26-02-2018

Impact of Aurizon rail cut on Australia’s coking coal exports remains unclear

While the overall impact of rail operator Aurizon’s plan to lower coal throughput guidance on its key Central Queensland Coal Network by 20 million mt/year remained unclear Friday, some miners said they had already received notice of reduced contract railings for prompt deliveries.

Earlier in February, the Queensland Competition Authority in a draft maintenance and operating plan capped the rail network’s allowable revenue for the next four years at A$3.9 billion ($3.1 billion), A$1 billion less than the company had projected.

In response, Aurizon announced on February 12 it would lower throughput guidance on its Central Queensland Coal Network by 20 million mt/year in fiscal 2017-18 to 210 million-220 million mt, from 215 million mt-225 million announced earlier.

It said the authority’s draft plan would mean it would have to prioritize lowest-cost maintenance over flexibility, with no trains passing during work schedules.

Some miner sources said they had already seen an immediate effect on their contract railings.

One miner source said he had been told that he would get some reductions of his contract railings next week, and had several of his trains cancelled.

“It is a big issue,” he said, adding that it is possible that clients may not know the full effects as it is possible due to an information lag in mining companies.

The source added that in view of recent rains in Queensland Australia and reduced railings by Aurizon that the company was not looking to offer any spot coal in April.

The combined issues are “more serious than meets the eye,” the source said.

Another miner source also said he had received notice on his contract railings, and while declining to reveal the exact tonnage affected, said it was “not insignificant.”

Aurizon could not be reached for comment.

MARKET YET TO REACT

While supplier sources said that if the cuts were to eventuate, the effect on supply would be serious, buyers have yet to react.

However, several miner and buyer sources said there was also skepticism over whether the rail company could truly reduce volumes by 20 million mt/year.

While premium metallurgical coal prices have strengthened by $15/mt since February 1 to $232.50/mt FOB Australia Friday, with several trades to markets outside China such as India, both seller and buyer sources said these trades were not related to concerns over the Aurizon issue.

One miner source said if the cuts were to take place, the effect could be “bigger than that of Cyclone Debbie” and while there had been little reaction from buyers yet, “it’s a sleeping beast, yet to bite.”

Cyclone Debbie took close to 16 million mt out of the market in April last year, causing a spike in prices of 100% within a month following the cyclone, to $304/mt FOB Australia, for premium low vol coal, according to S&P Global Platts data.

This appeared to be largely due to the uncertainty over the situation. The state competition authority has not commented since its draft report was released.

Sources at two major steelmakers said they were closely monitoring the situation, but had not reacted.

One said he had yet to receive concrete information from suppliers and was waiting for updates. Two sources said the signals they received from Australian suppliers thus far had offered nothing definitive.

One of the steelmakers indicated that they had been diversifying their coal supply options already and hence did not believe there was a need to seek for urgent contract volumes elsewhere.

The relatively muted reaction thus far was confirmed by a non-Queensland met coal supplier who had not seen customers seeking to request extra volumes since the announcement yet.

“This should have medium term impact, not short term,” he said, although adding the longer-term impact would be significant. However, he said it may result in other options emerging to cover any supply gap.

The seaborne coking coal market has seen price spikes in the last two years, mostly driven by supply disruptions and weather conditions in Australia. Spot prices for Platts premium low vol coking coal quadrupled year over year in 2016 and, during cyclone Debbie, Platts premium coal prices saw their largest daily increase of US$58.50 (or 32%), to US$241/t FOB Australia April 5.

According to estimates for coking coal exports in 2017 by Goldman Sachs, Australia will made up 58% of global exports, with global exports estimated at 295 million mt.

Source: Platts

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