Coal stoush heats up as miners told to supply local power plants
Australia’s largest coal miners, including BHP, are pushing back against a new reservation policy that will force them to set aside hundreds of thousands of tonnes of coal for domestic power plants for 15 months, despite wringing major concessions from government.
As part of a national effort to boost east-coast coal supplies and limit soaring electricity bills, NSW Treasurer Matt Kean issued final directions to the state’s coal exporters earlier this week requiring them to hold back 5 per cent of each mine’s output volumes for use by the state’s coal-fired power stations.
Coal diverted under the NSW reservation scheme will be capped at $125 a tonne – vastly lower than the elevated prices that Australian coal cargoes have been fetching on international export markets due to the war in Ukraine worsening a global energy crunch.
Under pressure from the coal industry, Kean this week lowered the reservation requirement from an initial range of between 7-10 per cent to 5 per cent. The government also confirmed any miner that can demonstrate production costs exceeding the cap of $125 per tonne could apply to increase the cap, and companies would not be made to break pre-existing contracts.
However, major coal producers have renewed warnings this week that the NSW intervention risks disrupting the market and causing negative long-term consequences.
BHP, the largest Australian mining company, said the reservation requirement raised questions about the future of its giant Mount Arthur coal mine in the NSW Hunter Valley, which employs 2000 people.
“There is still significant uncertainty as to how the directions will operate in practice,” BHP vice-president of NSW energy coal Adam Lancey said.
“We remain concerned about the impacts to Mount Arthur Coal’s operations and business model, regional infrastructure such as the rail network, and our commitments to the community.”
In an email to staff last month, BHP said the reservation policy could force the company to re-evaluate its existing plans to continue operating Mount Arthur until 2030.
The coal reservation plan is aimed at lowering the cost of running large coal-fired power plants in a bid to tame the soaring wholesale electricity prices that will ultimately flow through to people’s bills. Left unchecked, east-coast power prices had been forecast to increase by more than 50 per cent by 2024, according to the federal Treasury.
Kean said the policy’s impact was apparent already as electricity futures contracts – those bought by retailers and large customers to lock in supplies at a later date – had fallen by 41 per cent since the price caps were first announced late last year.
He said the reservation requirement was a “modest ask” of the state’s coal producers, which had exported more than $61 billion of coal through the Port of Newcastle last year.
NSW coal miners that sell domestically are already subject to a temporary $125-a-tonne cap on local sales of intermediate-grade thermal coal. The state government has said the intention of the coal reservation plan was to help “even the playing field” between the state’s coal miners selling into the local market and those exporting their product.
The state’s biggest coal producer, Glencore, extracts about 30 per cent of the state’s thermal coal, but under the government’s final directions, the company said it is expected to provide up to 65 per cent of the state’s coal shortfall.
“We don’t know how the NSW Treasurer can talk about levelling the playing field for coal companies,” Glencore said.
Both Glencore and ASX-listed Whitehaven Coal posted record earnings on Thursday, inflated by soaring coal prices. Investors, wary about future softening in coal prices and rising costs, marked the miners down, with the share price of most major producers slipping on the Australian bourse.
Benchmark prices of high-quality thermal coal traded at the Port of Newcastle more than tripled last year to a record high of more than $US400 a tonne. However, prices have plunged 47 per cent so far this year as milder-than-average winters in Europe and parts of Asia have subdued demand.
“The fall in seasonal demand in the Northern Hemisphere, … will likely keep coal prices under pressure,” Commonwealth Bank mining and energy analyst Vivek Dhar said. “But we think it’s premature to think that thermal coal prices will return back to pre‑Ukraine war levels.”
While the coal market is expected to remain tight for some time yet the longer-term outlook remains deeply uncertain as countries across the world speed up plans to move away from carbon-intensive fossil fuels and embrace cleaner sources of energy.
Whitehaven on Thursday said it was finalising plans to meet its obligations under the reservation scheme. “This is largely a political issue. That is my concern,” chief executive Paul Flynn aid. “There’s not a shortage of coal going around, it’s a price issue.”
Yancoal chief executive David Moult said the scheme was rushed and poorly designed.
“Yancoal’s logistics are set up to export coal internationally – they are not geared towards domestic coal sales and redirecting coal to domestic customers could prove resource- and cost-intensive,” he said. “The scheme presents significant logistical challenges and will be disruptive to supplying coal to export markets.”
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