Declining oil prices good news for coal ops

THE decline in oil prices is a positive for coal companies according to some analysts, despite speculation that the oil glut will drag down the price of other energy forms, such as coal, with it.
Declining oil prices good news for coal ops Declining oil prices good news for coal ops Declining oil prices good news for coal ops Declining oil prices good news for coal ops Declining oil prices good news for coal ops

Gympie coal loader

Lou Caruana

The price of diesel has dropped by 23% since the beginning of the year using in US dollar terms.

The jury is out on if this will also reduce coal prices.

Rio Tinto coal boss Harry Kenyon-Slaney recently told the Sydney Morning Herald that green shoots were emerging in the thermal coal market after a dire run for more than two years, which has seen prices crash to languish near six-year lows of about $US62 a tonne.

“We are seeing the beginnings of the stabilisation of the market, particularly in respect of price,” Kenyon-Slaney said.

“You've started to see a correction in the supply imbalance, in that you've seen supply being taken out of operation. I'm under no illusions – the tough times are going to continue for some time yet. But the cycle will turn.”

Falling oil prices do not hinder coal demand, according to website Seeking Alpha.

“However, as lower oil prices translate into lower diesel prices, coal companies benefit via lower costs,” it states.

According to research by Wood Mackenzie and Macquarie Private Wealth, energy-related costs represent 29% of total production costs in the coal sector.

“While the entire curve will see deflation, it is generally most pronounced at low grade open pit operations, which are naturally high diesel consumers,” according to Macquarie.

“Meanwhile, the effect of high logistical cost in relative terms is also buffered with oil price falls.”

Macquarie says the medium term effect of the dramatic drop in oil and diesel prices over the last six months is difficult to pin down but the low price environment is likely to be maintained for some time.

“The oil price has fallen sharply since mid-year and our oil economist believes the new lower price is here to stay for a while,” it said.

“Historical price correlations suggest the immediate impact is negative but the medium-term impact is harder to call.”

Turning to coal operations – specifically large open cut coal operations typified by BHP Billiton Mitsubishi Alliance and Peabody Energy in Queensland’s Bowen Basin – the lower diesel price is definitely good news.

The cost of transporting coal using haul trucks in some of the nation’s largest open cut mines is becoming greater as coal seams get deeper.

As a deposit is mined, the pit typically gets deeper and material needs to be moved across a greater distance, according to research by the federal government’s department of resources.

“This can result in more energy being used to achieve the same ore output, so that the operation can appear less efficient over time,” its research states.

“Performance indicators need to be carefully designed to account for the increased distance and amount of material moved by haul trucks. These indicators effectively inform business improvement decisions and enable setting targets for the reduction of energy intensity.”

Peabody Energy – the world’s largest privately owned coal mining company and a big player in both the US and Australia – stands to save significant amount of costs in the current lower diesel price scenario.

Peabody Energy uses about 165 million gallons (about 625 million litres) of diesel per year.

Lower oil prices will help a larger company like Peabody Energy potentially saving $US 94 million in fuel costs if wholesale diesel prices reach $2 per gallon, which is a 34% decrease from 2013 prices, according to Seeking Alpha.

“Low oil prices should be seen as a positive rather than a negative for coal. Although oil is the primary source for energy in the US, its uses do not overlap with coal very much,” the report states.

“For example, thermal coal accounted for 39% of 2013's electricity generation in the US, versus less than 1% for petroleum. The cost of petroleum-generated electricity is far above that of coal and natural gas, so even a massive drop in the price of oil wouldn't have a noticeable impact on coal demand by itself.”

Other US coal producers should also benefit from the diesel price drop, according to Seeking Alpha.

Arch Coal uses about 62 million gallons of diesel per year, so a decline to $2.50 per gallon wholesale diesel will result in it saving $32.7 million per year versus 2013 levels, it states.

For Alpha Natural Resources, the savings would be $24.8 million and Cloud Peak would save $18.5 million.

The lower cost of consumables such as oil have already shown up in the books for NSW Gunnedah Basin producer Whitehaven Coal in the 2013-14 financial year with operating costs dropping to $A4.1 million from $4.3 million previously.

Whitehaven’s Coal Group EBITDA before significant items of $90.4 million has increased by 429% compared to the prior year EBITDA of $17.1 million. A range of operational factors favourably impacted the result. These include a range of non-production related cost savings during the year.

These savings have stemmed from the re-negotiation of a number of supplier contracts, particularly in relation to rail, road haulage, explosives and mine services.

“These results were underpinned by the introduction of a centralised procurement function during the first half of the year which has added greater discipline and improved structure to the group’s approach to supplier negotiations,” the company said in its 2014 annual report.

“The combination of production growth, underlying cost reductions and ongoing improvements in productivity are expected to position Whitehaven in the lowest quartile of the cost curve for Australian coal producers.”

Whitehaven’s costs for the FY2015 are expected to average about $62/t.

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