June 3, 2020
On 3 June Australia it was reported that the Australian economy shrank 0.3% in the three months to the end of March. Given that most of the impact of the COVID-19 shutdowns happened after that, it is certain that the economy will shrink far more in the three months to the end of June. The Reserve Bank has predicted the economy will shrink by a huge 8% in the 2019-20 year. That’s a strong recession.
Official unemployment for April was still relatively low at 6.2% and 820,000 people, but this hides the reality that 500,000 people gave up looking for work, and a further 750,000 were employed but did not work an hour (many of those on JobKeeper government support payments). So the real unemployment rate is more like 2 million and 15%. Truly awful.
But the broader story of the Australian economy is not the same as mining. While various sectors of the economy were almost entirely shut down for most of April and May, the mining industry continued in full production. While most parts of the economy are strongly linked to domestic demand (so, for example, the construction industry was never shut down, but is now declining due to higher unemployment and increased economic insecurity) the mining industry basically operates in response to the international economy.
The iron ore industry has continued particularly strongly because Brazil, Australia’s major competitor, still has a lot of production shut down due to tailing dam safety issues. Other minerals are taking a hit on prices due to falling overseas demand, but it varies.
Coal prices had been drifting down since about April last year, but suddenly dropped 15-20% this April. For thermal coal, spot prices in the US$60s per tonne suddenly dropped to low US$50s /tonne. Coking coal dropped from US$130s/tonne to not much over US$100 per tonne.
Steel industries in some countries did shut down during the first stage of the pandemic. Power stations didn’t shut, but power demand from industry fell. As of late May/ early June, the steel and power industries of major Australian coal markets like Japan, Korea, Taiwan and China are recovering. And other coal producing countries like Colombia and South Africa closed their coal mines wholly or partly, leaving more market share for Australia.
The result for Australian coal to date is that the vast majority of production and employment has continued. But current low prices mean some producers will be cash-negative, and no company will be making much profit.
There have been some job cuts – with Peabody mines Coppabella, Wambo and Metropolitan being prominent. These mines have not closed but are reducing operations. Peabody is a US company that, like all US coal companies, is having a very difficult time in its home country and that may influence their willingness to cut jobs here.
Predicting when there will be strong recovery from the current situation is extremely difficult. On top of the highly unusual situation of dealing with a global government-induced recession due to the pandemic shutdowns, we now have major civil unrest in the world’s largest economy, the USA. The US$ is now falling against many currencies, including the Australian dollar, due to fears of economic collapse. Among many impacts, this means coal sales in US$ to Asian markets convert into less Australian dollars, shrinking the revenues of coal companies.
The governments of Australia are now gradually re-opening the various sectors they shut down in April and May. But no one thinks there will be a rapid bounce-back to the pre-pandemic period (which was rather weak already).
Some argue that Australia may be perceived as a “safe haven” due to its relative success in suppressing COVID-19, and that this may produce an economic benefit. Any possible benefit will be reduced by the continuing ban on almost all international travel well into 2021. As well as stopping dead the major international tourism industry, this will dampen international trade and investment.
The US economy was already crashing due to President Trump’s bungling of the pandemic response there that has caused well over 100,000 deaths (and still rising). And that was before the civil unrest over the police killing of black American George Floyd. Compounded by the likelihood of a second wave of infections and deaths there, the US recession will be incredibly bad. And that will affect the whole world as the US is a very large part of world trade.
So far the Australian mining industry including coal has suffered only mildly from the pandemic (especially in comparison to many other major industries). But the international trade scenarios are more uncertain than ever – in scale as well as direction. The US situation increases the downside risks substantially.
On a brighter note…
The financial year 2018-19 may seem like a century ago, but the Australian Bureau of Statistics released industry performance data on 29 May. It showed the mining industry had a very healthy profit rate of 33%, while coal mining did even better at 39%. Industry value-added (income minus operating costs) was a whopping $1,164,100 per person employed, just beating metal ore mining on $1,128,600 per person. It seems strange that, with all the automation that has occurred in iron ore mining (which dominates metal ore mining) that value added per worker was higher in coal!
National Research Director