GVK, Adani Believe Hope Remains For Australian Coal

GVK, Adani Believe Hope Remains for Australian Coal

Trouble is brewing in Australia's coal sector. 

Midway through May, The Wall Street Journal reported that mining giant Glencore Xstrata (LSE: GLEN) would immediately be shelving its plans for a new coal export terminal in Queensland due to concerns about the medium-term outlook for Australia's coal industry, poor market conditions and excess port capacity in the area.

The next week, the publication revealed more news regarding Glencore Xstrata. This time, the company, along with Yancoal Australia (ASX:YAL), was said to be auctioning off port assets worth "tens of millions of dollars" that were hot assets only a year and a half ago. Specifically, Glencore Xstrata voiced the expectation that 5 million metric tons (MT) of its annual port capacity of 10.9 million MT "may not be required in the near term."

Only a week later, thermal coal miner New Hope Coal decided to cut production at its Jeebropilly mine, reducing its operating schedule from six days a week to five days a week. Like the other miners, it cited "difficult market conditions" as the impetus for its decision, The Australian reported.

Most recently, Yancoal has warned that "difficult" conditions in the global coal market will continue, stating at its annual meeting that lackluster demand and low coal export prices are forcing it — and all other coal miners — to cut costs, according to The Sydney Morning Herald.

Together, these events suggest that Australia's coal sector will be stuck in a downward spiral for the foreseeable future — but is that really the case?

Oversupply and lack of demand are key issues

While RenewEconomy's Giles Parkinson notes in a recent article that Dr. Nikki Williams, CEO of the Australian Coal Association, believes that "environmental extremists" are to blame for the nation's coal problems, in truth the issue is more complex; in order to understand the trouble that is plaguing Australian coal miners, it is important to consider the supply and demand issues surrounding the sector.