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ANALYSIS: Australia's Coal Mining Future

Its likely that the classic adage of “all good things must end” has crossed the minds of a significant number of miners, businesses and inve...

|Apr 28|magazine12 min read

It’s likely that the classic adage of “all good things must end” has crossed the minds of a significant number of miners, businesses and investors throughout the Australian coal mining industry. It’s simple to see how so many might have adopted this negative perspective. Australia is coming off of its largest mining boom dating back to the gold rush that exploded in the 1850’s. While Australia was feeling financially flush, enjoying the benefits of $400 billion in investments over the last ten years of this immense mining boom, the recent, steady decline in investing has been creating some severe withdrawal symptoms. So then, this tapering off of investments begs the question: Is Australia’s coal mining future darker than its product, or is there light at the end of the tunnel?

Drop in Financing Darkens Coal Mining Outlook

Low commodity prices, rising production costs and labour disputes have been doing significant damage on their own, hindering the financial success of Australia’s mining industry. Among the most significant factors that have contributed to this darkening outlook has been declining financing for miners. Financing has dropped by 56 percent in the second quarter of the 2013 fiscal year. A year ago, financing for miners amounted to $6.12 billion. This casts a large shadow over the diminutive $2.28 billion that financers put forth in Q2 2013.

Poor Market Conditions Blacken Coal Mining Picture

Australia’s elected officials aren’t letting poor market conditions affect their position on royalties. West Australian Premier Colin Barnett made it clear that the state is not planning on executing any aggressive measures to provide relief from price-related misery, such as adjusting royalties within the mining industry. “At the end of the day the state government owns the minerals and companies pay the equivalent of 10 percent of the value of the mineral. I think that’s a pretty good price,” said Barnett.

Job Losses Dig Coal Mining Woes Deeper

Australia’s coal industry is currently accountable for approximately 55,000 employees, directly, and 100,000, indirectly. Recent job loss polling demonstrated depressing numbers, showing that approximately 11,000 people throughout the coal-mining sector have lost their jobs; this number could still increase.

Peabody Energy (NYSE:BTU) only served to sadden the news by recently cutting an additional 170 employees from its Australian operations; 5.7 percent of its total workforce in Australia. This followed in the wake of Peabody Energy severing itself from 450 contractor jobs, as reported during the second quarter of 2013. 

Rejuvenating Growth in Coal Mining Sector

There’s significant potential for positive change in the coal mining industry within the federal elections to be conducted on September 7. The outcome of this election will undoubtedly have a profound effect on the short and long-term health of the coal mining industry, as well as the Australian economy as a whole. There will be an additional degree of responsibility adopted by the winner of the election, as they’ll be tasked not just with remedying an ailing coal-mining sector, but the increased difficulty of handling the transition from such an immense boom to a sharp decline. However, with this great responsibility comes some substantial potential to revitalise the coal-mining sector.

In addition, albeit a less desirable form of relief, Australian coal miners might also be granted some relief through a weak Australian dollar, recently reaching its lowest in three years.

Coal Mining Sector Could Receive Vital Boost from Local Power Utility Demands

In order to capitalise on the efforts, capabilities and stalwart mentality of individual miners, mining companies must also look to create, build and develop key affinity relationships locally. We can see a prime example of this in Peabody Energy’s approach. Despite their significant employee cuts and contractor job cuts, they still managed to succeed in turning a profit in the second quarter of 2013 by working more closely with local power utilities, optimising their operations by efficiently taking advantage of increased local demand.

Patience and Perseverance May Weather Cyclical Nature of Coal Mining Sector

It might also be possible to see light at the end of the tunnel when one considers the general nature of the mining industry as a whole. While Barnett acknowledged, “this is a tough time and some of the high-cost producers struggle,” he also reminded his audience that mining is a “cyclical industry.” This suggests that the current downturn in the coal-mining sector is only natural, and that this too shall pass, eventually leading to an increase in confidence, financing, employment and contractor jobs.

And the potential for another boom is demonstrated throughout the individual miners who refuse to relinquish hope. Raymond Burnham is a very unique, prime example of this refusal. This Australian miner actually presented the proposal to reward anyone who helps secure him a mining job with a bottle of rum each week for six months!

Here’s to Australia’s coal mining sector’s resurgence!