Where next for coal industry?

WHEN Port Waratah Coal Services announced a dramatic scaling back of its proposed T4 coal loader on Tuesday, it was finally admitting the increasingly obvious truth: the coal boom that had driven the Hunter Valley for more than five years was coming to an end.

But it did not make getting at that truth particularly easy.

An 11-sentence statement in the name of PWCS chief executive Hennie du Plooy (pictured, far right) talked of seeking approval for a 70-million-tonne loader, with another development application to follow if demand was enough to take the project to 120million tonnes a year.

But it was only in an interview with du Plooy that the penny dropped. PWCS now only intended building a 25-million-tonne loader rather than the 70-million-tonne first stage proposed earlier this year.

Some are asking whether T4 will be needed at all, but others will argue that it makes no sense to abandon the project after years of controversy and millions of dollars in planning costs.

Government approvals for such a large and controversial project are too valuable to abandon without very good reason. After all, any approval would probably give PWCS five years or longer before it needs to start serious construction.

 So even if demand for coal collapses even further, PWCS can logically be relied on to keep pushing to have it approved.

But the idea of PWCS even acknowledging that T4 is now a much more marginal proposition shows how fast the world is changing.

 Newcastle coal exports will still hit record levels this year, but prices are way down and the rates of growth are slowing dramatically.

So much so that the existing three coal loaders appear to have more than enough capacity between them for some years to come.

PWCS has two loaders – the ageing Carrington terminal, which is limited by its operating approvals to 25million tonnes a year, and Kooragang Island, which will soon be able to handle 120million tonnes a year.

In 2004, a group of Hunter coal companies unhappy with delays in the port formed Newcastle Coal Infrastructure Group, which then won the right to build its own loader on Kooragang Island, a $2.5billion project that shipped its first export coal in March 2010 and which should be able to handle 66million tonnes a year by the end of 2014.

All up, this means the port’s existing three loaders will soon be able – on paper at least – to handle 210million tonnes of coal a year.

And how much is the industry selling at the moment?

Exports this year will be lucky to hit 135million tonnes. That’s still about 10million tonnes more than last year but it’s about 15per cent less than the industry expected to export at the start of the year.

The ‘‘trigger’’ for T4 – which is explained in more depth later – came in November last year when PWCS said its customers expected to ship 177million tonnes in 2015, which was well above the existing PWCS capacity of 145million tonnes.

NCIG is much less public about its intentions than PWCS, but it also said it has signed binding ‘‘take or pay’’ contracts with its customers for the full 66million tonnes, meaning PWCS had no choice but to build T4 if all of the coal companies were to ship all of the coal they had signed rail and port contracts for.

LATE last year, coal was still selling for $125 a tonne and everyone was still saying the party would go on forever.

But no party ever does. The coal companies may well have signed 10-year take or pay contracts with the rail companies and the coal loaders to have their products put on ships, but the alarming drop off in prices and volumes is all the proof you need to realise  that they didn’t have corresponding contracts guaranteeing they could sell the coal.

For the time being the era of big annual increases in export tonnages, traded with fat profit margins, is almost certainly over.

The same situation applies in the Queensland coal industry and the Western Australian iron ore industry.

Far from generating the ‘‘super profits’’ that the Labor federal government hoped to plunder with both the Rudd- and Gillard-era resource rent taxes, much of the coal and iron being shipped from Australia is making modest profits at best.

Indeed, some observers say that perhaps half of the coal leaving Newcastle this year will do so at a loss.

But price is only half of the equation. Volume is the crucial point in this case, and while tonnage totals might still increase year-on-year, they will be nowhere near the levels predicted a few years ago.

  Prices have risen again recently in the past few weeks, to the point where ‘‘spot’’ or one-off cargoes of Newcastle coal are selling for about $87 a tonne, compared with the sub-$80 quotes that were common a few months ago.

If these sorts of break-even prices prevail, then the industry could well return to the situation that prevailed in the late 1980s and early 1990s, when the NSW Coal Association – as the Minerals Council of NSW was known at the time – used to characterise the industry as one of ‘‘profitless prosperity’’. In other words, everyone who worked in or with the industry made money, while the coal companies themselves made only modest returns at best.

The downturn has already resulted in many hundreds, and perhaps thousands, of contract mineworkers quietly losing their jobs, and a handful of mines have announced cuts in production.

Three small mines – Sunnyside at Gunnedah, Mannering at Wyee and Airly near Lithgow – have been closed on ‘‘care and maintenance’’.

Until recently, the Hunter coal industry was also characterised as ‘‘bottlenecked’’, with legendarily long queues of ships waiting to load coal for export to Japan and the rest of the industry’s mainly Asian customers.

 Under the often arcane rules governing the sea trade of commodities, it was the coal companies who paid the costs of the ships whose port delays triggered late-loading fees – demurrage charges, as they are known – that can typically run to $10,000 a day for the big Cape class ships that dominate the Newcastle trade.

It was the $100million annual cost of demurrage that resulted in the Australian Competition and Consumer Commission helping with separate short-term and long-term procedures to guide the industry’s growth.

The aim was to use the binding 10-year take or pay contracts mentioned above to ‘‘align’’ the growth of rail and port infrastructure with growth in the mining industry.

These contracts were fine while the market was rising, but in a contracting market, even the ‘‘fail safe’’ mechanism – the ability for companies to trade loader allocations between themselves – is not much good if nobody wants them.

Two companies, Whitehaven and Yancoal, have both warned investors in recent weeks about the cost impacts of the take or pay contracts.

But paying to shift non-existent coal is only one part of the take or pay equation.

Arguably the bigger question is whether these contracts are distorting the economics of the coal market by discouraging production cuts aimed at driving up prices by creating a scarcity of supply.

The confidential nature of these contracts makes it hard to be sure of their impact but average costs of about $10 a  tonne  are accepted as ball-park figures.

In round figures, the 15per cent shortfall in exports this year could be costing the industry about $200million, or twice the $100million that was bothering the ACCC in demurrage costs.

  Coal prices could indeed pick up again – noted economics commentator Ross Gittins is convinced the current downturn is simply a pause before the next mining boom takes off – but it’s fair to say that he is in the minority camp at the moment.

For much of the time since WWII, the Australian export coal industry has been a price-taker, rather than a market-maker. Japan was our main customer and the big electricity companies that burnt our coal bargained hard as a collective.

But they were also prepared to pay for security of supply, and it is this long-term relationship that some say has been unfortunately unsettled by aggressive buying from China.

It’s been this Chinese demand, as much as anything, that has fuelled the rapid increases in value of Australian coal companies, triggering the sort of takeover and development mania  characterised by Nathan Tinkler’s rise to fame and the unseemly scramble for coal licences now being played out before  ICAC.

THE potential for a smaller T4 certainly brings the finances of the project into  relief.

A shallow Hunter River, less than two metres deep in some parts, needs to be dredged to 15metres for more than a kilometre nearly all the way to the Tourle Street bridge, a task that helps lift the cost of even the reduced T4 to $3.5billion.

 That is a lot of money, especially when PWCS could probably tweak more capacity out of its existing Carrington and Kooragang terminals, which would require state government permission to lift their approved operating limits.

Du Plooy did not rule this out.

‘‘Whether that is an option or not would depend on the level of demand for T4,’’  he said.  ‘‘As things stand, even the worst case scenarios continue to suggest that T4 will be required.’’

Procedures are in place to allow coal originally destined for PWCS to be shipped through NCIG, should NCIG have the room to move it, and wish to take it on.

Another alternative would be to build T4 but close Carrington, which would win PWCS community plaudits for reviving what many believe was a longstanding government and industry promise to eventually move all of the port’s coal loading to the north side of the Hunter River.

Three major rail projects will also have a major bearing on what happens in the port. The major  rail companies, Pacific National and QR National, are moving their maintenance and refuelling facilities out of the port.

Pacific National has almost finished a new facility at Greta and QR is seeking approval to set up at Hexham, where it will build five sidings to hold its trains.

Beside it, the Australian Rail Track Corporation, which runs the Hunter’s coal rail lines, is planning another 10 sidings to improve scheduling of trains into the port.

ARTC has just extended its third coal track south from Singleton to Maitland.

 Together, these projects will free up the rail lines in and out of the port, although PWCS says the  efficiency gains have already been worked into the sums that give the existing loaders a potential capacity of 210million tonnes.

On the picture  unfolding now, it may be some years indeed before any more capacity is needed in a port that might have lost its old mantle as the world’s biggest coal port, but which is still an awful lot bigger than most. 

T4 loader row rumbles on

THE substantial expansion of the Hunter coal industry has been accompanied by a corresponding increase in environmental and community concern, much of which has focused on the unwanted impacts of the T4 loader. As much as the coal industry likes to characterise its critics as rent-a-crowd hippies who use multiple organisations to make their numbers look larger, there remains a substantial body of the Hunter public opposed to the industry, and concerned about its health impacts – real and perceived.

John L. Hayes, a former music industry lawyer who moved from Sydney with his wife Rosie for a quieter Newcastle life in retirement, has become one of the  outspoken critics of the impact of industry on suburban Newcastle.

His Correct Planning for Mayfield Group came to light during the 2011 state election,  in the days when Nathan Tinkler had money and clout and was eyeing  the former BHP steelworks site for an alternative loader to T4. Since then, Hayes has worked with Newcastle’s established activist network, which includes people like former Greens councillor John Sutton and Rising Tide co-founder Steve Phillips, to take the community fight up to Port Waratah Coal Services and other industrial heavyweights.

As a spokesperson for the Coal Terminal Action Group – a coalition of 16 community and environmental groups –  Hayes said the threat of T4 was as great as ever, regardless of its size.

Hayes said Tuesday’s announcement of a dramatic cutback in the size of the project meant the approval process should start again.

“This is a very sneaky move by PWCS, designed solely to allow the company to avoid assessing the full cumulative impacts of the original proposal,’’ Hayes said.

Self-described ship-watcher Rick Banyard said that if the coal demand had fallen away, then T4 should not even be considered for approval.

In a submission to the planning department in May, Banyard argued that PWCS could get a lot more out of its existing operations, based on his long-term ‘‘real time’’ observations of the times ships took to load.

‘‘Why, for example, does it take ships about the same time to load at Kooragang as they do at Carrington, when Kooragang has three ship loaders that can move 10,500 tonnes an hour and Carrington has two doing only 2500 tonnes an hour?’’ Banyard asked.

He told the planning department it was ‘‘unreasonable and unrealistic’’ to allow T4 to be approved until the existing coal terminals were used to near capacity level.

 As it happens, PWCS chief executive Hennie du Plooy said something very similar on Thursday when he said: ‘‘Because the cost of new capacity is so expensive, it is going to be in the more general interest of all of the stakeholders that the existing loader capacity, including NCIG, is fully utilised before T4 comes on stream.’’

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