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Port Nicola and Kylie Pickering Greg Byrne, Downing; Ian Reed, QNP Morgan Toyne and Toni Paterson. (L-R) Burdekin MP and LNP candidate for the seat of McMaster Dale Last with Middlemount Race Club Committee President Donald Black and winning trainer Tim Cook. Construction (L-R) Tony, Jackie, Daly, Layla and Ruby Smith. Aboutusgeneric_2 The Paul McGuire Memorial Dachshund Race raised over $4000 for the RACQ Capricorn Rescue Helicopter Service. Emily Files mining Aboutusgeneric_1 Best Dressed Gent winner Robin Sellar. dragline Jo-Anne Burke, DB Scaffolding; Susan McGuire, Mayogroup
Port Nicola and Kylie Pickering Greg Byrne, Downing; Ian Reed, QNP Morgan Toyne and Toni Paterson. (L-R) Burdekin MP and LNP candidate for the seat of McMaster Dale Last with Middlemount Race Club Committee President Donald Black and winning trainer Tim Cook. Construction (L-R) Tony, Jackie, Daly, Layla and Ruby Smith. Aboutusgeneric_2 The Paul McGuire Memorial Dachshund Race raised over $4000 for the RACQ Capricorn Rescue Helicopter Service. Emily Files mining Aboutusgeneric_1 Best Dressed Gent winner Robin Sellar.

Peak production behind us?
SUPPLY slowly reacting to poor prices despite take-or-pay contracts.
Wednesday 10 September 2014  

FIGURES released this week by the Queensland Mines Department covering the period up until the end of May, have painted an interesting picture of coal production across the state.

On the face of it, the Monthly Coal Report  indicates coal production in the first half of 2014 appeared to be defying the economic wisdom that as prices fall, so will supply.

The figures show that during the twelve months ending in May this year, total raw coal production was 46 percent higher than it was in the 12 months to May in 2013. Saleable coal production was nearly 11 per cent higher.

However, closer inspection of the figures reveal that total coal production in the Bowen Basin looks to be passed its peak, with onsite cutbacks in late 2013 and early 2014 translating into significant falls in production for the month of May.

Total production of raw coal in May this year was around eight million tonnes less than it was in the same month 12 months ago, reflecting a near 30 per cent reduction.

However, the fall in the production of saleable coal was far more modest with production falling just two million tonnes to 16.5 million tonnes in May this year.

In the absence of adverse weather events, one possible theory that could explain this is that companies are focussing efforts on high-value, low-cost coals and sending them direct to market to eke out a profit in this difficult period.

The theory that the low prices in the coal market right now are borne out of an oversupply rather than significant falling demand is also supported in the figures.

In the hard coking coal sector, exports to our biggest customers in Asia for the 12 months to May increased from 65 million tonnes to 84 million tonnes, although the value of those exports only increased from $10.5 billion to $12.2 billion, reflecting the falling coal price.

However, looking at the month of May on its own, exports were virtually unchanged year-on-year and the total value of those exports actually fell due to the falling coal prices.

In thermal coal, the supply response has been much larger, with May export tonnages to Asia down by nearly a third with a 40 per cent drop in value.

Although, again, over the twelve months ending in May, exports of coal were slightly higher.

Compared to previous downturns in the sector, a wind-back in production has taken longer to take effect this time around largely because miners are bound by expensive take-or-pay port and rail contracts.

According to general manager of mine operations for QCoal Danny McCarthy, the contracts are distorting how businesses react to falling prices.

“We are seeing record volumes, and a lot of that is due to the fact that producers such as ourselves have got take-or-pay contracts, and in some ways it is cheaper for us to continue to produce at a loss than it would be to stop producing,” he said.

“Some take-or-pay contracts that have been committed to during the boom or on the back of boom time large coal prices are up to 10 years in duration.

“There are certain triggers along the way no matter whether you are producing zero tonnes of coal or one tonne of coal, you are still committed to four or five million tonnes - depending on what your take-or-pay commitments are.

“If, for example, you multiply eight million tonnes by a large number, you get a very large number and if there were no take-or-pay commitments you would probably see some different scenarios playing out.”


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