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Coal and iron ore miners could slash costs by more than $5 per tonne if they renegotiate transportation contracts with rail haulage groups like Asciano and Aurizon, new research from Macquarie has forecast.
Coal miners are likely to try and change their take-or-pay haulage contracts with rail haulage groups following the revelation last week by Aurizon that it is considering giving "contractual relief" to iron ore miners in Western Australia, including Karara Mining, Macquarie said.
"We consider this announcement by Aurizon as the start of the squeeze on the final component of miners cost structure that has not moved: infrastructure," the bank said.
Macquarie forecasts that a 25 per cent cut in rail haulage fees would allow miners to cut costs by $3.30 per tonne on average, and by more than $5 per tonne in some cases.
Both Aurizon and Asciano use "take or pay" contracts on most of the coal and iron ore they move from mines to ports. The contracts require miners to pay the rail haulage companies and other infrastructure providers such as port operators, regardless of whether they export forecast amounts of coal and iron ore.
Infrastructure providers include rail track operators like Brookfield Rail and the Australian Rail Track Corporation, as well as port operators, which include Brookfield as well as state governments. Brookfield operates Queensland's Dalrymple Bay coal terminal, which is used by big miners such as Anglo American, Glencore and Rio Tinto.
The contracts, which run for between 5 and 10 years, were popular during the resources boom, because they guaranteed miners access to ports. But the contracts have hurt miners as commodity prices have fallen, because miners are required to keep paying fees, even if they stop exporting.
Miners' losses no longer sustainable
Macquarie estimates that take or pay contracts have risen from less than 20 per cent of a mine's total costs to as much as 50 per cent for some companies.
With miners' losses no longer sustainable, infrastructure providers should either allow miners to end their contracts for a minimal cost, or reduce the rates miners are charged and extend their contracts, the bank says.
Other analysts say infrastructure providers should heed attempts by US coal producer Arch Coal, which filed for Chapter 11 bankruptcy in early January, to scrap take or pay contracts with port and rail operators, including the Union Pacific Railroad Company and Ridley Terminals.
Arch Coal has asked the US Bankruptcy Court for permission to reject the contracts, arguing they are an "unnecessary burden". The coal group plans to continue operating while it goes through the bankruptcy process.
In Canada, port operator Westshore Terminals agreed in December to restructure its contract with thermal coal exporter Global Coal Sales Group to allow for lower export volumes.
RBC Capital Markets has also expressed concern about the outlook for Aurizon and Asciano due to their exposure to the coal industry. The bank says Aurizon's exposure is more risky than Asciano's during periods of low commodity prices because the Queensland rail group hauls more coal for customers with low or no credit ratings.
Aurizon is estimated to haul around 70 million tonnes annually (almost one-third of its total haulage) for speculative or unrated customers, while Asciano is estimated to haul around 43 millon tonnes (one-quarter of its total haulage.)
Aurizon's shares have lost 35 per cent since the start of December to close at $3.61 on Wednesday due to concerns over its earnings outlook. Asciano's stock, which closed at $8.50, has lost only a few cents over the same period because it is the target of a takeover battle between Brookfield and a consortium led by logistics group Qube.
This article first appeared on www.smh.com.au
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