By the Casey Research Energy Team
Australia’s powerful coal industry is rocking the country’s political boat again. It was only 10 months ago that former Prime Minister Kevin Rudd lost his job over an emissions trading scheme that the mining industry opposed vehemently. Now his successor, Prime Minister Julia Gillard, is attempting to revisit the issue, and so far it is not going well.
Gillard has proposed putting a price on carbon emissions starting in July 2012. The scheme would initially operate like a tax, with polluters paying a fixed price for emissions for the first three to five years, before moving to a full cap-and-trade scheme where the price would be linked to international carbon markets. Importantly, the scheme would tax emissions from the coal mining process, rather than taxing the product itself.
But the heavyweight Australian Coal Association (ACA) is not pleased with the plan. The ACA thinks an emissions trading scheme would send investment overseas, costing the country in jobs and revenue. In fact, ACA chief Ralph Hillman said the industry told the government to "go back to the drawing board" during negotiations.
"No other country in the world" taxes emissions from the mining process, says Hillman, "because they are too hard to measure and there is no available abatement technology." He estimates the scheme would cost the coal industry A$18 billion over the next 10 years but would fail to reduce global emissions because "the coal will be mined in other countries."
Australia is the world’s worst polluter on a per-capita basis, largely because it relies heavily on coal-fired power. The nation also exports millions of tonnes of coal every year to Asian utilities and steelmakers. In 2010, Australia exported A$43 billion worth of coal.
And even though massive floods at the start of the year are dampening Australia’s production rates, Australian coal miners are set to rake in considerably more this year because prices for thermal and metallurgical coal are on the rise. Those floods are part of the reason: production from the Bowen Basin, which is a key metallurgical coal region but which bore the brunt of the flooding, is expected to total 170 million tonnes this year, down from pre-flood estimates of 200 million tonnes.
The problem lies with water-logged pits at some mines that are taking longer to drain than expected, and the resulting loss of 30 million tonnes is exacerbating a worldwide shortfall in met coal. Prices are now expected to stay around the US$300 per tonne level for the rest of the year.
In fact, the impact of those January floods are only starting to become clear, as miners report first-quarter production numbers. BHP Billiton is the latest miner to report production losses: the company’s coking coal production was down by 18% compared to Q1 2010. Wesfarmers and Rio Tinto also reported falls of 34% and 12%, respectively, in Q1 metallurgical coal output because of the floods.
On the thermal coal side, it is a different natural disaster that is supporting stronger prices. The earthquake and tsunami wiped out 9 gigawatts of Japan’s nuclear power, leaving the world’s third largest economy searching for alternative energy sources. Japan has already inked a deal to purchase additional liquefied natural gas (LNG), which is already a major fuel in the country, but the rest of the energy shortfall will be made up by thermal coal. Estimates for Japan’s additional thermal coal requirements range from 2 to 7 million tonnes, on top of the 102 million tonnes it imports regularly in a year.
The latest thermal coal contract on the books came from Japan, as Xstrata signed on to supply coal to Chugoku Electric Power for the next 12 months at US$129.80 per tonne. The agreement sets a benchmark for the global thermal coal industry and is a signal the market is tightening. The contract price exceeds the current spot price for Australian thermal coal, which is US$123.20 per tonne, and is 13% higher than a previous 2011 settlement between Xstrata and Japanese utilities.
The long and the short of it is: coal is heating up. Shortages on both the thermal and metallurgical fronts are pushing prices higher in trends that look certain to last for the rest of the year. Australia’s coal industry will decry carbon taxes in any form, and may yet bring down another government, but in reality the country’s miners are doing just fine. And anyone interested in investing in coal has a good chance of joining them for the ride, provided they pick the right horse.
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