Queensland’s new coal royalties upset miners

Australia’s biggest miners say the Queensland government’s move to hike royalties on coal operations will cause more job losses and project cancellations in the troubled sector.

The country’s top coking coal and thermal coal exporters, BHP Billiton (BHP-N, BLT-L) and Xstrata (XTA-L), have already shut mines, deferred expansions and reduced its workforce in the wake of sliding prices, soaring costs and a strong Australian dollar.

The miners, along with other industry participants, warn the state’s decision to lift coal royalties will put more pressure on jobs as companies rein in production to trim costs.   

As outlined in Queensland’s annual budget, released Sept. 11, from Oct. 1 the levy for coal sold above A$100 per tonne will rise to 12.5% from 10% currently, and then to 15% once the price hits A$150 per tonne. These changes are anticipated to generate A$1.6 billion over four years. 

Queensland Resources Council, whose members include, BHP, Xstrata, Anglo American (AAL-L) and Rio Tinto (RIO-N, RIO-L) and others, stated the new royalty rates combined with the company income tax mean the state will carry an effective taxation rate of 50% on the typical coking coal mine.

The council’s chief executive Michael Roche said the coal industry contacted government officials to explain the current market situation and the how higher taxes will further undermine the sector that has been rocked by declining prices, which are off 25% from this year’s peak.

The government’s decision “confirms that they have failed to hear the message about how investment decisions for new projects are evaluated by mining companies,” said Roche.

“For some existing high cost coal mines, the new royalty structure could be the final straw,” he cautioned, noting the average cash cost for coking coal mines in Queensland is over US$100 per tonne.

Bill Champion, Rio Tinto’s managing director of its Australian coal unit, echoed his dismay. “We are shocked, surprised and very disappointed by the size of the royalty increase that has been imposed by the Queensland government.

“Their decision to increase royalties in this way flies in the face of the efforts being made by mining companies to improve the competitiveness of their operations by reducing costs.”

He added this would put more jobs at existing coal mines and projects on the line. In Queensland, Rio Tinto operates the Blair Athol, Hail Creek, Kestrel and Clermont coal mines. It recently reported that it will be wrapping up operations at the soon to expire Blair Athol mine, which employs 170 workers.

However, the Construction, Forestry, Mining and Energy Union’s president Steve Smyth told ABC News that firms are using the royalty hikes to justify the outcome of their actions.

“The companies are using this as a bit of an excuse to trim the fat and make sure they maintain their bottom line and huge profits.”

But producers argue that’s not the case, pointing out the increased taxes add to the surging costs, making it more difficult to operate.   

“A significant portion of the Australian thermal and coking coal industry is losing money at current prices,” said Francis De Rosa, Xstrata Coal’s spokesperson in an emailed response. “There is a risk that the increase in royalties could result in production cutbacks in marginal operations.”

In an attempt to keep down costs, Xstrata will axe 600 jobs or 6% of its Australian coal workforce. While the company declined to point out which mines would be affected, it reassured that production volumes would not be materially impacted by the downsizing.

BHP has factored in the royalty changes into its ongoing cost review of its pits in Queensland, where its joint venture with Japanese trader Mitsubishi, BMA operates seven metallurgical coal mines in the Bowen Basin.

As part of the review, BMA announced earlier it would take its Gregory mine offline in October because it is too pricey to operate in the low price environment, putting the jobs of roughly 300 workers and contractors in limbo.

Gregory is BHP’s second coal mine to go this year, following the closure of its loss-making Norwich Park mine in April that employed 500.

More recently, BHP scrapped development plans for the Red Hill and Saraji East coal projects in Queensland, citing a “challenging external environment.”

BMO Capital Markets’ analyst Meredith Bandy noted that the spot price of met coal has continued to dip since July. That’s the same month BMA, the largest exporter of hard coking coal, settled a lengthy labour dispute that involved roughly 3,500 workers at six of its coal mines in Queensland.

The current spot price of US$140 per tonne implies that roughly a third of the global seaborne coking coal supply may be at risk, Bandy wrote in a Sept. 18 note.

 She expects the price to rebound next year given the recently announced mine closures and economic stimulus packages in the U.S., Europe and China.