July 8, 2020
Compared to many industries hard-hit by the COVID-19 pandemic, mining is doing reasonably well and that includes coal mining. But there are some ominous clouds – both short-term due to pandemic-induced falls in demand, and longer-term due to business and investors shifting from fossil fuels.
The whole world is in a recession due to shut-downs and lockdowns responding to the pandemic, and that includes Australia. Worst hit are entertainment, hospitality and tourism, and that flows through to other industries like construction and retail. In relative terms, the Australian economy is suffering less than others but the costs in terms of lost jobs and incomes is high.
Mining has been relatively unscathed – able to continue operating during the lockdowns. Iron ore is booming due, not so much to demand, but because major competitor Brazil has many mines shut down due to tailings dam safety issues. Gold is also doing well, as it usually does in uncertain times.
But coal and many other minerals have suffered price cuts as demand drops due to industries shutting down or restricting production – in other countries where most of our products go. But – so far – coal production volumes have been holding up while prices fall.
The Australian Government’s Office of the Chief Economist (OCE) in the Department of Industry has released forecasts in late June that attempt to take into account the pandemic. For the 2020-21 financial year the OCE has forecast a small 3 million tonne decline in thermal coal exports to 210mt. Similar for coking coal – a 2mt decline to 180mt in 2020-21.
But the falls in export earnings are much greater – from $20 billion down to $16b for thermal coal (and that is after a decline from $26b in 2018-19) while over the same 2 years coking coal export earnings decline from $44b to $26b, before a modest recover in 2021-22.
Right now spot prices for Newcastle thermal coal are grinding along the bottom at under US$50 per tonnes, and coking coal is in the low US$100s per tonne. At these prices, some mines are cash negative – the coal sale price does not cover cash operating costs.
So far only a handful of mines have retrenched mineworkers, and other countries have cut production (and jobs) more. But if recovery from the pandemic is slow, or there is a large second wave of infections, then the situation for coal production and jobs will be grimmer.
Looking further forward, there are more concerns. In the medium term, China is determined to protect prices and production in its domestic coal industry and appears to discriminating against Australian coal in particular because of our relationship with the USA and our concerns about Chinese interference in our affairs.
Longer-term, the NSW Government in its recently-released coal strategy has forecast falling demand for thermal coal through to 2050. Only a modest decline, but a decline nevertheless. No more forecasts of ever-increasing demand.
Large mining companies like BHP and Rio Tinto (and even some oil and gas companies!) are committing to achieve net zero greenhouse gas emissions by 2050, and BHP has recently announced a sale process for its last remaining thermal coal mines (Mt Arthur in NSW and Cerrejon in Colombia). While Rio Tinto has sold all of its coal assets, others like BHP, South32 and Anglo American are remaining in coking coal.
And while coking coal for steelmaking cannot be replaced easily, there is considerable effort being put into hydrogen production technologies to reduce the price to the point where hydrogen can replace coal in the steelmaking process.
Coal will be around for decades to come but the question in the next five years is whether it will be a growing or declining industry. There are powerful economic, technological and investment forces lining up against all fossil fuels.
National Research Director