Australian coal industry at crossroads One of the hardest-hit parts of the mining industry in the recent downturn in commodity prices is the Australian coal industry. That has come as a bit of a shock to some - Australia is not used to being a high-cost producer of anything. Better get used to it. The structure of the coal market is shifting, and the current pain is a sign that Australia's pre-eminent position in the global coal market - as the second-largest exporter of thermal coal and largest supplier of coking coal - is under threat. "Australia shouldn't see itself as entitled to a certain share of seaborne coal market," says one senior mining executive. The industry is going to have a tough time. The immediate cause of the pain is clear: thermal coal prices have fallen below $80 a tonne for the first time in three years and hard coking coal prices for the fourth quarter are settling at a 2½-year low of $170 a tonne. The punishing conditions in the market have been reflected in the industry's recent earnings. Mitsubishi, Japan's largest trading house, which in a joint venture with BHP Billiton, is the world's top coking coal miner, recently slashed its outlook for mining earnings for the fiscal year ending in March by 80 per cent or Y150bn ($1.9bn). Yancoal, the Australian subsidiary of Yanzhou Coal of China, this week announced an underlying loss of $53.1m for the third quarter. Miners have responded by shutting mines and cancelling projects. Rio Tinto and BHP Billiton this year announced the closure of mines including Blair Athol, Norwich Park and Gregory. Xstrata's coal division is cutting 600 jobs in Australia as part of a restructuring programme "in response to industry-wide pressures." The industry pain has had an even more dramatic effect on new projects. Peabody has deferred its Codrilla and Wambo projects, while BHP has put off its Peak Downs. Wood Mackenzie estimates that 85 per cent of Australian thermal coal projects are unviable at current spot prices. "There is little incentive to dig for coal at current prices," says Gero Farruggio, the consultancy's supply analyst. Is this just a cyclical downturn, the like of which the mining industry has seen many times before? There is good cause to think not. While some of the fall in demand, particularly for coking coal, is cyclical, there have been several structural changes in the Australian coal industry that have made it less competitive. First, the balance of the global coal market has been altered by the US shale gas revolution. As a result of a shift in power consumption from coal to gas, US coal exports are likely to hit a record high of 125m short tons this year, according to the US Department of Energy. The surge in exports is pushing prices down - particularly for thermal coal but also for low-grade coking coal (such as semi-soft and pulverised coal injection), which, to some extent, is substitutable with thermal coal. Second, the fortunes of the Australian dollar, which usually moves in line with commodity prices, have changed. Australia's status as one of the few triple A sovereigns left standing has attracted haven flows to its currency, lifting the Aussie dollar even as mineral prices fall. This appears to be a structural rather than a cyclical shift. A stronger currency lifts costs for miners relative to their US dollar-priced revenues. In Aussie dollar terms Newcastle thermal coal prices recently fell below their 2008-09 lows and are at their weakest in more than five years. Third, costs may not follow lower coal prices. Many of Australia's contractors, engineers and equipment manufacturers will continue to be employed by the country's liquefied natural gas projects, which are unlikely to be deferred or cancelled. This could keep capital costs high even as mined commodity markets soften. Fourth, Australian taxes are rising. The new carbon tax is lifting costs for coal miners. At the same time Queensland, a major mining state, is raising royalties on coal mining. As Gregory Boyce, chief executive of Peabody, said in a speech to the Melbourne Mining Club last week, the Australian coal industry is "at a crossroads."