Dr Nikki Williams, Chief Executive Officer of the Australian Coal Association, believes Australian coal producers’ international competitiveness will be hugely impeded when “the world’s biggest carbon tax” of $23 per tonne is introduced on 1 July.
The tax is intended to raise $20 billion for government coffers over 2012–2020, of which Australia’s coal industry will contribute $18 billion, according to a study by ACIL-Tasman. It concluded that the tax would put over 4,000 jobs at risk within the first three years of its introduction with some 18 existing mines expected to be forced to close.
Miners in Australia are also unhappy about the new Minerals Resource Rent Tax (MRRT) which will also be introduced on 1 July. This is a tax on profits generated from the exploitation of non-renewable resources in Australia and will replace the previously proposed Resource Super Profit Tax (RSPT). The tax will be levied at 30% of the ‘super profits’ from the mining of iron ore and coal in Australia by companies whose annual profits reach $75 million.
Faced with this new taxation burden, miners are pinning their hopes on a change of government. The opposition Coalition, led by Tony Abbott, is committed to repealing the laws introduced by the administration of current Prime Minister Julia Gillard which enable the MRRT and carbon pricing.
Abbot claims they will damage the mining industry and the economy overall. “No ifs, no buts, it will be gone under a coalition government,” he said about the MRRT.
But with coal and other commodity prices slumping in recent months, and declining freight rates reducing Australia’s ocean freight advantage into Asia’s burgeoning markets in comparison with more far-flung suppliers of coal and iron ore such as Colombia, the US and Brazil, leading executives in the mining industry claim many companies are already scaling back investment programmes because the increased taxation burden will render them uncompetitive in international markets.
“The ultra-competitiveness of world coal markets is a reality which is sometimes not understood by policymakers in Australia,” said Williams. “Every day the focus of my work is to help Australian policy makers avoid caving in to the anti-coal, anti-growth agenda and to help them to understand that it is not in our customers’ interests to burden prices to the point where sales are unattractive and in the end make it impossible to attract the investment necessary to fulfil our customers’ needs.”
Simon Bennison, chief executive of the Association of Mining and Exploration, said that one recent report from ABS detailed declining investment in mining which he said was a sure sign of the alarm being caused by the MRRT and carbon tax.
“What the ABS data shows is that the carbon tax is undermining mining investment in Australia,” he said. “The carbon tax is an unnecessary cost that no other country has to pay in order to produce commodities.”
Williams, speaking at Coaltrans Asia in Bali in June, said the coal industry supported emissions reduction but called for the Australian government to rethink its carbon tax to
enable it to achieve its objectives without harming investment. She called for the adoption of a phased approach to the auctioning of emissions permits for trade- exposed industries as well as the greater use of coal mine fugitive abatement technologies “in step with Australia’s coal export competitors.”
She added:“In this way we could achieve the aims of Government and maintain the cost competitiveness of the Australian coal industry.”
Apart from rising taxes, Australia’s miners also face inflationary production costs, according to Port Jackson Partners. A study earlier this year by the consultants found that in 2007 Australia’s average capital spend to build a tonne of new coal capacity was roughly in line with the rest of the world. Yet by 2011/12 capital spend to build a tonne of new-capacity cost $176 in Australia compared with $106 for the rest of the world.
“If left unchecked, this evolution in capital and operating costs will jeopardize investment and prevent us from meeting our customers’ needs,” said Williams, who added that national and state governments should understand that a higher cost environment would see “our competitors move aggressively to eat into our market share.”
“There is an urgent need for them to restore Australia’s reputation as a low sovereign risk investment destination, with a predictable and sensible policy making regime premised on an understanding of Australia’s competitive exposure. The next steps are to address multi-factor productivity, review the cumulative tax burden on the industry and implement necessary regulatory reforms.”
Whether or not competitiveness issues are the cause or not, one port which is scaling back its export expansion plans is Abbot Point, located 25 kilometres from Bowen on
Central Queensland’s coastline. As reported in DCI, late last year the Queensland government
announced the successful ‘Preferred Respondents’ selected to build six new coal terminals at the port, the outcome of a call for expressions of interest by North Queensland Bulk Ports Corporation (NQBP) instigated in mid-2011.
The plan was that each of the respondents would build a 30mtpa (million tonnes per annum) capacity terminal — an expansion called the T4-9 Project. Construction was expected to start in 2014 and, along with other planned expansions, the new facilities were expected to take port capacity from 50mtpa currently to almost 400mtpa in five years.
However, Rio Tinto, one of the preferred respondents, pulled out in April citing uncertain global economic markets, cost pressures and long time frames for regulatory approvals. Initially NQBP said
the facility would still be built with the other five respondents — Anglo American Metallurgical Coal, Macmines Austasia, North Queensland Coal Terminal, Rio Tinto Coal,Vale, and Waratah Coal. But in late June a spokesperson for NQBP told DCI the T4-9 project had now been shelved along with plans for a massive new Multi Cargo Facility (MCF).
“The newly elected state government has asked NQBP to focus on the delivery of T0 – T3 at Abbot Point and the delivery of two new coal terminals at Dudgeon Point situated within the Port of Hay Point,” she said.
“We are not currently progressing the original T4-T9 terminal proposal. However, we are working with the state government on the expansion of Abbot Point.
“Also the original proposal of an MCF will not progress but NQBP is working closely with government to consider other off-shore terminal options.”
One mining company that is not scaling back investment is Fortescue Metals Group. Speaking at Coaltrans Asia in early June prior to the company’s launch of a legal battle against the MRRT late in the month, owner Andrew Forrest said Australia’s various new ‘unfair’ taxes would largely impact junior miners who would be forced to scale back investment.
He said with the opposition ahead in the polls, the new taxes would not last. “Politicians shouldn’t just look to polls, they should looks to what’s best for voters’ children,” he said. “The best explorers are the juniors, not the biggest miners. These policies are impairing the economy and the future of Australia.”
Forrest opened a third berth at FMG’s Port Hedland terminal in late May. Despite lower iron ore prices, he said the company would also then open a fourth berth in the first quarter of next year. The port upgrade is just one aspect of the company’s huge expansion of its Western Australian mine, rail and port network which will increase exports to 155mtpa by June 2013 compared with 55mtpa
now. The investment will see two more mines opened along with additional train unloader systems and two more stacker- reclaimers.
“We can build railways, ports and mines at a speed never seen before in world,” he told Coaltrans delegates. “This is a new approach to project management. We bring in vendors of major equipment, shiploaders and other equipment and ask them how would you do this to optimize efficiency? We don’t tell them what they can’t do; we do make them do it quicker.
“With iron ore, it’s like coal, you need infrastructure, you need port access. We have an exceptional port at Port Hedland, we have room to grow. We can expand the port to 200mpta so we’re telling customers we can expand when we need us to.
“We can expand to 300mtpa if needed.”
Forrest said lower prices would see more industry consolidation but expects demand, driven by Asian consumption, to continue to grow. “We’re not raging bulls; we’re just realistic,” he said. “We’ve
got a China and an Asia which has said we will match Western living over a period of a generation. Let’s support them to do it.”
Despite the grey taxation clouds over Australia’s mining industry, new projects are also moving forward elsewhere, according to Australia’s Bureau of Resources and Energy Economics’ Mining Industry Major Projects report published earlier this year. Bree found that four coal mining and two iron ore projects were completed in the six months to April this year adding 8.3mt (million tonnes) and 7mt of production capacity, respectively.
Over the same period a number of infrastructure upgrades were also completed. The Kooragang Island Coal Terminal at Newcastle was finished at a capital cost of $670 million adding around 20mt of annual capacity to give the terminal a total capacity of 133mt. A further 12mt expansion is ongoing and when complete at the end of this year will give the terminal a total capacity of 145mt, the limit of its government approval.
In Western Australia, at a capital cost of US$284 million, Rio Tinto has completed a 5mt expansion to its Dampier port to give it a capacity of 150mt.
Bree said another 15 iron ore projects and 21 coal mine projects were at an ‘advanced’ stage and due for completion over the next three to four years. A further 11 coal and five iron ore infrastructure projects are also at an advanced stage.
Of the iron ore infrastructure projects at an advanced stage of development, apart from FMG’s plans BHP Billiton is also expanding its inner harbour port capacity at Port Hedland and Rio Tinto is undertaking a US$3.1 billion expansion at Cape Lambert, which will increase annual capacity by 53mt to 133mt by 2013.
Of the coal-related infrastructure projects, six are rail expansions and five port expansions under construction. The largest project, in terms of capital expenditure, is the third phase of BHP Billiton’s Hay Point coal terminal in Mackay, Queensland. This is scheduled for completion in 2014 and will increase the port’s capacity by 11mt annually to 55mt a year, at a capital cost of US$2.5 billion.
At the port of Gladstone, the Wiggins Island Coal Terminal is now under construction and will add capacity of 27mtpa.
Two expansion projects taking place at the Newcastle Coal Infrastructure Group (NCIG) terminal will increase capacity from 30mtpa to 53mtpa at a cost of $900 million. The third stage of the NCIG terminal will cost around $1 billion and add 13mt of coal export capacity. “When complete, the NCIG terminal will have a total capacity of 66mt, which is the maximum capacity under its New South Wales government planning approval,” said Bree.
Williams was upbeat about Australia’s coal prospects despite the increasing taxation threats to Australian competitiveness. She said long-term forecasts from the International Energy Agency showed that as world energy demand increased, driven by growth in Asia, by 2035 global use of coal was projected to be one-third higher than in 2009 and coal would remain the backbone of electricity generation.
“The IEA has demonstrated that irrespective of any future decisions by governments around the world to alter their domestic energy mixes, the share of world coal demand from non-OECD economies will rise from 70% in 2009 to approximately 80% by 2035,” she said. “No matter what the policy scenario, China, India and Indonesia account for over 80% of this projected increase in coal demand — with China and India accounting for one-third each.”
Australia, she said, would need to play a leading role in meeting this demand. Australia’s exports of metallurgical coal are forecast to increase at an average annual rate of 8%, reaching 218mt in 2017.
Driven by China and India demand, world thermal coal seaborne trade will increase at an average of 4% annually to reach 1.04 billion tonnes by 2017. In 2011,Australia’s thermal coal exports grew by 4%, relative to 2010, to total 148mt. “Projections for 2012 see an increase of 10% in 2012 to 162mt, then growing at an average annual rate of 11% between 2013 and 2017, to total 271mt by the end of the period,” said Williams.
She said that while over $70 billion was currently earmarked for investment in boosting Australian’s coal mining and infrastructure capacity, she warned that not all of this was definite and discrepancy spending could be lost if Australia did not improve the regulatory environment for investors.
“What we are seeing is a healthy commercial contest to meet global demand but given the current world economic situation, where finance is hard to obtain, investment decisions are not taken lightly,” she said. “Most large companies have more projects than dollars available, so choices will be made.
“So how Australia’s domestic policy settings are managed will be a factor in determining the proportion of our great project pipeline that will turn into shovels in the ground.”