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On The Up Down Under

Oilfield Technology,

The volume and value of Australia’s coal exports are expected to recover strongly in the current financial year, ending 30 June 2012. According to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), exports will reach record highs after declining in the year to June 2011.

In its June quarter review, ABARES predicted that in the 2011 – 2012 financial year, Australia will earn more than AU$ 60 billion from exporting 316.8 million t of metallurgical and thermal coal, mostly to Asia. Coal will account for more than 27.5% of Australia’s projected earnings of AU$ 218.3 billion from exporting energy and mineral products this financial year, compared with 25.2% of AU$ 182 billion for the previous 2010 – 2011 financial year (ending 30 June 2011).

ABARES expects metallurgical coal sales earnings to rise by 30.7% to AU$ 41.7 billion, while revenue from thermal coal will grow by 30.9% to AU$ 18.3 billion. The volume of metallurgical coal exports is expected to grow by 14.4% to 164.2 million t, while thermal coal is seen rising by 12.4% to 316.8 million t.

For the previous financial year, ABARES has predicted Australia’s total coal exports to fall by nearly 3.6% to 281.8 million t due to lost production following the heavy rainfall and floods in the main coal mining state of Queensland between December 2010 and February 2011. The combination of rainfall, floods and cyclone damage caused the biggest slump in Australia’s GDP for 20 years in Q1 2011. However, export earnings will still increase by a whopping 26.1% to AU$ 45.9 billion, thanks to sharply higher coal prices over the past year.

The volume of metallurgical coal exports are seen falling by nearly 8.8% in the previous financial year, but will recover on strong global demand for steel from H2 2011 through to 2012.

Partly offsetting the decline in metallurgical coal exports, Australia’s thermal coal exports will rise by 2% to 138.3 million tpa in the year ending 30 June 2011. Despite the bad weather from late 2010 to June 2011, miners were still able to start up a number of new mines, as well as expand capacity at Mount Arthur and in the Hunter Valley to take advantage of the expanded export-oriented Port of Newcastle.

ABARES said it expects prices to ease in the September and December 2011 quarters on rising production and exports from Queensland mines, which are due to resume operating at capacity by September.

For 2012, ABARES anticipates metallurgical coal contract prices to average US$ 241/t as increased supply from Australia and North America puts downward pressure on prices. But the market will remain supported by strong demand for steel production in China and India, as well as the reconstruction work in Japan following the March 2011 earthquakes and tsunami.

“Over the next 18 months, thermal coal spot prices in the Asia-Pacific market are expected to remain above US$ 100/t, supported by strong growth in demand for coal from electricity generators in Asia, particularly China, India and South Korea. Japan’s thermal coal imports are also forecast to increase in 2012 as coal-fired electricity generation increases and use of nuclear power facilities falls,” said ABARES.

In March 2011, Australian coal suppliers and Japanese power utilities settled some thermal coal contract prices at around US$ 130/t for the Japanese financial year ending 31 March 2012. The record price reflected both strong demand in Asia and supply disruptions in Australia, Colombia and Indonesia.

The carbon tax and coal investments

Sheltered from the worries of economic collapse and geo-political conflicts, Australians have once again chosen the carbon tax as their top national issue. Multiple death threats against climate scientists, possibly the first in the world, have given a surreal edge to the increasingly divisive debate which already has felled former prime minister, Kevin Rudd, and now threatens his successor, Julia Gillard, whose Labor Party was narrowly re-elected to power against the coal lobby-backed opposition in August 2010.

Following months of devastating rainfall, floods and cyclones in the key mining and farming stretches of Queensland and New South Wales, Gillard has resurrected the climate issue and carbon tax idea with greater conviction. Gillard’s Government has proposed to impose a carbon tax on polluting firms from July 2012, placing it directly into confrontation with the powerful coal and natural resources lobby.

Advantage, coal lobby

Both sides have stepped up the propaganda war in recent months, with the mining sector, led by the coal producers, appearing to have the early advantage. Having helped overthrow Rudd in June 2010, the well-organised and financially-equipped miners have the momentum to wage a long campaign to stop the tax, as well as loosen Gillard’s shaky grip on power. Her rise to power, ironically, owed much to the miners’ success at unseating the more popular Rudd.

The anti-carbon tax camp includes some of the world’s most powerful coal miners and natural resource companies including Anglo American, Rio Tinto and Xstrata. They argue that the proposed tax will derail the Australian economic miracle by sharply raising the cost of business. This will scare off investors, force the closure of mines and lead to large-scale unemployment in the booming mining sector.

The Australian Coal Association (ACA) has launched a AU$ 5 million nationwide campaign to persuade the public to oppose the tax. It said the tax could cost its members a total of AU$ 18 billion, severely undermining their competitiveness on the world markets.

Opposition leader Tony Abbott has portrayed it as “a great big tax” that would raise the cost of living and destroy jobs in the mining and manufacturing sectors.

The Government’s case for the carbon tax

The Government said it needs the scheme as the country has one of the highest per-capita rate of greenhouse gas (GHG) emissions in the world. Canberra has promised to cut emissions by 5% from its 2000 levels by 2020.

The Government has released a study supporting its case to promote the pricing and trading carbon emissions as the most effective national scheme to reduce pollution and battle climate change. The Government funded the independent Productivity Commission to study hundreds of measures to tackle GHG emissions in China, Germany, Japan, New Zealand, South Korea, the UK and the US. The study found that some countries had introduced emissions trading schemes, as well as established renewable energy targets and subsidies or feed-in tariffs to encourage industries and citizens to reduce emissions. It concluded that policies that encouraged small-scale renewable generation and biofuels “generated little abatement for substantially higher cost.”

On the other hand, it found that emissions trading schemes were cost-effective, as they placed a cost on high-emissions products and helped reduce demand and encouraged the production of low-polluting substitutes. “It is this market-based objective assessment of the costs and benefits of abatement options that underpins why direct pricing mechanisms generally will deliver any given amount of abatement at least cost,” the commission said.

Trump cards: Asia and the weather

The Government’s popularity has slumped since Gillard announced the carbon tax plan in February, which is supported by party loyalists, most scientists, academics, green groups and celebrities. But recent events have strengthened the Government’s position to push through the proposed tax. The devastating rainfall, floods and cyclones to hit Australia’s main mining regions played to its message that climate change is real, and the country needed to act to combat global warming.

Asia’s boom

Canberra can also argue that it will ultimately be Asia, not Australia, that will pay for any carbon tax imposed on its energy and natural resources sector.

Thanks to Asia’s boom, Martin Parkinson, Australia’s treasury chief, has presented a rosy long-term outlook for his country’s economy, with enhanced mining and energy capacities and high export prices leading the way. The treasury expects Australia to attract around AU$ 380 billion of new investments into its already massive mining sector by 2016. Miners have committed AU$ 83 billion in the current financial year to June 2012, rising from AU$ 51 billion in the year to June 2011. These investments are driven by higher demand for commodities, particularly from China, India and other fast-growing Asian economies. Parkinson added that other parts of Australia’s economy will also benefit from the energy and mining boom, and will more than offset losses in the manufacturing sector. The Reserve Bank of Australia expects mining investments to rise over 6% by 2012 – 2013, helping the economy to grow 4.25% this year and 3.75%/year through 2015. Parkinson’s prediction has strong foundation. With or without the carbon tax, coal companies from Asia and Brazil said they are planning to invest heavily in Australia.

Author: Ng Weng Hoong, World Coal contributing editor.

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