Threat To Australian Coal Industry From Carbon Tax

by Mary Swire, Tax-News.com, Hong Kong

26 July 2011

Australia’s proposed carbon tax could lead to a AUD8bn (USD8.7bn) drop in the value of the coal industry according to research group Wood Mackenzie in its report ‘Australia: Impact of the carbon tax’ just published.

Ben Willacy, Australasia Coal Supply Lead Analyst and author of the report, says: “The proposed taxation on fugitive coal mine emissions and an associated reduction in the fuel rebate for the industry will have an uneven impact on costs and value for coal producers.”

“It can cause a decrease in net present value (NPV) from as little as 2% to as high as 15%, based on a conservative scenario of the government’s carbon permit scheme. This is an average of a 4% reduction in net present value of coal companies’ Australian portfolios.”

“The average impact on the industry may seem small in terms of percentage reduction in NPV. However in absolute terms, this will still amount to significant costs to the industry. A 4% reduction in NPV corresponds to a AUD8bn drop in industry value. Moreover, in the long run when the trading scheme kicks in, an upward movement in price will have a greater cost impact on the industry.”

Highlights from the report:

• The impact of the tax varies significantly by mine. Gassy underground mines are hardest hit by the plan as they release the largest volume of fugitive methane emissions during the mining process; surface mines face much lower costs; and non-gassy underground mines are the least affected.
• The corporate impact of the carbon tax will depend on the mix of coal mines and projects owned by each company. Operators with a focus on surface mining, particularly for metallurgical coal, will be the least impacted by the tax. This includes BHP Billiton, Macarthur Coal and Aston Resources. Companies with a focus on gassy underground mining, and mines with low margins, will face the largest reductions in value. This potentially includes companies like Caledon Resources and Gujurat NRE, whose mines fit in the gassy category.
• The lower operating margins associated with the carbon tax and uncertainty over future carbon permit prices may damage investments in future projects, particularly in gassy underground thermal coal resources.

In summary, Mr Willacy says: “The average percentage increase in costs for the industry is quite small. However, no company will welcome the additional costs and this could have a negative impact on overall coal investments.”

”Companies in the early stages of project planning are likely to re-evaluate their investments in new coal mines, particularly underground thermal projects. Also those who have projects in advanced stages of development will face additional costs that were unaccounted for.”

Queensland Resources Council Chief Executive Michael Roche told a Senate Committee hearing in Brisbane this week that he was puzzled by the state government's failure to highlight losses of AUD1bn in coal royalties as a result of the proposed carbon tax.

Addressing the Senate Select Committee on the Scrutiny of New Taxes, Mr Roche said that according to independent analysis by consultants ACIL Tasman, 2,700 Queensland coal workers would be out of jobs by early as 2018 owing to the premature closure of both gassy and low margin mines.

“Assuming a four times indirect employment multiplier, this means the loss of 13,000 Queensland jobs,” he told Senators.

“For the Queensland Government the foregone royalties of these coal mine closures will be significant with ACIL Tasman estimating a cumulative reduction in Queensland coal production 120m tonnes by 2020-21, which equates to the loss of AUD1bn in coal royalties."

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