The department found extraction and production was the weakest phase in the value chain for Australia's coal industry.
While Australia has significant high quality metallurgical and thermal coal operations, it cannot mine and process this coal competitively.
This is a weak point for the industry, and if not addressed adequately and promptly, may lead to loss of overall world export market share, according to the Coal Industry Competitiveness Assessment report by the DIIS.
"Many mines are operating close to the breakeven point," the report states.
"Given the volatile nature of coal prices, the profitability of Australia's coal industry can move quickly. Scenario modelling suggests that, based on 2015 costs, a fall in the price of coal of only 15% would see 49% of mines operating with negative margins.
"On the other hand, should prices rise 15%, based on 2015 costs, only 15% of Australian mines would be operating on negative margins."
Australia has very high mining and coal preparation costs compared to the peer group.
Now the industry is faced with the much tougher task of tackling the structural factors contributing to Australia's poor cost competitiveness.
If not addressed as a priority, high-cost and low margin mines in Australia will be forced to close prematurely.
A key structural factor contributing to the country's high mining and coal preparation costs is the workforce.
Although salaries are high in Australia, labour productivity, measured as marketable product tonnes per employee, is also high.
"Australia scores highly due to the nation having more established and advanced operating environments compared to other countries in the peer group," the report states.
"Australia can further invest in increasing its current use of technology and automation in mining operations, for example, by learning from and considering remote operations and driverless trucks used in the metals mining sector.
"This will drive further productivity gains, offsetting the uncompetitive labour cost to improve overall competitiveness."
The ability to produce high quality coal at scale is key to the competitiveness of Australia's export based coal industry. Metallurgical and thermal reserves in Queensland and New South Wales are among the largest and highest quality in the world.
According to the report, the ability to export this coal at scale will set Australia apart from many of its competitors, however, it must be able to keep growing.