Major Australian thermal coal miners’ rising costs and weakening thermal coal prices may narrow their margins, but the major miners should continue to generate strong operating cash flows to support debt repayments, growth projects and shareholder returns, says finance and insurance company Fitch Ratings.

Australian grade thermal coal prices have fallen since the start of 2023 from the record highs in 2022, owing to softening seaborne demand, easing production disruptions and declining international gas prices.

The Australian 5 500 kcal/kg thermal coal price fell to $118/t as of February 28, 2023, from the $350/t peak in March 2022. At the same time, free on board unit costs – excluding royalties – have increased significantly, owing to lower production yields and higher costs associated with consumables, logistics, energy inputs and labour.

Production disruptions in 2022 arose from wet weather and labour constraints. Although weather conditions have improved recently, production has not recovered fully for some opencut mines, owing to excess water on site, as is the case for coal miner Yancoal Australia’s opencut mines in New South Wales (NSW).

Costs of consumables and energy inputs may reduce on easing global inflation, but Fitch expects the increase in Australian miners’ labour costs to be more persistent, at least in the near term, as indicated in Yancoal Australia’s 2023 operational expectations, as Australia struggles with the recovery in immigration of skilled labour.

Based on miners’ recent results, logistics and labour costs – which include the use of contractors – made up more than 50% of the unit costs. That said, miners have some flexibility to reduce roster sizes and minimise maintenance expenses, if thermal coal prices fall more steeply, as seen in previous downturns.

“While we expect Australian grade thermal coal prices to decline, the fall in 2023 will be limited by strong demand from India, a lifting of import bans by China, and supply constraints owing to Russian sanctions.”

Major Australian thermal coal miners generated significant operating cash flows in 2022, with average realised prices more than doubling those of 2021. Free cash flow was mainly used for debt reduction and shareholder returns.

Whitehaven Coal, Yancoal Australia and BHP Group are accelerating debt repayments at their NSW port joint venture, Newcastle Coal Infrastructure Group, using increased tonnage charges to reduce refinancing risks as banks limit lending to fossil fuel industries.

Given the increased financing risks for new coal projects, some miners have set aside excess cash to fund their growth projects.

Fitch expects the NSW Coal Reservation Scheme to have limited cash flow impact on major Australian thermal coal miners.

The scheme, which runs from April 1, 2023, to June 30, 2024, requires miners to reserve a portion of production for supply to the domestic market at a capped, delivered price of A$125/t as the federal government seeks to reduce high domestic energy prices.

The volume subject to the price cap is small compared with the miners’ yearly attributable saleable production; for example, is at about 4% and 5% for Yancoal Australia and Whitehaven Coal, respectively.