The profitless growth of coal industry

AT THE risk of sounding seriously bonkers, Hogsback would like to suggest that the coal industry is having a wonderful time, though there is one small problem with that proposition and that is a matter of price.

Staff Reporter

If, and this is an almighty if, we could all forget the fact that hardly anyone in the coal industry is making a profit then times could even be described as healthy.

They are not, obviously, but that is a problem caused by what economists call “profitless prosperity”, an expression that means working hard without achieving a lot.

In the case of coal this period of profitless prosperity looks increasingly to be the fault of the coal producers and not the customers.

Boiled down, coal miners appear to be ignoring signals from the market and are continuing to expand at a rate above what consumers require and that is largely why the price for thermal and metallurgical coal is in a hole – a coal pit if you must ask.

Three events over the past week led The Hog to a conclusion that the coal industry had been engaged in a spectacular demonstration of self-harm, with over-production doing much more to wreck the profitability of the coal industry than the stunts, lies and distortions of the anti-coal crusaders.

A similar picture, without protestors, can be seen in the Australian iron ore industry where over-production at a time of slowing growth has created a crisis.

A common-sense approach by senior managers in both the coal and iron ore industries would have avoided the crisis, which is confronting both businesses.

Consider some of the evidence, starting with demand for iron ore and coal and the fact that it has not suddenly dried up.

Demand is not as strong as it was during the boom years, but there is no evidence of a contraction in demand, simply a fall from annual growth of 5% to annual growth of 2%, or something like that.

Slower growth, unfortunately, was not programmed into the investment plans of coal and iron ore producers and by the time the evidence came through of China and other markets not growing as fast as forecast it was too late to slow mine expansion plans.

So, what were the three events noted by The Hog over the past week that led him to this remarkable conclusion that the coal industry is its own worst enemy – a charge that can also be laid at the door of the iron ore industry.

The first was a report from the Minerals Council of Australia that metallurgical coal exports over the past year were up 5% on the previous 12-months and are running at a record level.

Record shipments were reported from three of Queensland’s ports, Dalrymple Bay, Hay Point and Abbott Point.

Thermal coal exports have not been as strong but that met-coal export rate goes to the heart of the issue – demand for coal has not gone into reverse as some critics of the industry would have the general public believe, it is actually a case of demand growth not rising as fast as predicted.

Another pointer to the outlook for the Australian coal industry was Shenhua Coal’s receipt of final environmental approval for its big Watermark project in NSW.

Coal critics, naturally, were annoyed by the decision that should clear the way for development of a mine producing around 270 million tonnes of coal over its initial 30-year life.

However, the fact Shenhua negotiated its way through the tortuous Australian approvals process because it could see solid long-term profits from Watermark was a pointer to good times, not bad times.

The coal event that caused most amusement did not occur in Australia though. It was a European development that led to Germany finally admitting it could not replace its coal-fired power stations without destroying the country’s economy.

A series of changes in German power policy brought dismay to anti-coal campaigners and delight to the coal industry with the first move being the abandonment of a proposed financial levy on all coal-fired power stations.

Older coal units will still be phased out, but only if the wind and solar power farms being installed across Germany prove they can keep the country’s factories supplied with sufficient power at a competitive price – and that is certainly not guaranteed.

As a back-up some of the power stations mooted for closure will be transferred into a reserve category until at least the year 2021, a status that means they will be fully-manned, with a full yard of coal, ready to be switched on at short notice if the renewable power sources fail to perform as promised.

From where The Hog is sitting that sounds like a three-nil score line, three to coal (record exports, Watermark approval and Germany dropping its plan to abandon coal) – and nil to the critics.

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