THE DISTILLERY: Crying coal

Jotters lament the Queensland government's decision to increase coal royalties, while one says the move is simply too late.

Queensland Premier Campbell Newman and Treasurer Tim Nicholls get a lot of sympathy from Australia’s business commentators this morning. They inherited a budget in disarray and have few popular remedies. But the increase in coal royalties compromises the industry’s long-term sustainability. It’s as simple as that.

Fairfax’s Michael Pascoe makes a point that would have been unthinkable 12 months ago – the Queensland government is more of a threat to its coal industry than the federal government.

"The industry believes the royalty increase will be a game changer. More marginal coking coal mines will close and that will attract the same sort of headline activity as the job losses announced yesterday. However, still slipping under the radar are the new mines that will more than replace the lost production. That will be of no comfort to the regional community pockets that may have been dependent on existing mines that will cease to exist. There will be some nervous boom towns while waiting to see if they’ve just gone bust.”

Fairfax’s Malcolm Maiden says the move by Newman and Nicholls simply comes too late.

"The entire mining industry had been either maintaining or cutting production and cutting costs for two decades ahead of China's demand shock about a decade ago. It took a few years for them to gear up, but they were expanding aggressively and encountering cost pressures by 2007, when the global crisis emerged. When expansion resumed again in 2009 after the crisis hiatus cost pressures were even worse, because the crisis had killed off some suppliers, further tightening supply lines… Miners are selling or shutting higher-cost, lower-return production – the recent BHP and Xstrata coalmine closures and cuts in Queensland fit that bill – and curtailing expansion plans: BHP's deferral of its $US30 billion Olympic Dam open-cut expansion and Fortescue's revised iron ore expansion plan are examples.”

Business Spectator’s Stephen Bartholomeusz makes similar argument, but broadens it to include the federal government. His point is that both governments are overlooking the industry’s long-term viability to take care of their self-inflicted fiscal issues, which in turn weakens their own long-term fiscal health.

"Maybe it didn’t matter when commodity prices were at stratospherically high level; levels high enough to accommodate the escalating costs and increasing tax and royalty takes. Now that they’ve come down to earth, however, the miners will have no choice but to look for ways to slash the costs that they can (the mining services companies and contractors are in for a tough time ahead) or else to shut down projects that don’t generate appropriate returns.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says Nicholls and QR National are taking the more bullish view that royalty increases will be accounted for by concessions to the federal MMRT.

"Of course, this argument assumes the coal miners have enough profits from coal mining to generate MRRT liabilities. The bullish view of coal is encapsulated in QR’s recent guidance to the market. It has said it will lift its coal export volumes by 12 per cent this financial year to a maximum of 205 million tonnes. About 80 per cent of the coal volumes QR moves by rail are in Queensland. That proportion is not expected to change in the year to June 2013. The company was still running its numbers yesterday on the impact of the higher royalties but at this stage it does not see a need to change its guidance.”

The Australian Financial Review’s Matthew Stevens says the mining industry would be tempted to get campaigning again after the success of its battle against the original Resource Super Profits Tax.

"This temptation should be avoided with some prejudice. To explain why, let’s just assess where the coal industry is right now. Let’s start with demand and supply curves that have thermal coal orbiting $US85 a tonne and shipments of premium metallurgical coal leaving Queensland’s northern ports at say $US156 a tonne. For royalty purposes that works out to around $82.50 and $151.50 a tonne respectively. Given the current thermal price sits below the thresholds for the royalty increase, the new settings don’t directly alter outcomes. Though life is a little more complicated that the simple rigidities of a tax system. In this situation one complexity is that many of Queensland’s mines produce a portfolio of coal products, from hard cokes to semi-hard and thermal products. Changes to the royalty base for those higher value products could then alter the underlying financial metrics of some thermal production. Less doubtful though is the impact of this change on metcoal’s numbers.”

While this will inevitably pit Newman and Nicholls against Federal Treasurer Wayne Swan, it’ll be interesting to see how Opposition Leader Tony Abbott positions himself in the wake of a Liberal government increasing taxes on an industry in trouble.

Similarly, Fairfax’s Josh Gordon, the Victorian state political editor, has been told by Premier Ted Baillieu that the Garden State "wouldn’t blink” if Chinese players were to fund, build and run major infrastructure projects. Again, this fits awkwardly with the noise Abbott has been making about Chinese state-owned enterprises purchasing Australian assets.

There’s a lot more on mining this morning. Fairfax’s Elizabeth Knight says yesterday’s rebound in iron ore prices is likely to be a brief jump rather than the beginning of a sustained recovery. Knight’s colleague Adele Ferguson continues her reporting on Fortescue Metals Group, which suffered another share price fall yesterday amid expectations that the iron ore miner will have to raise equity. The Australian’s Matt Chambers reports that BHP Billiton chief executive Marius Kloppers has apparently had a spring in his step recently because the slide in iron ore and coal prices has highlighted his company’s diversified portfolio.

The Australian’s Bryan Frith says it’s becoming easier to argue that Nathan Tinkler’s $5.3 billion proposal to take Whitehaven Coal private should never have been announced, with the coal baron struggling to pay the bills.

The Australian’s Barry Fitzgerald says Rio Tinto might be able to lend some support to South Australia in the wake of BHP Billiton’s Olympic Dam cancellation with its Vulcan exploration program.

In other economic news, The Australian Financial Review’s economics editor Alan Mitchell brings the discussion back to the federal government’s budget, indicating that it looks like the base assumption is for a 1.5 per cent deficit.

The Australian’s Asia Pacific editor Rowan Callick, still thirsting for the government’s white paper ‘Australia in the Asian Century’, has finally got a report to talk about – the Boston Consulting Group’s ‘Imagining Australia in the Asian Century’.

It’s an interesting read because it talks about Australia’s share of global trade to Asia in the non-resources sector. This has fallen in recent years and if anything is demonstrated by the slide in iron ore and coal, it’s that Australia would be well advised to diversify away from mining.

And finally, The Australian’s John Durie discusses a proposal by Treasury and the Australian Securities and Investments Commission to increase charges on stock orders to reduce the incentive for high frequency traders.

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