The playing field has tilted decisively in favour of Chinese exporters, favoured by a fixed exchange rate and shorter ocean freight distances. Renewed growth in Chinese thermal coal exports at the expense of Australian exporters is the likely result.

Average Australian export thermal coal prices fell to AU$40.89/t FOB in April, equivalent to US$24.94/t at the average US61c exchange rate for the month. But the average export price is likely to have fallen to as low as AU$37.50/t FOB in May assuming:

1. average US dollar prices fell further as the new Japanese fiscal year contract prices continue to kick in, and

2. an average exchange rate for May of US64.7c.

In other words the average Australian dollar price of thermal coal exports will likely be as low in May as at any time over the past ten years (as far back as our records go). The lowest historical level over that timeframe was AU$37.83/t FOB back in the dark days of March 2000.

The factors that have led to the weakening of Australia’s competitive position are not expected to ameliorate any time soon. Ocean freight rates will continue to decline from recent unsustainable peaks, but will likely remain well above historical averages, with Capesize rates supported by high growth in iron ore trade, particularly into China.

Long-term shipping contracts have buffered Australian coal exporters from the full impact of the rise in ocean freight rates so far, but the impact will flow through as existing freight contracts expire.

Even after its recent strong rises the Australian dollar remains below its historical average against the greenback, with most pundits predicting continued rises.

Compounding these problem is growing evidence that discounting of Japanese contract prices, from the Tohoku headline price of US$26.75/t FOB Newcastle, is much more widespread than first thought. It appears that many major contract settlements have been structured with half of the contract tonnage fixed for the year at US$26.75/t and the other half of the volume not just referenced to the spot price but actual at the spot price (with individual adjustments for coal quality). This would put the current average price of contracts so structured at US$24.90/t – and this for business that used to represent the premium end of the market.

Normally you would expect US dollar coal prices to increase to offset the strengthening currencies of major exporters. This certainly appears to be the case in Atlantic markets where Richards Bay spot prices have taken off, contrary to our earlier expectations, as a result of the firming South African rand, a 33% surge in US steam coal imports in the March quarter as domestic US spot prices firmed, and a stronger Euro that is boosting the competitiveness of imported coal against domestic coal producers in Europe. Richards Bay spot prices increased to US$24.50 in mid May then shot up to US$26.70 at the end of the month.

Pacific Rim thermal coal spot prices are also expected to increase somewhat in US dollar terms, but China’s US dollar FOB cost structure remains unaffected by the weakening US dollar and this will likely moderate price increases in the region.

So the next few months will be a real test of the benefits of industry consolidation in Australia. Will producers continue to churn out increasing tonnages of steam coal for sale at zero profit? There will certainly be production cutbacks at some mines, but whether such measures will be sufficiently meaningful and widespread to move the industry back into profit is difficult to predict.

Australian exporters may have to sacrifice significant market share in Korea and Taiwan over the medium term in order to achieve profitability. Producers would certainly be wise to shelve most of the raft of steam coal mine development projects that are in currently in the pipeline.

Much of the above discussion also applies to the coking coal sector, with high ocean freight rates and exchange rates reducing Australian exporters competitiveness into Europe, prompting a resurgence in US metallurgical coal exports (up 30% in the March quarter). But international coking coal prices are substantially higher than they were a few years ago whereas steam coal prices have fallen. Hence Australian coking coal exporters may be able to ride out the current situation without the need for the same degree of cutbacks that will be necessary in the steam coal sector.

Australian steam coal exporters could have faced an even tougher situation but for large increases in East Asian steam coal imports in the March quarter. The three largest steam coal importers, Japan, South Korea and Taiwan all recorded increases in excess of ten percent relative to the March 2002 quarter. But this was not sufficient to remove the overhang of inventory of Australian export coal, which fell from the record level of 17.6 in November 2002 to 15 Mt by the end of March 2003, but remained well above average levels.