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Coal companies face a tighter future

CNBC, the US financial news service, released a story about Chinese coal consumption and how importing may be affected by shifts to greener, cleaner energy sources. With world coal prices already slumping, this has a great effect on Australian coal producers.

This month, August futures for thermal coal were at $78 a tonne, down 17% this year. It hit a high of $139 a tonne in January 2011.

China, which uses about 47% of the world’s coal production, became a net importer of thermal coal in 2009, spawning a great rush amongst Australian coal miners to ramp up production. China has set targets to reduce its coal usage by 40%-45% by 2020.

If China is successful in that goal, then at current production levels, 20% of the world’s coal supply will have to find a new home, and that may just be India. India is going through the same growth and urbanisation similar to China, albeit at a slower pace. India has iron as a natural resource, but not so much coal, so continuing its modernisation will require more imports.

There was the scenario being considered that had China and India competing for both iron and coal, but if their economic growth is not in sync, it may be that one country picks up the slack when the other slows down. This has been evidenced in recent years with Indian mining companies buying coal mines in Queensland and NSW. They want to secure production, and not just buy the coal on the open market.

Australian coal producer New Hope Corporation (ASX: NHC) previously increased production to over 6 million tonnes in 2012, but with lower spot prices, it is struggling to reduce costs by production slowdowns. It may not want to cut the workforce, but many other producers have.

Up to about 10,000 coal mining jobs have been shed in the past year to control costs.

Whitehaven Coal (ASX: WHC) increased its production by 53% pcp in the June quarter, yet it, too, is reviewing operations to see where costs can be cut.

The falling Aussie dollar would regularly help exporters by making their products comparatively cheaper, but many mineral producers use US$ for pricing, so there may not be any relief there for them.

Foolish takeaway

China is trying to shift away from heavy industry to more of a consumer economy, but with 25% of the 1.3 billion population moving to urban areas over the next 20 years, there will be need for greater energy consumption. Its mix of nuclear, coal and natural gas will tell the tale for Australian energy producers.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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