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Export earnings set to fall with drop in coal -

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Export earnings set to fall with drop in coal price

The World Today - Thursday, 12 March , 2009 12:14:00

Reporter: Sue Lannin

ELEANOR HALL: Coal producers are bracing for the price of the key Australian export to fall by
almost half this year. The fall in the price of coal is expected to wipe billions of dollars off
Australia's export earnings.

Already Rio Tinto and Swiss mining giant, Xstrata, are believed to have negotiated dramatically
reduced annual contract prices with a Japanese power company.

And with imports and exports slumping in our two biggest trading partners - Japan and China - there
is little prospect of a recovery any time soon.

Finance reporter Sue Lannin has more.

SUE LANNIN: Coal is Australia's biggest export and last year contract prices of high quality coal
reached as high as $US300 a tonne. The average price for thermal coal was a record $US125.

This year with the world in the grip of a recession it's a different story. The first contract has
been signed with a Japanese customer and prices are reported to be around $US70 a tonne.

Commodity analyst Jonathan Barrett says that's much better than expected.

JONATHAN BARRETT: A lot of people actually thought it would be a lot less than they would have
actually had to accept but considering where it came in, yes it's a negative number but not as
negative as what a lot of us actually expected.

SUE LANNIN: Australian producers are still haggling over the price for lower quality coking coal.

Nicole Hollows, the chief executive of Queensland miner Macarthur Coal says negotiations are going

NICOLE HOLLOWS: Coal is generally annually negotiated. The negotiation time now and the contract
here finishes at the end of March. The price will fall and it's just how much it's going to go
down. And it will depend on the product. You'll see actually segregation of products a lot more
this year than you would have in the past and that will continue to occur.

The lower Aussie-US dollar exchange rate will actually improve and help the Australian dollar
revenues and so that is a positive. And the industry just has to get their costs down. I mean the
pricing is where it's all what above what it was two years ago so we were only there two years ago.
So it's just a matter of them being focussed to get those costs.

SUE LANNIN: You can only really get the costs down by cutting, say cutting staff can't you?

NICOLE HOLLOWS: The actual reason we, the industry has cut people is not necessarily from a costs,
it's not only from a costs perspective. We would have been stockpile bound so you were forced to do
it anyway whether you were going to save costs.

But the other ways you can do is be smarter, like try and find ways, renegotiate contracts, go back
to suppliers. You're seeing fuel prices go down, you'll see explosives price go down. And they've
been big increases, inflated costs that we've been actually grappling with as an industry.

SUE LANNIN: Macarthur Coal is reported to have struck a deal of $US90 a tonne with South Korean
steel giant Posco for other low quality coal.

Posco is in a substantial shareholder but the chief executive Nicole Hollows says that's not a
conflict of interest.

NICOLE HOLLOWS: I don't think there's a problem when there's a percentage of ownership in Australia
and I think maybe we're all a bit worried unnecessarily. If it means they're not having control
over the company and there's not a risk of transfer pricing like pulling profits out and putting
them over there, then I think they're like any other investor and having them as an investor should
be more supportive to support Australia versus our competitors around the world.

SUE LANNIN: The big drop in the price of coal which follows a big rise in 2008 will hit Australia's
export earnings hard. The official commodities forecaster ABARE says income from coal exports will
drop this year.

And ANZ's Mark Pervan says prices will continue to fall.

MARK PERVAN: These are only early outcomes but I suspect these have been done with the big players
so this will be probably the benchmark price for thermal. The PCI coking coal market has yet to be
struck or settled. I think we'll see that in the next week or two. The coal producers are all
talking in the order of 45 per cent drops for thermal coal and 50 to 60 per cent drops for coking
coal this year.

The following year, the 2010 year, I suspect prices will probably remain around these levels as we
start to see a bit of firming conditions from the global economy.

ELEANOR HALL: That's ANZ's commodity analyst Mark Pervan ending that report by Sue Lannin.