Take-or-pay system forces coal mining companies to increase production

What factors are at play causing the Australian coal mining industry to take a cold, hard look at�its production guidance targets in 2015?

With Australian coal mining companies producing more coal than we’ve seen in decades, there are many questions to ask about how to deal with the over-supply in the coming 12 to 18 months.

Whilst a falling Australian dollar and cheaper oil is providing a glimmer of hope for Australian coal mining, these improved conditions could help prevent the thing the sector needs.

Australian coal mining companies have been able to stand their ground and keep everyone working in a challenging global coal market – even displacing some of their major competitors in the US, Canada and Indonesia. The activity in the local coal market here in Australia is assisting to keep the market over-supplied, and the coal price down.

Australian exports of metallurgical and thermal coal have increased by 14 million tonnes and 20 million tonnes respectively over the last 12 months, even though coal prices have plummeted over the last few years.

One of the factors of higher production costs in a down market is the “take-or-pay” system causing many Australian coal mines to operate at a loss because of fixed rail and port contracts. Simply closing down unprofitable Australian coal mines would cost companies more money, so the reality is mining companies have to keep the mines running.

AME Group head of research, Matt Fusarelli, agreed that take-or-pay contracts had resulted in Australian exports remaining much higher than they would have if the agreements weren’t in place.

Coal mining company Yancoal complaining of restraints

Australian coal mining company Yancoal has been complaining about the restraints imposed by take-or-pay contracts. Spokesman James Rickards said a small improvement in market conditions and minor price increases in the first few months of the year, doesn’t mean coal producers can break out the champagne.

Current research suggests Australian thermal coal exports will increase by a further 25 million tonnes this year (2015) with metallurgical exports to be somewhere in the region of 15 million tonnes more than in 2014.

Global prices for metallurgical coal have dropped over 200 percent over the past three years,� from around $US300 ($387) a tonne to around $US106 a tonne.� Thermal coal prices have reduced 50 percent from $US120 to about $US60 a tonne over the same period.

Coal analysts are predicting thermal coal to be around $US63 a tonne in 2015 and $US67 in 2016, with metallurgical coal expected to average $US116 a tonne in 2015 and $US129 per tonne in 2016.

Understanding the industry is key to career advancement

Understanding how the Australian mining sector works is one of the key principles for career advancement. Even if you are not working in the coal sector at the moment, one of the ways to get a job is to keep yourself informed about what’s happening with mining projects, who’s hiring and where the future jobs are.

Additional resources for mining job seekers: Help me write a good resume | Are resume scanners blocking your job applications? | The trick to successful job interviews

For instance, if you’ve never heard of Carmichael Mine, or New Acland Coal, or even the joint venture between GVK and Hancock Prospecting, you could be missing out on future job opportunities.

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