnes of export coal, or 70% of worldwide export production.

According to the report, written by Melissa Cundy, coal industry analyst at AME, between 1996 and mid-2000 the export coal industry endured falling prices and low profits. Changes throughout the industry have reduced FOB cash costs for export steam and semi-coking coal mines by 23% between 1996 and 2000 and by 26% for hard coking coal mines.

While the cost reductions made over the last four years have been dramatic, AME said the rate of change has now slowed. FOB cash costs for steam and semi-coking coal mines fell 12.5% between 1997 and 1998, but reduced only 5% between 1999 and 2000.

Similarly, unit cash costs for hard coking coal mines fell 11% between 1997 and 1998, but only 6% between 1999 and 2000. AME is predicting a fall of 1% for steaming/semi-coking coal mines and 2% for coking coal mines between 2000 and 2001.

“The decline in FOB costs has been particularly marked in Australia where export coal cash costs have fallen by a staggering 33%, measured in US dollars per gigajoule, since 1996,” AME said. “The fall in the Australian dollar by 23% against the US dollar over that time has of course been a major factor in reducing mining costs in US dollar terms. However, deregulation of the labour market, rail and electricity sectors have been equally significant.”

The report pointed out that as prices have continued to drop there has been a marked flattening of the lower end of the country cost curve for steaming and semi-coking coal.

Colombia and South Africa have been joined by Indonesia and Australia at the low end of the cost curve for exporters of steaming coal in 2000. Infrastructure improvements in Colombia and Indonesia are having a substantial impact on FOB cash costs in those countries.

“Australian cash costs of steam and semi-coking coal production have fallen again in 2000, securing that country’s future as a competitive supplier of steam coal to the international market – a future that appeared far less certain a few years ago. The US and Canada remain the most vulnerable, high cost, steam coal exporters.”

Three countries – Australia, Canada and the United States - dominate world hard coking coal exports. AME’s analysis suggests that Australian hard coking coal cash production costs fell to an average of US$24 per tonne FOB in 2000, substantially lower than Canada and the United States.

Australia’s cost advantage in this sector is forecast to remain fairly constant over the next five years. Canada, on the other hand, continues to suffer the effects of continued low prices and high costs leading to the closure of the Quintette, Smoky River and Gregg River mines in 2000.

The major cost reduction activities for both hard coking and steaming/semi-coking coal mines are broadly grouped on a country-by-country basis. The greatest contribution to these cost reductions has come from Australia, where drastic reductions in labour numbers and unit rail freight charges are responsible for the improvements in FOB costs.

Greater access to rail transport facilities in Colombia has made a significant impact in overall FOB costs for that country in recent years, and the strong US dollar, improved productivity and operating efficiencies have contributed to somewhat less significant cost reductions in Indonesia, Canada, and South Africa.

These cost reductions were clearly driven by the downturn in coal prices. Since 1996, the Australia-Japan benchmark price for Goonyella brand hard coking coal has dropped US$17.60 per tonne (31%) in real terms. The majority of coal contracts are agreed at prices below the Goonyella benchmark.

Similarly, in the steaming and semi-coking categories benchmark prices have dropped 33%. Over the same time period median unit costs of production have fallen approximately US$14/t for hard coking coal mines and US$10/t for steaming/semi-coking coal mines. The obvious result of these changes is the continued squeeze on the profit margins of mining companies.

As price negotiations get underway for JFY2001, the industry consensus is that there will be a price increase across all coal categories. AME’s export coal mine cost analysis indicates that, in general, the major cost reduction activities have already taken place. Although costs are expected to decrease in real terms in the future, these reductions are not expected to be near the magnitude of those made between 1996 and 2000.

“If prices do go up as we expect, and costs continue to go down in real terms, mining companies should begin to see a return to historical profit levels.”

In addition to cutting costs and surviving difficult market conditions, the export coal mining industry has undergone considerable consolidation over the last two years, particularly in the steaming coal sector. Oil companies have been withdrawing from what they consider "non-core" assets while resources companies with their core business in mining have been increasing their stake in the coal mining industry.

Since the beginning of 1999, the mines belonging to Cyprus Amax, Carbocol, Shell Coal, Oceanic and Duiker, in addition to the North Goonyella, Liddell and Burton mines, have been sold. At the end of 2000 the mines belonging to Exxon Australia and QCT are in the process of changing hands, the mines owned by Peabody Australia are close to being sold, and the mines owned by Exxon Colombia are set to sell in 2001.

In the steaming coal sector, the four largest producers, Anglo American, Billiton, Rio Tinto and Glencore, now produce in excess of 30% of the world’s export steam coal. These four companies are also among the lowest cost producers.