Does every cloud have a silver lining? – recent developments in Australia’s mining sector

8th of 5, 2017

Paul Mills, Senior Economic Adviser

Mr Mills previously worked with Skills Australia, an Australian government agency where one of his key responsibilities was to assess demand for skills from Australia’s mining sector

There has been speculation that flooding arising from the massive rainfall dumped by Cyclone Debbie would have a major impact on metallurgical or coking coal production in Queensland Australia (sometime stylised as the world capital for metallurgical coal (Yeo, 2017: 1). 

Figure 1: Road blocks to metallurgical coal supplies in Queensland

Some commentators have speculated that that the supply disruptions would benefit Mongolia’s coking coal industry (Business Council of Mongolia 2017: 1).  Indeed, many major miners including BHP Billiton, Glencore and Anglo American shut down in the lead up to the cyclone.  Spot prices for metallurgical coal rose rapidly after the cyclone as commentators attempted to understand potential supply disruptions.  After all, Australia supplies 50 per cent of metallurgical coal to world markets (Janda 2017: 2).

Yeo notes the metallurgical coal market has proven in the last 14 years to be particularly supply sensitive.  Cyclone Debbie also came at a critical juncture, as premium met coal prices have fallen from a high of $310/metric tonne FOB Australia on November 18, 2016, to $151.50/metric tonne FOB on March 24, just before the cyclone hit (Yeo 2017: 1).

The outlook for Australia’s metallurgical coal production

Nonetheless, major Queensland miners have resumed production quite quickly.  Following previous cyclones, mining companies have worked hard to install infrastructure to minimise cyclone related production disruptions. Reflecting this, BHP Billiton announced that it had resumed production on April 4th 2017, shortly after Cyclone Debbie passed (BHP Billiton 2017: 1) and Glencore has also resumed operations.  Most port facilities have also resumed work.  However, rail logistics are a problem, with several lines needing repairs, but operator Aurizon expected most repairs to be completed quickly.  There are also usually considerable supplies dockside waiting to be shipped, suggesting port coal stockpiles will fall rather than failure to ship supplies.  Hence there seems no positive news for Mongolia here.

Indeed, the Australian Government has been quite calm in its reactions to post cyclone supply problems.  The most recent projections by the Department of Industry, Innovation and Science, released in early April 2017, suggests Australian metallurgical coal exports in 2017 will be very similar to exports in 2016.

Figure 2: Steel making metallurgical coal, actual and forecast, millions of tonnes

Source: Australian Government Department of Industry, Innovation and Science, April 2017, Resources Energy Quarterly

Other markets
Obviously trends in the international price for copper, as well as gold prices are key concerns for Mongolia.   Australia is also a significant producer of copper and gold.  Australian Government recent reviews of potential copper and gold prices are discussed below.

Figure 3: Recent Australian government projections for copper prices

The Australian Government suggests the outlook for copper prices is quite positive, as shown in Figure 3 to the left.  This outlook, if realised, is positive news for Mongolia, given the prospective ramp up in OT copper production in the years ahead.  The Department of Industry also suggests the outlook for gold prices to 2022 is solid, although possibly not as exciting as some in Mongolia would like!

Figure 4:  Australia’s official view – gold prospects

Source: Australian Government Department of Industry, Innovation and Science, April 2017, Resources Energy Quarterly, p. 97

Other factors influencing coal prices
China remains the key to the world metallurgical coal outlook.  The Australian Government Department of Industry, Innovation and Science notes that the main driver for China’s increased import demand in 2016 increase was reduced domestic supply availability, after domestic production and capacity cutbacks (Department of Industry, Innovation and Science 2017: 54).  Chinese decisions concerning China’s own production of coking coal will again be a key influence for its import demand and hence coal prices in 2017.

China’s refusal of supply from North Korea is also important.  Recently China has refused to allow coal ships from North Korea to enter Chinese ports.  This reflects China’s concerns with political developments in North Korea.  Reuters reported that China’s customs department issued an official order on April 7 telling trading companies to return their North Korean coal cargoes (Reuters 2017:1).  If China maintains this policy stance, potentially this could result in increased Chinese demand for coking coal from Mongolia.

On the other hand, iron prices have slumped recently.  The main factor seems to be a decline in demand for steel to support residential construction in China.  The Chinese dragon’s head and feet are all moving, but sometimes the head does not seem to connect well with the feet!  As noted by Australia’s ABC News, uncertainty seems the only certainty for mining, oil and gas as 2017 unfolds (McHugh 2017: 1).

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