Metallurgical coal still extremely profitable but rising costs should not be ignored

CRU reports that recent financial statements of global mining companies demonstrate that metallurgical coal remains an extremely profitable commodity. During the last two years, we estimate that the seaborne industry has generated an average cash-margin of 40% and ~$44 billion in cash and, at currently profitability remains very strong. CRU, however, notes recent cost inflation in the industry and why this should not be overlooked.

“In CRU’s Metallurgical Coal Cost Report 2017, we highlighted the fact that industry costs had increased strongly since the start of 2016 and cost inflation has continued in 2018. After spending fell to ‘bare minimum’ levels during the downturn, companies have made rational choices to loosen this approach; marginal revenues remain very high. Therefore, it is logical for mining companies to produce as much as possible even if this means increasing marginal costs in the short-term. As a result, we estimate that global business costs increased by 18% y/y in 2017 as a whole. In 2018, there have been both upward and downward cost drivers, but we estimate that underlying costs continue to increase overall.

Underlying cost trends are particularly difficult to determine in Australia because weather disruption was severe in 2017 and, in 2018, low train availability has caused companies to incur greater costs. Supply chain disruption has resulted in most companies paying more in demurrage penalties and many sites are having to truck coal to satellite stockpile areas as primary yards are full. Financial results for the period 2018 H1 show that unit costs are fairly similar to those in 2017 H1. However, it is important to remember that Cyclone Debbie caused a sharp rise in costs in 2017 Q2 last year. Therefore, costs in Australia may not be significantly higher y/y, but they remain elevated nonetheless.

Elsewhere, companies are continuing to attempt to lift sales volumes and, at most mines, marginal costs are increasing towards marginal revenues in order to maximise profits. For example, Teck has increased the use of contractors and rented more mining equipment in an attempt to sell more in the short-term and this has lifted marginal costs and contributed to a 7.5% y/y rise in ex-works costs.