None of the firms operating large thermal coal assets in Australia were profitable in July-December when high grade thermal coal prices were around $50/t fob Newcastle, but all expect to be profitable at current prices of around $80/t.

 

Chinese firm Yancoal, Swiss trading and mining firm Glencore, UK-Australian mining firm BHP and Australian independent Whitehaven all posted losses at the earnings before interest and tax (EBIT) level for their thermal coal businesses in Australia, indicating that prices for all grade coals were too low to cover production costs.

 

Yancoal benefited from some of the lowest costs in Australian thermal coal production, but still posted a loss for its 2020 financial year that runs to 30 December. Whitehaven, which sells mostly high grade thermal coal to buyers outside of China, scraped an EBIT of A$78.3mn ($60.8mn) for its financial year to 30 June 2020 but returned to a loss of A$94.5mn in July-December, the first half of its 2021 financial year.

 

All firms maintained production during the period of low prices, which ran from May to November, because they were locked into fixed volume take or pay contracts to use third party rail and port infrastructure. These contracts mean that it is difficult for Australian coal mining firms to flex production in response to market conditions, although excess capacity in some port and rail systems may increase flexibility in these contracts as they are renewed over the next few years.

 

Costs remained reasonably high during the past year, as Covid-19 mitigation costs offset gains from lower diesel and consumable costs. Most firms are guiding for higher costs in 2021, largely due to the stronger Australian dollar and some broader mining inflation relating to older mines and high strip ratios.

 

The stronger pricing environment is more than offsetting the higher costs, with most firms guiding for a much more profitable January-June than July-December. This could allow firms, such as BHP, to divest unwanted thermal coal assets at a price that shareholders will accept.

 

Argus last assessed high-grade Australian thermal coal at $82.57/t fob Newcastle for NAR 6,000 kcal/kg on 26 February, down from $89.62/t on 29 January but up from a low of $46.18/t on 4 September. It assessed lower-grade coal at $55.65/t fob Newcastle for NAR 5,500 kcal/kg on 26 February, up from $55.01/t on 29 January and $35.04/t on 4 September.

 

The heat-adjusted premium on a NAR 6,000 basis for higher-grade thermal coal of $21.86/t on 26 February decreased from $29.61/t on 29 January but rose from $8.65/t at the end of August.