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Mining services update

August 2013

Please find below updates and alerts on issues that may be of interest, trends in the market and our insights. If you would like to receive further information on the topics below or the industry generally, please feel free to contact one of our team listed below.

You could understandably hold the view that coal mining is a sector to avoid or exit. We know prices came off fast last year and have continued to drop in 2013. We also know the level of investment and capital expenditure is retreating from the lofty highs of the 2000s. But do you know what is happening with volumes?

The reality is that the coal sector is in transition, moving from a growth phase to one of consolidation and improving returns. Demand for coal is expected to increase over the next few years, albeit at the current depressed prices in a climate of subdued global demand. This view is held by the Australian Government’s Bureau of Resources and Energy Economics (“BREE”) who publish the Resources and Energy Quarterly. In the June 2013 publication they estimate 190 million tonnes of thermal coal will be exported in 2013-14, up from 182 million tonnes in 2012-13. They forecast export values to increase to total $17.5 billion due to the increased volumes with the lower prices being offset by an assumed declining AUD/USD exchange rate. Their chart reflecting this outlook is shown below.

For metallurgical coal BREE records exports of 150 million tonnes in 2012-13, forecast to increase by 7% in 2013-14 to 160 million tonnes. Export values declined in 2012-13 due to the lower prices, however they predict an 8% increase in 2013-14. Their chart reflecting this outlook is shown below.

In further considering this we looked at the volume of throughput for some of the major shipping ports on the eastern seaboard. Data was not available for all of them, however the sample of four shown below represents a fair proportion of total exports. We have included data from the beginning of 2012, using a start point before the dramatic decline in commodity prices. What we found is that demand has remained robust across the four ports despite the drop in confidence in the mining sector. If anything, volumes have been trending upwards slightly which would be consistent with the miners continuing to ramp-up delivery to port as the development stage of the mines matures to extraction.

Abbot Point

Abbot Point, located north of Bowen, Queensland is the most northerly deep water coal port of Australia. The current export capacity is 50 million tonnes per annum (“MTPA”) with a proposed 35 Mtpa expansion of the existing terminal.

Port of Hay Point (including Hay Point coal terminal and Dalrymple Bay coal terminal)

The Port of Hay Point is one of the largest coal export ports in the world. It comprises two coal export terminals, Hay Point Coal Terminal and Dalrymple Bay Coal Terminal, located just south of Mackay. Dalrymple Bay Coal Terminal has a throughput capacity of about 44 million tonnes per annum. Hay Point Coal Terminal has a throughput capacity of over 30 mtpa. A mooted expansion involves two new coal terminals in the port, with an estimated capacity of up to 180 Mtpa.

Port of Newcastle

The Port of Newcastle is the main port for the resource rich Hunter Valley and much of the north and northwest of NSW. It is Australia's oldest and one of the largest tonnage throughput ports, with coal exports representing more than 90% of total throughput tonnage. Its current capacity is 145 million tonnes per annum.

There are other observations and factors that support this view, such as those below:

  • Take or pay commitments
  • Increasing global population/li>
  • Miners increasing production to address declining margins
  • New mines commencing production
  • Increasing demand for thermal coal from India
  • Increasing focus on reducing emissions which should favour Australian coal over Indonesian supply
  • The supply capacity of LNG will be limited in the short term and some customers e.g. China will require several years to increase their receiving capability for LNG
  • Some customers e.g. Japan will alternate between LNG and thermal coal as the price of LNG react to market forces.

Outlook for contractors and service providers

Irrespective of the reasons, the key point is that the volumes and activity levels are remaining at similar levels or higher. We think this means there should be opportunities for contractors and service providers. However we have the view that they need to have a certain look to them:

  • Being of sufficient scale to provide a breadth of multiple services – the miners intend to reduce the number of suppliers they deal with
  • They must be cost competitive – Miners are aligning with counter parties that can assist them maintain margins and are willing to operate on a share of gain and pain basis. Larger contractors are not immune from this cost purge
  • Quality of service and management must be maintained – It appears that some of the contractors that have suffered terminations were on the lower end of the spectrum for quality of service. Following some of the redundancies effected by the miners there will be more and better talent available for recruitment.

Author

Nick Harwood
Tel: +61 7 3308 7136
 

 

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