It is hard to know how much more pain the coal industry can take after a prolonged winter of depressed prices.
Anglo’s Australian business could look very different on Wednesday morning. It could shrink its local presence in coal to a couple of mines.
When Anglo chief executive Mark Cutifani announces its full year earnings on Tuesday, investors will be watching to see that the mining giant is executing its radical overhaul with a sense of urgency. The miner will outline the details of its asset sale plan: how it plans to cull assets from 55 to 20. It is expected to take more write-downs, and to post a 55 to 60 per cent fall in underlying earnings.
Anglo has a $US4 billion ($5.6 billion) target on asset sales by next year – at least half of which is already locked in – but pressure is mounting to hit the target. While it is trying to offload its higher-cost, lower quality assets first, it is likely have to go further and put some of its higher value assets up for sale too.
That might mean trying to sell some of the metallurgical coal assets in Australia it has been keen to hang on to. Or mothballing the Australian assets it can’t sell.
Anglo already had four coal assets for sale in Australia, as part of its attempt to exit thermal coal. It has struck a deal to offload one to Nathan Tinkler’s new outfit Australian Pacific Coal.
But the market is flooded with sellers, from Anglo and Brazilian miner Vale to Rio Tinto and American group Peabody – and the past six months have yielded very few sales. Rio has managed to get some mines off its books, but its thermal coal assets are the best on the block.
Take-or-pay contracts have kept some operators in a vice, leaving them with little choice but to keep unprofitable mines in operation. The contracts lock miners into a fixed cost for rail haulage, regardless of whether they actually ship the coal or not – and at current prices, plenty would rather not.
Hope in half-year numbers
But half-year numbers from rail operator Aurizon offer some hope. Of its customers, just 26 per cent are cash-neutral or -negative (that is, losing money) at current spot prices, and an Australian dollar at US70¢.
And cash costs, one element of total export costs, have come down at roughly the same rate as the spiralling price in the past 12 months.
Thermal coal has fallen about 20 per cent in the past 12 months to languish around $US53 a tonne, a fraction of the roughly $US150 it was fetching in the heady days of 2011. Metallurgical coal has crashed about 32 per cent in the past year to about $US73 a tonne, nowhere near the $US300 a tonne it was trading at four years ago.
According to Wood Mackenzie data cited by Aurizon, cash costs at metallurgical mines are down 27 per cent and down 24 per cent at thermal mines.
But a price recovery in coal looks like it is least a few years off. And the question for many is whether it is an industry in structural decline, or a cyclical one.
Production cuts by majors like Glencore don’t seem to be helping the price, and as Whitehaven Coal chief executive Paul Flynn has put it, they will probably fail to support depressed prices because much of the output being curbed is unprofitable.
A few months ago, Rio’s coal boss Jean-Sebastien Jacques said thermal coal prices were likely to stay depressed for five to seven years. Other industry players expected the market would bottom well before that.
On unveiling its radical restructure in December, Anglo did not say if its Australian coal operations would be sold or shut down but indicated they would be part of the review completed. It is cutting or shifting about 85,000 employees around the world, as it looks to offload 60 per cent of its mining assets.
The heat is on Anglo to prove it can – and is – running fast enough to restructure as the industry braces for a shocking two years. And that may well mean parting with some of its finer china.