Hogsback and Newton's apple

Hogsback thinks that coal mining directors should have paid more attention during science classes at school. If they did they might have recalled Newton’s law of gravity – what goes up must come down.

Lou Caruana

This piece of logical thinking could have been handy in the coal industry during the heady days of 2011, when the price of coking coal soared ever higher as industrial disputes over enterprise bargaining agreements in central Queensland curtailed production and floods in the same region destroyed infrastructure and choked off supply of the precious commodity.

Higher and higher went the coal price, to the glee of the managers and directors, who used this rare phenomenon to plumb their respective boards to release billions of dollars to pay for extra production capacity, outrageous wages to its employees and contractors, and to commit to infrastructure project and arrangements that would lock in access for years to come.

It was such a beautiful sight beholding that price rise ever so higher that coal mining companies wanted to replicate that experience again and again all over the world – even to places they had never even heard of.

Australian coal exploration geologists and mine contractors – who previously had never ventured further west than Roma in Queensland or further south than in Bellambi in New South Wales – were being packed off to Outer Mongolia where they had to endure sub-zero temperatures and survive on rations of yak milk while looking for a discovery that would prove they had found the next world class coal province.

So convinced were the directors of some of the world’s biggest companies that the trajectory of the coal prices would always go upwards that they wasted billions of dollars in paying for assets in countries where they did not understand the language, the culture or the logistics.

Case in point: Rio Tinto’s ill-fated Benga coal project in Mozambique ultimately lead to the company’s CEO Tom Albanese falling on his sword after the company had to write down $US 14 billion.

Hogsback thinks the last four years must have been a rude shock for mining executives such as Albanese who seem to have forgotten about the sheer cyclicality of the coal business.

The boom-bust cycle has been a feature of the Australian mining industry for decades, yet when prices are climbing, it seems there is a collective group-think in action that stops anyone from warning of the impending descent back to earth.

There is some conjecture amongst market watchers now that the coal price has in fact actually reached a bottom.

This week we learned that the world’s largest privately held coal mining company Peabody Energy had filed for bankruptcy, following a spate of other bankruptcy filings by other smaller companies in the US.

Earlier it was revealed that Anglo American would be exiting from the coal mining business entirely. Glencore has confirmed that its Newlands Northern underground coal mine in Queensland would be closed by June.

This might be a sign that the rapid descent in the coal price over the last four years has wrought its damage on the coal miners and that a reversal of the coal price might be afoot.

Hogsback thinks that Newton’s apple might have finally fallen and hit some of the world’s mining directors on the head.