Regular readers will have caught whispers in a number of posts at MB that there is a problem brewing in Australia’s thermal coal sector. Prices have been hit hard this year as China slows and the dramatic spike in fixed costs as well as the dollar is forcing a margin squeeze in the sector, even though prices remain historically high.
Late yesterday ANZ produced an excellent note on the subject that is well worth a read. It makes a couple of points that are worth recalling for the future decline of other commodity export sectors:
- labour costs are out of control
- the dollar and carbon tax are hammering competitiveness
- marginal pricing power is shifting to lower cost producers offshore
- major expansion plans are in the gun
There are a couple of reasons why you wouldn’t expect the same convergence of factors to also iron ore and coking coal. Paramount among them is that in these two other major bulk commodities Australia is the marginal low cost producer by a large margin so pain would be felt elsewhere before here. However, a similar magnitude fall in the price that thermal coal has suffered would still quickly hit the smaller, higher cost, players hard even if core producers continued to expand.
Anyway, there’s certainly a warning for Australia in the brewing thermal coal shakeout. Commodity booms always end and never with a whimper.
ANZ Insight Coal Trip Note Jul12 (1)
