Thermal coal producers in the Hunter Valley region of New South Wales are reaping the benefits of a hungry global market, but growing infrastructure constraints stand in the way of keeping those customers fed.
For the past two years, the export capacity of Australia’s port facilities has come under increasing pressure and scrutiny, with long vessel queues leading to increased demurrage costs for coal producers and higher spot prices in the Pacific market.
Although coal producers, rail providers and Port Waratah Coal Services, the operator of the coal export terminal at Newcastle port, plan to increase the capacity of the entire Hunter Valley coal chain to 102 million tonnes per annum by the end of 2007, it will be just the beginning of a long road to permanently alleviating the problems.
Energy Economics’ Clyde Henderson believes the Hunter Valley’s 12 or so active players will face an uphill battle trying to balance supply with demand as long as the capacity of the state’s transport infrastructure continues to make the headlines.
At present the Hunter Valley rail network has an annual capacity of around 85Mtpa of export coal, with a surge capacity around 10% higher capable of being sustained over a period of some weeks. Demand of 100Mtpa is anticipated in 2007 with a further potential rise to around 115Mtpa by 2009, making improvements to the network all the more necessary.
The enhancement program, which is planned for completion later this decade, will no doubt bring much-needed relief to today’s producers, which Henderson believes have been “caught out” by intense overseas demand.
“At the beginning of 2003, the (mining) industry was in the doldrums. The Australian dollar was weak, spot sales were more popular than long-term contracts and coal prices were historically quite low. Spot prices for thermal coal for example, were close to $26 a tonne compared to today’s price of $60/t,” he said.
“During 2003, there was a radical turnaround in the market and suddenly, instead of having a great surplus of coal in international markets, it rapidly became a deficit situation. The scope of change was quite huge, particularly in the coking coal arena where things swung fairly quickly from oversupply to undersupply and then into quite a large deficit.
“That situation was largely unanticipated and resulted in insufficient mining and infrastructure capacity. There were very few people, myself included, who predicted the turnaround, which of course stemmed back to the great change in China that has seen it become a magnet for all resources.”
While transport constraints have favoured coal prices – according to Henderson, “they have worked to push coal prices up to levels they may not have otherwise seen” – the situation for Hunter Valley producers has been described as potent, particularly in comparison to their Queensland counterparts.
“The current expansions in Queensland’s rail and port capacity may well end up alleviating constraints there within a couple of years,” Henderson said. “But when you look at the pace of mine expansions and developments in the Hunter Valley compared to the pace of change in infrastructure, it still has strong potential to be quite a substantial constraint to what is exported out of NSW.
“Even the increase in port capacity at Newcastle is likely to be utilised by 2007, primarily because of the level of coal activity in the pipeline.”
The planned investments to improve port and rail infrastructure should afford Australian thermal coal producers the opportunity to increase exports by way of new mines and expansions. Already the sector accounts for 35% of Australia’s coal production, churning out 98Mt in 2003-04, the majority of which was thermal.
In the Hunter Valley – where proved coal reserves are estimated at 2.3 billion tonnes and proved plus probable reserves are around 4.2 billion tonnes – there is not a lot standing in the way of continued exploration and development (infrastructure issues aside). Certainly at current production levels of around 93Mtpa and an estimated mining life of 24 years (proved) and 46 years (proved plus probable), the reserve base is sufficiently large to sustain domestic consumption and forecast demand for Hunter Valley export coal beyond 2010.
Indeed, in 2003-04 alone, coal exports from the region were 77.8Mt, the majority of which was thermal and accounted for around 78% or 60.3Mt. Exports of Hunter Valley coking coal by comparison were just 17.5Mt.
And ABARE predicts an even healthier outlook, with potential demand for coal exports from the Hunter Valley increasing at an annual rate of 2.8% a year to reach 122Mt in 2015. Most of the demand will be for thermal coal, further boosting Australia’s profile as the world’s biggest exporter of the product.
Such forecasts are music to the ears of Rio Tinto Coal Australia managing director Grant Thorne, whose company manages the Hunter Valley assets of Coal & Allied, one of the major coal producers in the region, which has the planned Mount Pleasant opencut development containing around 450Mt of coal under its belt.
Thorne is one of many who holds mixed feelings about the thermal coal outlook, in light of infrastructure issues, and is encouraging companies to take control of the situation.
“It can certainly be said that the medium term outlook for thermal coal is rosier than it was a year ago,” Thorne told an industry briefing last year.
“The first nine months of 2003 were very tough, but from September the stars began to align. Europe had been through a very hot summer with air conditioners whirring furiously, China realised it must divert some planned exports to meet its spectacular growth in domestic demand for energy, Indonesian mines succumbed to the effects of very heavy monsoonal rains and Japan was slow to return to duty its battery of nuclear-fired stations, which had lost general community confidence.”
Thorne said the logistics issue in the region needed to be solved quickly lest it drove customers into the arms of competing coal regions or countries.
“The mines can play a part by ensuring efficient loading of trains at each Hunter Valley loading point and showing a willingness to commit to take-or-pay arrangements with the downstream service providers; the rail, where undoubtedly the present bottleneck is most acute, must add infrastructure capacity; and the port and harbour must be ready to respond when the focus shifts to them,” he said.
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