Has the government completely lost the plot? Why are they helping flood the market by backing the opening of 20 new coal mines? Why are they approving extensions everywhere when the price of coal has thudded through the floor?
Anglo American has just announced a $US5.6 billion loss and put its coal and iron ore mines up for sale. Peabody is a seller. Goldman Sachs has just cut its long-term coal forecast to $US42.50 – a price at which few or no coal producers make money, ever.
Yet even as the once great Anglo’s credit rating was cut to junk, Resources Minister Josh Frydenberg was enthusing at a National Press Club lunch on Tuesday about the bright future for Australian coal, a future fuelled by rising demand from India.
What next from Canberra – are they contemplating a foray into the Eskimo market with an export drive in ice-blocks? Perhaps we could dispatch a trade mission to Chad and Niger to see whether they’d be interested in buying any of our nice Aussie sand.
Don’t murder our exports
Here is an idea for the Ideas Boom: put a moratorium on all new coal mines. Protect the price of our bulk commodities, protect the nation’s wealth. Don’t rip it up by murdering the price of our biggest exports.
Why encourage Adani to dig up the Galilee Basin and dump another 50 million tonnes of thermal coal into a market already in glut?
Even analysis by the bullish Wood Mackenzie reckons the global seaborne thermal coal market now operates at “gross cash flow break-even”.
That is, before interest, before stay-in-business capex, before tax, before providing for mine rehabilitation. And Goldman Sachs is predicting it will fall further.
That, at a coal price of $US52 a tonne, half the coal industry is in the red at the gross level suggests nobody globally is making a profit at the net level.
There are mines for sale everywhere, yet here are the governments of NSW and Queensland backing new mines all over the place.
Major projects proposed
There are close to 20 major greenfield mine developments well advanced in the two states’ respective mining departments. Beside’s Adani’s Carmichael project – the biggest new coal mine in the world – these include the greenfield mine proposals from GVK’s Alpha and Alpha West mines, the Liverpool Plains (Shenhua’s Watermark and BHP’s Caroona mines), the Bylong Valley (KEPCO), the Hunter Valley (Rio’s Warkworth and Salim Group’s Mount Pleasant mine proposal) and Wollongong (Jindal Steel’s Russell Vale Collieries mine and POSCO’s Hume Coal).
This is before counting the multitude of mine extension requests also being processed, all by an industry that is in aggregate losing money with every tonne of existing coal produced.
Meanwhile, none other than the Queensland Resources Council, the peak body for coal miners in that state, is crying out for government support. Things are that bad. Its chief, Michael Roche, denies this means subsidies, but subsidies are precisely what they are chasing: lower council rates, royalty breaks, tax breaks, discounts from rail and ports operators.
Fortescue chairman Andrew Forrest was accused of rampant self-interest last year, even market rigging, when he quite sensibly called for restraint from BHP and Rio producing too much iron ore. Why would the government support a policy and a production schedule that drove down the price of its greatest export, he asked.
Surely that is not in the national interest, said Forrest. Surely he is right. But here we are, not just doing it in iron ore but doing it to four of our five biggest exports – all the bulk commodities – iron ore, coking coal, thermal coal and LNG.
LNG has been a failure
LNG in particular has been a gross failure of policy. Three separate LNG plants were built concurrently at Gladstone, leading to global oversupply. The price of gas has crashed, valuable farmland has been torn up for coal seam gas exploration and foreign buyers now pay less for our gas than we do.
Australian industry is now paying 60 per cent more than the global price of gas even though Australia is soon to become the world’s largest exporter of the stuff. The failure of energy policy is taking its toll on the efficiency of the entire economy.
It should be said that such a dramatic crash in the price of oil and gas could not have been reasonably anticipated. Nonetheless, there are serious competition issues with the tight cabal of gas producers.
No such problem in coal, just a mad surfeit of the stuff, and a wall of desperate sellers, despite the bizarre rush to open new mines. Equally bizarre is that while economic reality has been so thoroughly ignored via this supply-deluge policy, the Coalition has taken the axe to ARENA (Australian Renewable Energy Agency) and CSIRO, the very two organisations who could contribute most to Australia’s revolution in new energy.
Spectacular falls for fossil fuels
The spectacular fall in the price of fossil fuels means the revolution in new energy will take a little longer than it might. Cheaper gas and coal mean more competition for renewables.
Still, the writing has been on the wall for some time. Typical of investment banks, whose research folk are usually careful not to offend their corporate clients, Goldman Sachs is late coming out with its structural decline thesis – coal futures have told the story for some time.
Still, its research should not be ignored. This is a big call on coal’s structural, rather than cyclical, decline.
“Unlike most other commodities, thermal coal is unlikely to experience another period of tightness ever again because investment in new coal-fired generation is becoming less common and the implied decline in long-term demand appears to be irreversible,” the Goldman analysts wrote.
“Ever again” and “irreversible” are words uncommon to finance and politics.
Decline faster than expected
Tim Buckley, director of the Australasia Institute of Energy Economics and Financial Analysis (IEEFA), a green think tank, has been saying it for some time. Even so, the sheer pace of decline has surprised him. It is all happening faster than we anticipated, he told BusinessDay.
“The seaborne coal industry is suffering both excessive supply and a faster than expected decline in global demand. Chinese coal net imports fell 11.6 per cent year on year in January 2016. This is the third year of declining import demand from China, given the 30 per cent decline over 2015 and the 11 per cent decline in 2014.”
Worse still for Australian thermal coal exporters, says Buckley, India’s coal imports are down 16.5 per cent year on year in the 10 months to January 2016 (India works on a financial year end of March).
“The rate of decline in Indian imports has accelerated with every month this new financial year, and runs contrary to the Australian government’s forecast of double-digit growth in Indian thermal coal imports.”
Even ignoring carbon budgets and stranded asset risks, he says, a temporary greenfield mine moratorium across the NSW and Queensland coal export sector would clearly be in Australia’s own national strategic interest.
“Coal export markets are in a state of prolonged oversupply. Adding more supply will only further depress the coal price Australian mines receive, and given the average coal export mine is only operating at a gross cash flow break-even position (before financing, stay in business capex and before funding mine rehabilitation costs or corporate taxes), approving even more supply will push the industry further into the red.”
While still small in absolute terms, China’s coal exports actually rose 162 per cent yoy to 0.6Mt for the month of January.
IEEFA forecasts net imports into China will fall 20 per cent yoy for 2016 overall, which would mark the third consecutive yearly decline in what was the world’s largest coal import nation globally in 2013. As the global seaborne coal sector continues to shrink, IEEFA expects China will become an opportunistic net exporter, further eroding the scope for any global pricing stability.