Australia China coal ban showing no signs of letting up, South32 boss says
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The head of diversified miner South32 can't see China's ban on Australian coal imports ending any time soon.
Weaker coal prices contributed to an 8 per cent dent in South32's revenue, down from $3.21 billion to $2.94 billion from July to December 2020.
This drop was driven largely by lower realised prices for its metallurgical coal, which took a $US145 million hit due, in part, to China's trade spat with Australia and an ensuing ban of Australian coal imports in October.
South32 chief executive Graham Kerr echoed comments from BHP boss Mike Henry earlier in the week that he did not expect the ban to end any time soon, though he was still bullish about metallurgical coal in the medium to long-term.
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"The big question that's going to drive the metallurgical coal price is going to be driven by what China decides to do on the ban," he said.
"Certainly at the moment, there is no movement from their side nor is there perhaps any movement on the Australian side, so we probably expect that the ban will stay in place for a period of time."
South32 is one of Australia's biggest coal miners and while only about 10 per cent of its exports go to China, Mr Kerr said it still impacted prices.
China had self-sufficiency with metallurgical coal and a number of alternative markets from which to draw the commodity, which is essential in the steelmaking process.
"So the Chinese, by putting in place the ban, have been drawing down on their domestic supply but they've also been willing to pay up to a $US50-per-tonne premium to access it from other places and as a consequence that's pushed the Australian ore out," Mr Kerr said.
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"That Australian ore has then been placed in other markets such as India, South Korea and Japan.
"I note markets themselves have idled some steel capacity as part of COVID-19, so without having the same demand they were getting more supply than they needed so they pushed hard down on price."
Despite increased sales and a 9 per cent decrease in operating costs, South32's revenue dropped 8 per cent and profit after tax and costs decreased 46 per cent from $99 million to $53 million.
In addition to the coal hit, prices for the company's alumina and manganese ore products dropped $US62 million and $US57 million respectively and the stronger Australian dollar also wiped about $50 million from the balance sheet.
In promising signs, underlying earnings increased $US5 million and average prices for energy coal and metallurgical coal were up 43 per cent and 26 per cent, respectively, compared to the first half of the financial year.
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Mr Kerr said the company was primed to take advantage of increased prices in coal and other base metals.
"We are now seeing a rebound in demand from markets outside of China for some of our key commodities, that is underpinning a recovery in prices. With this, our business is well placed to benefit as the global economy recovers, enabling us to deliver value for all our stakeholders," he said.
Mr Kerr said the company was pushing ahead with its South Africa Coal divestment, which dragged on earnings before interest and tax to the tune of $US103million.
"Subsequent to the end of the period, we also completed the sale of the TEMCO alloy smelter and a portfolio of non-core precious metals royalties," he said.
"As we exit these lower returning businesses we continue to transform our portfolio, moving towards a base metals bias."
Mr Kerr said they were seeking $US50 million in savings beyond the next financial year as the company "changed the way it worked".
"In order to achieve this goal, we are reducing our office footprint and continue to simplify our corporate and marketing structures," he said.
The company declared an interim dividend of US1.4 cents per share.
Mr Kerr said the company was also considering whether to appeal a decision by the New South Wales' Independent Planning Commission to knock back a proposal to expand its Dendrobium coal mine at Kembla Heights in the Illawarra region.
He said they were also considering submitting a new mine plan but had not yet decided on a path forward.
The commission rejected the expansion due to risks to Greater Sydney's drinking water catchment.
South32 shares finished the day 1 cent lower at $2.70.
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