Clyde Russell is a Reuters columnist. The views expressed are his own.
LAUNCESTON, Australia, July 31 (Reuters) – While it’s easy to point the finger of blame at Rio Tinto’s former management and feel a tad smug about their downfall, the real lesson of the company’s humiliating exit from its Mozambique coal assets is that the wheels of the next commodity boom are now in motion.
This may seem counterintuitive at first, as once all the arguments over Rio Tinto’s wisdom of paying $4 billion to gain a foothold in Mozambique are stripped away, it comes down to the fact that weak coal prices made it uneconomic to spend any more to develop the mines and infrastructure.
Oversupply in the coal sector has been a chronic problem, and given the amount of mine capacity that is currently under-utilised, it’s likely that prices will struggle for some time to come even if optimistic demand projections are met.
When Rio bought Riversdale’s Mozambique assets in 2011, thermal coal prices at Australia’s Newcastle port, an Asian benchmark, had peaked at $136.30 a tonne in January of that year. Coking coal reached an eye-watering $330 a tonne at mid-year.
Since then, prices have plunged. Newcastle thermal coal is currently $67.89 a tonne, while Australian spot coking coal fetches about $114 a tonne.
These prices alone ensure that developing Mozambique’s rich coal basins isn’t viable, given that billions of dollars still has to be spent expanding rail capacity and port infrastructure.
Brazil’s Vale is another major player in Mozambique, and it too is struggling to make the economics work.
Whether it will take the same route as Rio, and exit what the Anglo-Australian miner had earlier called “the world’s next major coal basin”, remains to be seen.
Certainly, the $50 million paid for Rio’s Mozambique assets by International Coal Ventures Private Limited (ICVL), an Indian government venture seeking overseas assets, reflects the potential for production rather than actual output.
Mozambique can export about 6 million-7 million tonnes of coal a year, mainly through a colonial era railway and the shallow-water port of Beira.
When companies like Rio and Vale entered the poor nation in southern Africa, the plan was to raise this to more than 100 million tonnes per annum.
That was before the reality of falling prices sunk in – along with the infrastructure challenges in a country that was ravaged by two decades of civil war from the mid-seventies.
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