EDITORIAL & OPINION — COMMENTARY — Changes compel coal exporters

Since the devaluation of the Thai bhat in mid-1997, followed by the collapse of the emerging Asian economies, substantial changes have occurred in the competitive positions of the top coal-exporting nations — Australia, Canada and the U.S. — according to a study released by Australian-based AME Mineral Economics.

The Australian coal industry has significant geological and geographic advantages over Canada and the U.S. in the export coal trade. These advantages hinge on having large reserves of high-quality coal near the coast and deep-water harbors. However, these natural advantages have been eroded by high labor and rail freight costs.

The coal industry is reacting with commendable speed to introduce cost-cutting measures in response to plunging coal prices. Employment in the industry is being slashed — a situation that began in the second half of 1997 and for which there is no end in sight.

The combined workforce figures for the two coal-exporting states, New South Wales and Queensland, show a fall in employment of 4,495, or 18%, to 20,586 in the second quarter of 1998 from 25,081 in the same period last year. However, productivity increased by 10% to 8,350 tonnes per employee per year in 1997 from 7,590 tonnes per employee per year in 1996, and output is expected to have risen by an even greater percentage in 1998.

Rail transport of coal in Australia has been undertaken by state-owned monopolies, and the lack of competition has led to high operating costs. These costs, however, are declining to commercial levels as New South Wales and Queensland strike new arrangements with miners through increased rail competition or re-negotiated contracts.

Reducing operating costs in Canada will not be so easy. Canada’s average coal production costs are generally high — the result of extremely long mine-to-port haulage distances and low washery yields. Typical haulage distances for most of Canada’s export production are around 1,100 km.

The problem of long freight routes is compounded by the need to traverse mountainous country, resulting in average rail transport costs of around $18 per tonne. The low washery yields reflect the beneficiation required to produce the country’s high-value, low-ash coking coal products. Most of Canada’s export mines are in the Rocky Mountains, where geological and climatic conditions for mining are difficult. The folded and faulted nature of the strata contributes to low yields and restricts most export mines to using truck-and-shovel operations, which are generally higher cost that dragline mines. Given these inherent disadvantages, it is commendable that an average productivity rate of 8,800 tonnes per employee per year is achieved in Canadian export coal mines.

Canadian coal companies have managed to reduce mining costs at most operations. However, with several existing operations reaching the end of their lives over the next five years, it is unlikely that the capital expenditure for replacement operations can be justified. Canadian coal exporters have less scope to reduce cost than their international competitors, owing to the long rail transport distances and rail freight rates that are already close to “world best practice.” Canadian hard coking coal mines at the top of the cost curve will find it difficult to survive over the next few years as demand stagnates and substantial new low-cost capacity comes on-stream in Australia. Inland Canadian steam coal operations will struggle to survive market weakness during the next two years despite rail freight rates that are about $3 lower than those for hard coking coal.

Coal mining in the U.S. represents world best practice. Most U.S. export coal is produced from relatively deep, thin-seam longwall mines in West Virginia, Virginia, Kentucky, Pennsylvania and Alabama. While mining costs are maintained at low levels, transport distances from mine to port are long.

With on-site and off-site efficiencies already at or near world best practice, the U.S. coal industry is not in a position to lower costs substantially in response to tumbling international coal prices. But competitor nations’ costs have dropped markedly over the past year in U.S. dollar terms, driven by relative currency weakness. The reduced competitiveness of the U.S. export coal industry is expected to affect the steam coal export sector in particular. Such exporters in Colorado and Utah that sell to Pacific Basin markets will continue to be hit hard and will divert more tonnage into domestic markets.