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Top 10 reasons why the coal sector is in trouble

What:

Australia’s $60 billion coal industry is facing serious headwinds. As reported in today’s The Australian Financial Review, the short term outlook is extremely bleak despite nearly 12,000 jobs being cut from the sector over the last two years.

So What:

This will have varying impacts on companies such as Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Whitehaven Coal Limited (ASX: WHC).

The problems plaguing the sector include:

  1. High costs
  2. Lack of financing alternatives from nervous lenders
  3. Some mines continuing to produce at a loss

(Newly released figures from the Queensland Resources Council reveal a quarter of the state’s coal output is produced at a loss. Similar conditions prevail in NSW).

  1. Strong Aussie dollar
  2. High taxes
  3. Oversupply
  4. Prices declining – see below
  5. Big low-cost producers not cutting back on production, in an attempt to lower unit costs
  6. More job losses and mine closures in prospect
  7. For the longer term, environmental activists are hindering future expansions and growth prospects

Now What:

The remedy for the majority of the above ailments for the sector would be a reversal in the sliding price of coal. From mid-2011, the coking coal price has plummeted from $US330 per tonne to $US120 per tonne, while thermal coal has fallen from $US125 per tonne to $US74 per tonne. Both Rio Tinto and BHP remain confident of the long-term outlook as they are among the lowest-cost producers.

If the larger producers are intent on maintaining production, investors may consider an infrastructure play such as Aurizon Holdings Ltd (ASX: AZJ), that will continue to benefit from transporting coal via its rail network.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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