Australian Dollar’s Decline Helps Slow Rocketing Labour Costs

BRISBANE, Australia - Sept. 11, 2013 - PRLog -- The decline in the value of the Australian dollar has not only benefitted coal producers by reducing the impact of falling prices. It has also help reduce costs as well. IHS Coal’s Australian Coal Report has more.

One significant effect of Australia’s shift from a high dollar to a low dollar environment is the reduction in the world’s most expensive coal sector labour costs; hopefully back to levels prevailing in two of the country’s fiercest competitors, Canada and the US.

The head of trade and supply chain finance at Westpac Institutional Bank, Gordon Sparrow, pointed out that Australia’s coal production labour costs came in at an astounding compound annual growth rate (CAGR) of 16.6% between 2001 and 2012, compared to 8.6% for Canada and 5.6% for the US.

“Up until 2009 Australia’s coal industry labour costs tracked along nicely with both the US and Canada with all three hovering around a nominal US$60 per hour. Then the investment boom began to gain traction and Australia’s labour cost component headed north,” he said.

“It was driven out of sight, not just in the coal industry but across the board in the mining sector. After all the skills base is commodity agnostic – the same skill sets are required in most mines, whether coal, gold, iron ore or copper.

“Mining in Australia continues to become more expensive with labour constituting the highest input amongst rising costs. The latest data tells us labour costs in mining shot up 4.6% compared to a year earlier, the biggest rise among the 18 industries surveyed.

“Furthermore, labour represents 50% of new project costs in the coal sector. The remote locations of mines poses a challenge which tends to be overcome with wage hikes – for instance, at peak, salaries for specialist truck drivers in West Australia reached $250,000 a year.”

Sparrow explained the effects of currency on the competitiveness of Australian coal producers by drawing on the analogy of a see-saw with big kids on one end and a bunch of smaller kids on the other.

“The big kids constitute costs, the smaller kids are income and the pivot point is currency. Under a best case scenario you may be able to control two of the three factors by shuffling big and little kids around but you would have to be very adept to master that act,” he said.

“The simple reality at the moment is we can’t control prices – they are determined by market forces and we can’t control the currency. Production costs, particularly labour inputs, are the one factor we can influence most.”

While Gordon Sparrow highlights Australia’s mining investment boom as being at a peak, he explained that increasing evidence is pointing to a slow down.

“Australia has committed mining projects and mining investment nudging $110b right now but estimates would indicate that this could reduce to under $10b by 2018-19,” he said.

“Our house view is that we are not moving into a high growth environment, as reflected in projected world GDP growth, and slowing GDP growth in China also plays a pivotal role in that.

“As a consequence we see coal prices, as illustrated by the benchmark for metallurgical coal, remaining under pressure going forward to the end of 2013. And Australian coal exporters are likely to bear the brunt of any correction based on current spot prices.

“A glance at the Australian hard coking coal seaborne cost curve shows how many of our operations and the consequent coal export levels are towards the high cost end with significant tonnages already under current spot price and therefore under water.

“This is nothing new though, we have been in an extremely high and extremely low Australian dollar (AUD) environment before,” he said. “From 1993 until 2013, the AUD/USD averaged $0.76, reaching an all time high of $1.10 in July 2011 and plunging to a low of $0.48 in April 2001.

“Since 2009 the strength of the Australian economy relative to key developed economies has provided support to the AUD. From being a commodity-based currency the AUD, in the post-GFC scene, has become a safe-haven currency.

He said safe-haven status came about because of the AUD’s relative security compared to other economies, particularly due to the differentials in public debt, interest rates and the overall strength of the Australian economy.

“This has resulted in a perfect storm – falling currency values combined with dipping commodity prices. Liquidity abounds – global markets are awash with money at the moment and that is influencing the behaviour of markets.

The challenge to Australian coal producers is to manage the currency relationship between earning income in USD and managing costs, particularly labour costs, in AUD.

“Any currency conversion carries with it a translation in cost layer,” he said.

“Which introduces the question; Just how long can we continue in the marketplace to benchmark in USD when Australia’s major buyers globally are increasingly funding their purchases in RMB and INR.

“Although CNY is not yet deliverable, the AUD has direct convertibility to CNY, so there will become a point at which suppliers and buyers may reconsider their invoicing currency,” he said.

IHS Coal is part of IHS and is an internationally renowned publisher of leading coal industry publications and reports covering Asia Pacific, Europe, South Africa and the Americas. In addition to the weekly Australian Coal Report, our publications include the weekday Inside Coal, weekly Coalfax, Indian Coal Report, South African Coal Report, and importantly, we also deliver key market price indicators for all regions, including the Newcastle Export Index (NEX) and the world's first Coking Coal Index as well as a Database of Prices & Indices.

For a free copy of one of our reports, please contact epi.coalinfo@ihs.com, call +61 7 3020 4000 or visit http://www.coalportal.com/.