Higher Costs May Narrow Margins for Australian Thermal Coal Miners

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Australian thermal coal miners may face tough times ahead as higher costs and weakening thermal coal prices threaten to narrow their margins.

As the world moves towards more sustainable energy sources, demand for thermal coal has declined, leading to lower prices and forcing miners to look at ways to cut costs while maintaining strong operating cash flows.

Energy production costs have been increasing in recent years due to rising fuel costs, increased labour expenses, and the need for greater safety measures in the workplace. These all contribute to the rising costs associated with thermal coal mining.

With thermal coal prices falling due to decreasing demand, these higher costs could further squeeze profit margins for miners.

Australian grade thermal coal prices started declining after reaching record highs in 2022, thanks to the softening of seaborne demand, easing production disruptions, and declining international gas prices. This has resulted in miners being forced to reduce their output or increase their operating costs even further to remain competitive.

According to Fitch Ratings, “The Australian 5,500kcal/kg thermal coal price fell to USD118 per tonne (t) as of 28 February 2023, from the USD350/t peak in March 2022. At the same time, FOB unit costs (excluding royalties) have increased significantly due to lower production yields and higher costs associated with consumables, logistics, energy inputs, and labour.”

Australian thermal coal miners experienced a surge in operating cash flows in 2022, as average realised prices more than doubled compared to 2021. This resulted in miners having greater financial flexibility to reduce their debts and make returns to shareholders.

The higher cash flow allowed miners to invest more in safety measures and technological advances to operate in challenging conditions. This is particularly important given that mining is traditionally an industry with high risk.

Overall, Australian thermal coal miners had a good run in 2022 thanks to higher realised prices and increased demand from Asia-Pacific countries. While margins may be threatened due to rising costs in the future, the strong cash flow generated last year has allowed them the financial flexibility needed for future growth.

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