Queensland’s new tax angers coal miners

Australia’s biggest miners say the Queensland government’s latest 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 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.   

Queensland’s government outlined in its annual state budget that from Oct. 1, the levy for coal sold above A$100 per tonne will rise to 12.5% from 10%, and 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), state that the new royalty rates, combined with the company income tax, means the state will carry an effective taxation rate of 50% on a typical coking coal mine.

The council’s chief executive Michael Roche says that the coal industry contacted government officials to explain how higher taxes would further undermine the sector that has already 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,” Roche says.

“For some existing high-cost coal mines, the new royalty structure could be the final straw,” he cautions, noting that 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, echoes his dismay. “We are shocked, surprised and disappointed by the size of the royalty increase that has been imposed by the Queensland government,” he says. “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 adds that this would put more jobs on the line at existing coal mines and projects. In Queensland, Rio Tinto operates the Blair Athol, Hail Creek, Kestrel and Clermont coal mines. It reports that it will also wrap up operations at the soon-to-expire Blair Athol mine, which employs 170 workers.

Construction, Forestry, Mining and Energy Union president Steve Smyth tells ABC News that “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.”

Producers argue this isn’t the case, and point out that 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,” Xstrata Coal spokesperson Francis de Rosa tells The Northern Miner by email. “There is a risk that the increase in royalties could result in production cutbacks in marginal operations.”

In an attempt to keep costs down, 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 assures that production volumes will not be materially impacted by the downsizing.

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

As part of the review, BMA announced earlier that it would take its Gregory mine offline in October because it is costly to operate in the low-price environment, putting the jobs of 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 people.

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 notes that the spot price of metallurgical coal has been dipping since July. That’s the same month that BMA, the largest exporter of hard coking coal, settled a lengthy labour dispute involving 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 writes in a Sept. 18 note.

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