Eyeing an upturn in Oz

Key parts of the Australian resources sector have epitomised the boom and bust nature of mining and production. The cyclical price and demand downturn of the past couple of years has caused considerable pain for even the biggest companies, and a significant number of casualties amongst smaller producers, contractors and service providers, not to mention the impact on the project cargo, breakbulk and bulk shipping sectors.
 
Recovery?
But there are now strong signs of recovery, and predictions that a new investment phase is about to begin. 
“Prices for most construction and steel making raw materials continued to grow in the last three months – despite expectations of decline – because of unexpectedly resilient demand from China’s construction sector and unforeseen supply disruptions,” the Australian government’s Department of Industry, Innovation and Science’s chief economist Mark Cully observed in the September edition of Resources and Energy Quarterly.
“The speculative activity in China’s commodity futures markets that led to high spot price volatility in the first half of 2016 has tapered off. This was supported by measures to reduce speculative trading, including increased commission fees, margin requirements and trading restrictions. Commodity prices should therefore better reflect market fundamentals going forward.
“China’s economy – and its demand for construction raw materials – is slowing as it transitions away from investment-led growth to consumption-led growth. While any slowdown in the short term remains sensitive to government policy and stimulus measures, the likelihood of significant increases in demand from China for resource commodities is limited,” wrote Cully.
“Australia’s suppliers are wellplaced to satisfy demand for resources and energy over the next 15 months, despite difficult operating conditions. In particular, production of most bulk commodities is forecast to increase, even as prices decline. As a result, Australia’s earnings from resources and energy exports are forecast to increase by 12% to A$176B in 2016-17.”
Coal price surge
The most remarkable turnaround has been for the coal industry. 
In mid-October negotiations between Australian producers and Japanese steelmakers saw coking coal contract prices surge 117%, having risen from US$81/t in the March 2016 quarter to US$200/t in the December quarter. The spot price was up further, to US$213/t.
Meanwhile, the price of supposedly out-of-favour thermal coal was up 60% over four months. At the trough of prices, every thermal coal mine in Australia was said to be losing money.
If the recovery sustains, some remarkable ‘winners and losers’ stories will emerge, with a number of nimble – or contrarily optimistic – companies emerging to snap up assets being shed involuntarily or optionally by big names Peabody Energy, Rio Tinto Coal, Anglo-American and more. 
 
In Queensland, Glencore is restarting production at one of the state’s oldest open-cut thermal coal mines, Collinsville near Bowen, which was wound back in December 2015 due to low prices. 
 
Construction is still expected to start on Adani’s controversial Carmichael coal and rail project – slated to eventually be the southern hemisphere’s largest – next year, with prospects for a development that many have assessed as  uneconomic now improving.
The coal downturn has seen the arrival of private equity interests looking for bargains, and early movers look set to make substantial profits Taurus Funds Management has backed Stanmore Coal to buy and restart the formerly Vale-owned Isaac Plains mine, and Taurus in its own right has purchased the Foxleigh metallurgical coal mine near Middlemount. Denham Capital’s coal vehicle, Pembroke Resources, headed up by successful industry veteran  Barry Tudor, has bought Olive Downs coking coal tenements from bankrupt Peabody Energy projects.
Handling pressure
The coal handling sector has been under pressure too, with miners eager to renegotiate or abandon take-or-pay rail haulage and port terminal contracts.
The two leading rail companies, Aurizon and Pacific National (PN), have felt the pressure on revenues, even while tonnages from those mines remaining in the game have stayed high. Aurizon has taken a series of write-downs,and completely wrote off, at a cost of A$251M, its involvement in the now-abandoned 40 Mtpa West Pilbara Iron project with China’s Baosteel.
PN, a key division of ports and rail operator Asciano, now has new owners after competing bidders Brookfield of Canada and Australia’s Qube joined forces, along with others, to mount a joint A$9B takeover of Asciano. Followingthe dismemberment of the parent, PN is now owned by Global Infrastructure Partners with a consortium of pension funds, including the Canadian Pension Plan Investment Board, China’s CIC Capital Corporation, Singapore sovereignwealth fund GIC and the British Columbia Investment Management Corporation.
According to Asciano’s 2015-16 annual report, revenues at PN fell by 5.4% from A$3.84B in 2014-15 to A$3.63B in 2015-16, while statutory net profit after tax fell by 24.4% to A$272M from A$359.6M the previous year.
Coal volumes were down by 2.5% from 162.8 Mt to 158.8 Mt for the year, with increased tonnages in Queensland, but lower volumes in NSW’s Hunter Valley. 
 
It is the latter where another power play is under way, after Glencore Coal decided to exit its GRail business and invited bids from prospective buyers. The Australian division of the US railroad company Genesee & Wyoming (G&W)  operates GRail on Glencore’s behalf, and is one of the bidders, while two others are, predictably, Aurizon and PN, raising concerns for the Australian Competition and Consumer Commission (ACCC). 
 
The ACCC recently released a Statement of Issues on the respective offers by the ‘big two’, saying it was assessing the proposals against the alternative scenario of a new player entering the market by acquiring GRail.
“The Hunter Valley coal haulage market appears to have high barriers to entry, so we would expect the addition of a third competitor to have a significant effect upon the market,” said Rod Sims, ACCC chairman. “This has been supported by market feedback. 
 
“In contrast, an acquisition by Aurizon or Pacific National would essentially be a continuation of the status quo, where there are two active players in the Hunter Valley coal haulage market.
“Aurizon and Pacific National were both sponsored into each other’s coal haulage markets in Queensland and New South Wales, and there has been little or no new entry before or since. There are some examples of coal producersacquiring their own rolling stock, but Glencore Coal is the only Hunter Valley coal producer to have done so for a majority of its coal haulage requirements. 
“Glencore is now selling that rolling stock along with a long-term haulage contract. Coupled with the fact that Glencore Coal is the largest coal producer in the Hunter Valley, this is a platform for entry that is unlikely to be replicated in the foreseeable future,” said Sims. 
 
“However, the ACCC also  recognises that coal producers are generally well-resourced, sophisticated parties that may be able to protect their own interests, even if Aurizon or Pacific National acquires GRail. We are going to be exploring their ability to leverage comPacific National or to bypass both haulage providers by acquiring their own rolling stock or by sponsoring new entry.” 
Heavy haulers
PN hauls the majority of the coal on the Hunter Valley Rail Network, with Aurizon hauling the second largest volumes. GRail hauls most of Glencore Coal’s production using rolling stock owned by Glencore Coal and operated by G&W. GRail was set up in 2010 with capacity for 40 Mtpa of haulage to the port of Newcastle. Glencore is the largest coal producer in New South Wales.
The ACCC’s provisional date for a final decision is 15 December 2016. 
The renewed interest in the Bowen Basin, Hunter Valley, Illawarra and elsewhere is good news for port and terminal operators too.
A host of proposed new projects has been abandoned in recent years, including a number of terminals on the Queensland coast, as well as major expansion phases at Abbot Point and Newcastle. Gladstone’s Wiggins Island Coal Export Terminal(WICET) consortium is struggling under a mountain of debt, as it battles lowerthan-projected volumes and the financial fragility of some shareholder miners. 
India’s Adani, which paid A$1.83B for a 99-year lease of Abbot Point Coal Terminal in May 2011, has now stumped up a further A$19.25M to take control of the terminal operator, the Glencore-owned Abbot Point BulkCoal Pty Ltd,  ending a long-standing legal wrangle. This helps smooth the way for the Carmichael project, although some federal approvals are still outstanding. Adani Australia CEO Jeyakumar Janakaraj called the deal “a key milestone inour well-advanced plans for Abbot Point”.
Statistics from North Queensland Bulk Ports (NQBP) for FY 2015-16 show a comparatively small reduction in throughput at the three major coal terminals under its statutory jurisdiction, with the yearly total falling by only around 800,000t to 142.82 Mt in the financial year. 
 
NQBP’s biggest exporter, Dalrymple Bay Coal Terminal, reported throughput in FY 2015-16 of 67.52 Mt, down from 71.55 Mt a year earlier, while Abbot Point Coal Terminal’s volume of 27.05 Mt was down almost 1.5 Mt from 28.64 Mt. Against the trend, Hay Point, which serves the BHP Billiton Mitsubishi Alliance joint venture, Australia’s largest coal exporter, saw its throughput rise from 43.42 Mt to 48.25 Mt in 2015-16. 
 
Ore optimism
There is both optimism and opportunism in the iron ore sector too, where Andrew Forrest’s Fortescue Metals Group (FMG) has paid just A$1 (plus royalties) for an additional 75% of the mothballed Nullagine iron ore mine in WesternAustralia’s Pilbara region. It was only in 2012 that FMG sold to its joint venture partner in Nullagine, BC Iron, a 25% stake for A$190M. Originally (in 2009), BC Iron ceded half the project to FMG in exchange for rail and port access.BC Iron shut down Nullagine at the end of 2015 due to ore prices stubbornly sitting below US$40/t, although they have recovered this year to average around US$55/t. Under the previous arrangement, FMG processed and shippedthe ore from its Port Hedland facilities on BC Iron’s behalf. 
 
While BHP Billiton, Rio  Tinto and FMG have quietly reined in previous bullish expansion plans, the newest of the Pilbara producers, Gina Rinehart’s Roy Hill, has struggled to meet export targets since its inaugural shipment in late 2015, widely seen as a ‘contractual obligation’ milestone. The situation has not been helped by a series of multi-million dollar disputes between Roy Hill mine, rail and port builder Samsung C&T and a number of subcontractors, as well as Rinehart’s Hancock Prospecting, the majority owner of Roy Hill. Samsung C&T claims to have lost US$1B on the project. 
 
Meanwhile, Rio Tinto has obtained state government approval for two new developments that are essentially replacements for mines approaching exhaustion. One of the new projects is at the Western Turner Syncline mine near Tom Price in the Pilbara, where expansion will allow the annual production of 25-30 Mtpa to be maintained, through the development of deposits to the north and west of the existing mining operation, and associated works such as the construction of haul roads, site access roads, storage areas and water treatment facilities. The second new project is at the Silvergrass mine, also near Tom Price, which will add 10 Mtpa, fed by conveyor system to an existing ore processing plant at Nammuldi. 
 
Tom Price itself – Rio’s first Pilbara mine in 1966 and since, literally, transformed from a mountain to a hole in the ground, but still producing 24 Mtpa – is seen as likely to be replaced by the Koodaideri, greenfield project, requiringconsiderable new infrastructure. 
 
BHP and FMG also need to replace exhausted mines. The former is expected to develop South Flank as a replacement for the 80 Mtpa Yandi mine, while FMG is looking to its Western Hub province to maintain supplies after the 25 Mtpa Firetail mine is depleted in around 2019. 
 
Stable output 
Although recent volumes shipped by the majors have not quite met analysts’ expectations, it is clear that the outflow has remained strong throughout the price fluctuations.
Pilbara Ports Authority (PPA) delivered a total monthly throughput of 56.3 Mt for the month of September 2016, an increase of 3% over the same month in 2015. The Port of Port Hedland achieved a monthly throughput of 42.4 Mt, an increase of 6% from the previous year, with iron ore exports for the month accounting for 41.8 Mt of that, also up 6% from September 2015, but down on the 42.9 Mt handled in August 2016.
 
The Port of Dampier delivered a total monthly throughput of 13.9 Mt, a decrease of 3% from the same month in 2015.
For reasons that are unclear, although PPA also has maritime jurisdiction over the ports of Port Walcott (where the four-berth Cape Lambert terminal exports iron ore from Rio Tinto subsidiary Robe River Iron) and Cape Preston (export point for CITIC Pacific’s  ino Iron project), which are located between Port Hedland and Dampier and just south of the latter, respectively, their throughput is not included in PPA figures. Thus, although Port Hedlandand Dampier monthly figures are regularly used as global indicators, they do not tell the full story about Pilbara ore exports. 
Election looming
Still in Port Hedland, the Western Australian (WA) Government has been forced to concede the disputed sale of the Utah Point Common User Bulk Facility (UPCUBF) will be delayed until after the March 2017 state election.
Sale legislation passed through the WA parliament’s Lower House earlier this year, but was blocked in the Legislative Council when the Liberal Party’s own coalition partners, the National Party, joined forces with the Labor Party opposition to force the establishment of a committee of inquiry. 
 
The inquiry heard of two major concerns held by UPCUBF users – that private owners would drive up prices, and that there was nothing to stop the port’s big customers, BHP Billiton, FMG and Roy Hill Mining, from doing deals with new owners that would squeeze existing users out. It’s pertinent to note that the whole raison d’être for the facility was to provide export access for junior and mid-tier miners in the Pilbara, such as Atlas Iron, Mineral Resources and Consolidated Resources.
WA treasurer Dr Mike Nahan pledged to address most issues raised in the committee’s report in the revised sale legislation by, for example, including provision for compulsory arbitration over pricing matters. But once the revised sale legislation appeared, he was accused of failing to consult with users over the “fine detail” – and the fine detail included that only 50% of the facility’s capacity would be safeguarded for “protected users”.
Meanwhile, instability within the WA Government has seen the proposed sale of the Kwinana Bulk Terminal rolled into a larger plan to privatise (by sale of lease) the entire Port of Fremantle, WA’s largest multipurpose port, but this too has stalled. As a result, new leases for the port’s two container terminals and a decision on the successful bidder for Fremantle’s new automotive and ro-ro terminal are frozen in time.
Grain games
In the Australian grain sector, corporate machinations continue, with the GrainCorp-associated Australian Grains Champion (AGC) dropping its aggressive push to see Western Australian cooperative CBH Group corporatised. Although AGC’s consultants valued a floated CBH at “at least” A$2.56B, CBH chairman Wally Newman said growers had recently wholeheartedly supported the board’s March decision to reject the AGC offer.
“The Board was unanimous in its view that the proposal did not represent value for Western Australian grain growers, and it would have delivered a strategic blocking stake in CBH to east coast grain handler and competitor GrainCorp,” said Newman. “We surveyed our members and they were very clear; 78% of growers supported the board’s rejection of the proposal.” 
 
He said CBH would now continue to work on a range of projects to add value and cut costs for growers. In line with this, the group is preparing to launch its new CBH Direct to Vessel service for the 2016-17 harvest, claiming it represents a 24% saving on standard supply chain fees. 
 
As the name suggests, growers are able to deliver contracted grain directly to vessel, offering savings for both growers and marketers. By utilising the service, growers are eligible for a rebate of A$3.80/t and exporters are eligible for a rebate A$3.50/t, taking the total estimated cost for export through this service down to A$23.20/t (for wheat). That compares to A$30.50 for the CBH Integrated service. 
 
CBH says it demonstrates the group’s focus is on continually improving services and offering new solutions to ensure the most efficient, flexible and cost-effective supply chain. It is estimated that growers will see an average 4%reduction in freight rates over the upcoming 2016-17 harvest, as a result of larger than average harvests bringing the cost per tonne down. 
 
“We’ve had a number of good harvests and are expecting another this season. This has a positive impact on our fixed rail costs, which are based on a five-year average,” said CBH operations manager David Capper.
CBH is currently negotiating with Brookfield Rail for an interim rail access agreement, with the current deal set to expire on 31 December 2016, while arbitration continues to settle long-term access arrangements. CBH said it had alsoworked to secure cost-effective road transport options, which has been aided by a slight reduction in fuel prices since the previous season’s rates were set in February. 
Elsewhere, the ACCC has announced that it will not oppose the proposed acquisitions of 40% and 9.99% of Glencore Agriculture Limited, respectively, by Canada Pension Plan Investment Board (CPPIB) and British Columbia Investment Management Corporation (bcIMC). 
 
Through its subsidiary, Viterra, Glencore Agriculture has a strong position in the supply of upcountry grain storage and handling, as well as bulk grain port terminal services in South Australia. CPPIB and bcIMC now have various interests in the grain supply chain and interests of 33% and 12%, respectively, in the rail operator PN. 
 
“The ACCC does not consider  that the acquisition gives Glencore Agriculture the incentive to use its position in the grain supply chain in South Australia to adversely affect Pacific National’s rivals,” the ACCC said.
“The nature of the minority interests and the fact that Pacific National does not provide grain rail haulage services in South Australia were important considerations. Furthermore, the incumbent rail company, Genesee & Wyoming, is the dominant provider of grain rail haulage in South Australia and owns most of the relevant below-rail network. 
 
Separately, the ACCC has waved through GrainCorp’s proposed acquisition of Cargill Australia’s bulk grain storage and handling facility in Gilgandra, New South Wales. 
 
“Growers and other market participants were not generally concerned about the proposed acquisition,” said ACCC chairman Sims. 
 
“Despite the transaction resulting in the removal of a close competitor to the existing GrainCorp site in Gilgandra, based on market feedback, the ACCC considered that there will be effective competition from other suppliers of  torage and handling services in the region.”