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Major miners Glencore Xstrata and Peabody Energy made large cuts to their Australian coal operations last month, but in the long-term their actions may have a positive impact on the industry.
The big news in the coal sector last week was unfortunately not particularly positive. In a series of blows for Australia, mining giant Glencore Xstrata (LSE:GLEN) laid off 46 employees at its Ravensworth coal mine, along with another 450 from its Newlands and Oaky Creek mines, while Peabody Energy (NYSE:BTU) said it plans to eliminate about 450 contractor jobs at its operations in Queensland and New South Wales.
The cutbacks began Monday night, according to Australia’s ABC, when the 46 Ravensworth workers were informed that they were being laid off “as part of an ongoing review of the company’s operations in Australia.”
Ravensworth is located near Hunter Valley, and many expect the cuts, which amount to a 26-percent reduction in the mine’s staff, to negatively impact that community.
The cuts continue
In retrospect, Monday’s news was merely the calm before the storm.
The next day, news surfaced of Peabody’s intended cuts, with the company citing the need to “reposition [its] cost base in these challenging market conditions,” as per Australian Mining.
Contractors were targeted because they have “traditionally been an area of high spend for the company.” The cutbacks will take place over the following weeks.
The second wave of lay offs from Glencore Xstrata came on Thursday, when the company revealed its plans for the Newlands and Oaky Creek mines. In a statement, the company noted that “lower coal prices, high input costs and the strong Australian dollar” all contributed to its decision to make the cuts, according to Mineweb.
The bright side
While none of the above is being lauded as good news, that’s not to say there isn’t a silver lining. One somewhat positive outcome of last week’s extensive lay offs is that Australia’s coal production will undoubtedly decrease.
Indeed, Mineweb notes that “a source familiar with the matter” commented that Glencore’s cuts at Newlands and Oaky Creek will result in a combined production decline of 3 million metric tons (MT) — 1 million MT from the former and 2 million MT from the latter. The lay offs at Ravensworth will also result in lower coal production, a company spokesman told Reuters.
Peabody has not said that there will be drops in production at its operations, but that outcome seems likely given that it is cutting a similar amount of jobs to Glencore Xstrata.
While lack of production is not generally regarded as favorable, it may be just what Australia’s coal industry currently needs. As Coal Investing News reported last month, coal companies in the country are currently suffering due to lack of demand — largely the result of China’s “control coal” policy — and, unsurprisingly, that is leading to oversupply issues.
Glencore Xstrata and Peabody’s cuts alone are unlikely to curb that oversupply, but they are certainly a step in that direction. As Peabody said, it is cutting workers “to secure the long-term competitiveness of [its] operations.”
Perhaps, then, as is often the case, what seems undesirable in the present will prove prescient in the future.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
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