China ban gives Australian coal miners a quality quandary
An ironic thing happened over the past decade as the Australian thermal coal sector was busy spruiking its merits as the world’s highest quality supplier with the best chance of survival in a decarbonising world.
The average energy content of Australian thermal coal
exports went down, while the average content of an unwanted contaminant, ash,
went up.
A decade of rising Chinese demand for intermediate quality
coal is viewed by most in the sector as the force that drove the trend, while
former billionaire Nathan Tinkler blames it on the marketing strategy of the
biggest producer Glencore.
Either way, with China no longer interested in buying
Australian coal, the local mining industry faces a big decision over whether it
should assume the Chinese ban is permanent and recast its product offering to
suit the changed trade environment.
“We have the best coal quality in the world and we should be
playing to that strength and yet since major assets have come under the control
of Glencore, it has become a race to the bottom,” says Mr Tinkler of the
gradual trend that has seen coal with energy content of 5500 kilocalories per
kilogram and higher ash levels grab a bigger share of Australia’s export
volumes.
“Glencore has unfortunately driven the Australian market
toward a much lower quality of product.”
Not surprisingly, Glencore strongly rejects the notion its
marketing team was the architect of the trend.
“Our coal operations in Australia produce a wide range of
coal types and qualities in response to customer and market demand,” said a
Glencore spokesman.
Australia is home to some of the highest energy content coal
in the world.
The energy content in each tonne of coal is important for
power generators because it has a direct relationship to the amount of
electricity that can be produced by burning the coal.
Wanting the best bang for their buck, power generators
generally pay more for coal with higher energy content and that dynamic puts a
premium on the best stuff from the NSW Hunter Valley, which has energy content
above 6000 kilocalories per kilogram.
While Indonesia has some coal with close to 6000
kilocalories per kilogram, it ships large volumes to Asia with energy content
about 4000 kilocalories per kilogram.
This natural advantage for Australian producers has taken on
greater significance over the past decade as local miners have pointed to
energy content when defending their role in a world threatened by climate
change.
Energy content is not the only game in town when it comes to
the relative environmental credentials of coal; as a general rule, the less ash
in a tonne of coal, the better.
While the political narrative frequently depicts Australian
thermal coal as having 6000 kilocalories per kilogram, that’s a bit like saying
all Australian cricketers can bat like Steve Smith.
Over the past decade, Australia has been shipping rising
volumes of coal with energy content of 5500 kilocalories per kilogram and high
ash levels, says Rory Simington, Wood Mackenzie’s Asia Pacific head of coal.
“The high-ash 5500 (net as received) trade has grown not because
of a strategy by Glencore or any other producer but because of increased demand
mainly from Asian countries, including China, that will take this sort of
coal,” he says, noting that BHP, New Hope, Yancoal and private company Mach
Energy have joined Glencore in servicing that demand.
“China’s imports of thermal coal, basically all comprising
high-ash 5500 type product, has doubled over the last 10 years to about 200
million tonnes. Australia’s share of that trade has increased by about 25Mtpa
to 40Mtpa over that period.”
China has not been the only nation driving demand for
intermediate quality coal; consumption in Vietnam and India has also surged
over the past five years, Mr Simington says.
Nor is Australia the only coal exporter that has responded
to the demand surge; Mr Simington says Indonesian exports of coal with high
energy content slumped from about 175 million tonnes per year a decade ago to
73 million tonnes in 2019.
“The decrease in quality from Australia is part of a global
trend in declining quality,” he says.
Yancoal chief executive and former Centennial Coal boss
David Moult does not believe there was any strategic error made by Australian
miners who ramped up supply of intermediate coal over the past decade.
“I don’t see it as an error, I think it was just the
industry responding to market forces and I think it will do the same in future
depending on whichever way the quality curve goes,” he says.
“Producing that (intermediate quality) type of coal tends to
be easier and cheaper and depending on the price you are getting for it, if it
makes sense it makes sense.″
Mr Moult says Australia is very lucky to be one of the few
nations with the flexibility to change the type of thermal coal it exports to
suit the market conditions.
He thinks that flexibility could be important in future.
“I can only see this as a positive for Australian suppliers
because our coal is inherently better quality than most countries and we have
that ability to produce to whatever the market is wanting,” says Mr Moult.
“Some countries like Indonesia don’t have the luxury to be
able to flex their quality.
“Over time there will be a move away from the higher ash and
lower quality coals.″
Glencore pointed to its recent investment in mines that
produce high quality coal, such as its 2017 acquisition of a stake in Yancoal’s
HVO mine, as a sign of its growing focus on quality.
Mr Tinkler says it is time for the Australian coal sector to
reset with an eye on value over volume.
Exports should at least be 5500 or above. We need to get it
back into the markets which value reducing their emissions, and also allow new
investment in the Australian coal fired power sector,” he says.
“No one in Australia is going to invest in new coal fired
power technology to be fed by 5000 or a 4500 (kilocalorie coal)
“To move forward you need a 6000 kilocalorie feed to lower
emissions significantly, but it very much seems we are going the other way in
the sector.”
BHP’s Mt Arthur mine arguably provides an insight to the
Australian coal sector’s future.
BHP made a prescient call in 2019 to recast its Mt Arthur
thermal coal mine away from its focus on Chinese customers to start producing
the higher energy content coal that is typically sought by customers in Japan
and South Korea.
If Mt Arthur is any guide, the future is smaller volumes of
higher quality coal that costs much more to produce because of the need for
extra coal washing.
BHP produced 18.1 million tonnes of coal at Mt Arthur in
2017 but is on track to produce closer to 15 million tonnes this year.
Unit costs at Mt Arthur have risen from $US41 per tonne to
$US65.98 per tonne over that period, although a higher Australian dollar is
part of the reason for that surge.
The recent performance of Mt Arthur, which lost money over
the past six months, suggests making the switch to higher quality on an
industrywide scale won’t be simple, Mr Simington says.
“Producers are trying to produce more higher grade coal but
it is not easy. BHP is a good example of this. They are trying to wash to a
higher grade but their low average sales price in the second half of last year
is an example of the fact that it is not easy to make a major shift in product
quality at many operations,” he says.
“Producers such as Glencore with many mines have more
flexibility to adapt by cutting production at their mines with lower quality
products, which they did do last year.″
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