Very few commentators have focused on the physical stagnation of Australia’s coal supply as perhaps the main catalyst for rising energy and gas prices today, apart from global geopolitical events and their impact on international prices.
The simple fact is that the rain has drastically disrupted coal production on the east coast, flooding some mines and key railways. I have no data from Queensland, but this figure shows what has happened to coal sales in New South Wales over the last two years.
To make that figure, I assumed that NSW’s total sales = marketable coal volume + change in stocks, and that domestic sales were total sales – exports. I then took a three-month moving average and expressed the two series as an index.
Annualized exports have fallen from 173Mt to 150Mt, and annualized domestic sales derived from 31Mt per year to a three-month annualized March 2022 total of 19Mt.
Thus, total sales have dropped from 200Mt to about 170Mt. International sales have fallen, but obviously producers have prioritized international markets over prices, and therefore domestic coal generators have been compressed.
It is also true that disruptions to coal plants and the closure of a unit in Liddell contributed to this, along with mine problems in Mandalong which have damaged Eraring, but clearly the main effect on the whole industry is the humid climate.
Looking to the future, this could be good news, because despite La Niña’s ongoing forecasts, consumers and electricity retailers can still expect coal production to pick up over the next six months.
As the supply of available coal fell, coal generation fell and this increased the demand for gas generation by about 60-70 annualized petajoules or a 15% increase in Australian gas demand (excluding Australia Western).
This gas had to be bought at export market prices, but more specifically there is a real physical limit for the shipment of gas from Queensland to Victoria and South Australia and NSW, because the Moomba gas pipeline to NSW and South Australia is physically limited.
There is a bit of gas storage in Iona, but it runs out almost every day at its maximum discharge speed. Things will improve as coal production increases and we enter spring.
Demand for gas generation has increased significantly
I post this table quite often to see how the fuel mix is changing. Please note that although the figures are annualized, they represent only 30 days of production and are not seasonally adjusted and therefore change depending on the time of year.
It shows that the production and share of renewable energy has changed little. The big step is from coal to gas, which could lead to an improvement in emissions, but in today’s market it is having a big impact on prices.
Mandalong coal production will recover, right?
The coal problems of Origin stem from the inadequate supply of the Mandalong mine, owned by Centennial Coal, a subsidiary of Banpu Coal. Centennial is incredibly unprofitable in Australia.
And this is despite the fact that its cost of production, although high, is well below the spot price of coal and rather reflects that coal is sold in Australia mostly by contract. Interestingly, 22% of expected production in Australia was uncontracted in May.
However, the highlight is that Mandalong and Centennial coal production, which fell by 43% year-on-year, is expected to pick up.
So even if we assume that Centennial can only deliver most of what it says it will do, it would still be necessary for Eraring’s coal supply to return to contracted levels in six months. However, Centennial’s desire to sell coal at the time will remain.
More generally, and although the problems in Mandalong are likely to be related to the age of the mine (17 years of operation are likely to make a decent impact on the best quality reserves), it is also very likely that the whole of the Hunter and operations in Queensland has been affected by the humid climate. Therefore, it is unlikely that production was able to respond to the price signal.
My point, however, is that while the rain hasn’t gone away, it’s reasonable to expect production to pick up over the next six months in both NSW and Queensland.
David Leitch is a regular Renew Economy contributor and co-host of the weekly Energy Insiders podcast. He is a director of ITK, specializing in electricity, gas and decarbonization analysis from 33 years of experience in research and stock market analysis for UBS, JPMorgan and predecessor companies.