Tag Archive for: Coal Mining Cost Forecasts

Coal Mining Cost Forecasts

This report provides detailed data, forecasts and commentary covering the outlook for costs – construction and operating – in the coal mining industry. Along with the numerical data and forecasts, we provide explanations of the important drivers of costs and our rationale for the forecasts of each input cost component. We also provide descriptions of the methodology behind the calculation of the overall indexes of construction and operating costs.

We provide forecasts for total Australia, as well as for the two largest coal mining states; Queensland and New South Wales.

The drivers of costs are many and varied. Some factors are important only for the prices of specific inputs, while others can have a much broader impact on the overall rate of cost growth. In general, the key determinants of overall cost inflation fall into the following three categories:

  • Demand for inputs, as determined by the volume of construction activity, and augmented by the composition of overall construction activity at a particular point in time.
  • The supply of inputs, of which perhaps the supply of labour has been of most importance in recent times.
  • Global economic conditions, which not only influence construction activity and economic growth in Australia (and hence demand for inputs), but also commodity prices, including metals (steel; copper) and fuels, as well as the exchange rate.

Our forecasts of overall costs are produced through a detailed examination of the determinants of each basic cost item. That is to say, we break overall costs down into its individual components (e.g. labour, EPCM services, equipment and materials of various types, etc.), analyse and model the movements in the prices of each, and then forecast based on the expected outlook for their respective determinants.

The total cost indexes that we present, in the table over the page and later in this report, are constructed by estimating the relative importance of each component in coal mining construction and operations, respectively, and then combining (or averaging) over the price growth of each component in such a way as to reflect that relative importance.

Looking at the experience of recent years, cost increases across all categories were particularly strong during the mid-2000s. Cost growth in this period was broad based, as evidenced by big increases in the prices of steel products, equipment and wages, which coincided with an unprecedented increase in Australia’s terms of trade, and an enormous surge in resources sector construction and expansion. The period was also marked by rising oil prices, which was particularly important for operating costs.

Construction cost growth peaked at more than 17% in the 2008/09 financial year, following the more than 60% increase in steel prices during 2007/08, combined with the sharp depreciation of the Australian dollar in the immediate aftermath of the GFC. Construction costs then declined during 2009/10 as the effects of falls in both steel and copper prices flowed through, and, importantly, the dollar regained much of its losses. Labour and EPCM services cost growth also declined during this period as annual construction activity went from growth of around 10% in 2008, to around 2.5% in 2010.