The parallel easing of China’s COVID-zero policies and the end of the Chinese ban on Australian coal has reopened what was once Australia’s second largest market for thermal coal.

However, the upside of these developments for the Australian thermal coal sector is uncertain. Much has changed in the global coal trade since Australian suppliers were locked out of Chinese markets.

Energy security is now a prime variable in national planning, and supply chains have shifted to match the new geopolitical landscape. China’s domestic coal output reached a record high in 2022, suggesting a desire by authorities to increase energy self-sufficiency.

China’s choice of source of thermal coal imports has also changed to favour Russia, which sells its thermal coal at a discount due to ongoing sanctions. The upshot of these developments is that although Australian coal exports to China will resume, they will not reach the levels seen in the previous decade.

In the medium term, Japan and South Korea will remain the largest destinations for Australian thermal coal. South Korean coal imports reached a record high in 2022. Australia was the largest source of coal in South Korea, having a market share of 44% by value.

Australian coal producers benefited strongly from the disruption in the global energy supply chain in the wake of the Russian invasion of Ukraine. The record revenue from coal exports was offset by unprecedented wet weather as the La Niña weather event battered the Australian eastern seaboard for the third year in a row.

Heavy rains caused operations at some mines to be suspended and delayed the shipment of coal at coal terminals. This resulted in a decline in coal output from 2021 levels from 191Mt to 189Mt. Thermal coal export volumes were at their lowest since 2013.

Wet weather is expected to subside in 2023, which will see supply-side disruptions drop off. Coal miners’ profit margins will be boosted by declining production costs as weather becomes more favourable. However, prices are also expected to decline from record highs throughout 2023.

The March of ESG

Australia has committed to reaching net zero carbon emissions by 2050. The pledge has set the regulatory pace for a wind-down in domestic demand for coal. The government plans to ensure the decarbonisation of the economy by setting a mandate for major carbon emitters to reduce emissions below a baseline level.

Coal mines are expected to be affected by this legislation. Coal mining costs may increase through the adoption of emission reduction strategies or the purchasing of carbon credits.

The outlook for greenfield thermal coal mine developments in Australia is not favourable. Federal and state governments, local regulations, and public sentiment have made the process of obtaining approval for new coal mines expensive and risky.

Additional capacity in the coal sector is likely to come mainly from expansions of existing mines, such as the recently approved expansion of the New Acland coal mine.

However, the potential upside provided by mine expansions is still subject to a favourable regulatory environment. The recent refusal of an extension to the operating life of Glencore’s Glendell mine by 20 years to 2044 is a sign of the headwinds in the coal sector.

The biggest single contributor to growth in coal export output in the medium to long term will be the Carmichael coal mine, which is expected to complete its production ramp-up in 2025.

Domestic Quotas

The bumper year for Australian coal exporters has led to soaring power prices domestically.

Australia currently sources around 50% of its electricity from coal-fired power station. Coal-dependence increases to 70-75% in the coal mining hubs of New South Wales (NSW) and Queensland.

The high consumer electricity prices have prompted the government to impose a coal price cap of A$125/t. The NSW Government also intends to introduce a requirement for coal mines to reserve between 7 and 10% of thermal coal produced for the domestic market.

Major Producers

Australia’s Whitehaven Coal (WHC) has lowered its raw coal production guidance from a range of 20-22Mt to 19- 20.4Mt for 2023 fiscal year, as La Niña has curbed output from its open cut operations. WHC’s flagship Maules Creek coal mine is now expected to produce 10.3-11Mt, down from an existing guidance of 11.7-12.6Mt.

Australian New Hope Corporation (NHC) has scheduled the restart of New Acland thermal coal mine by the end of FY2023, after acquiring a water licence in October. NHC aims to produce 2.5Mt of saleable coal in FY2024 and expand output to 5Mtpa through FY2027. Initially, the project was expected to boost New Acland's production from 4.8Mtpa to 7.8Mtpa and extend the mine's life for 12 years to 2034. New Acland has been on care and maintenance since November 2021 due to exhaustion of coal reserves in the existing mining area.

Yancoal, the majority owner of Moolarben, the largest source of Australian export thermal coal, reported production disruptions caused by wet weather throughout 2022. Production issues during 2022 are expected to see costs increase from A$66/t in 2021 to an estimated A$84-89/t in 2022. The miner has obtained permission to discharge excess water from its storage facilities as it seeks to optimise operations for 2023.

Glencore, the operator of the coal mines across NSW and Queensland, is facing renewed pressure from major institutional investors to reduce its reliance on coal. The diversified miner was presented with a proposal to disclose how its projected thermal coal production aligns with the goals of the Paris agreement. The motion, which was sponsored by major investment houses such as HSBC, will head to a vote at the company’s general meeting in May.