Queensland coal royalty hike brings investment warnings

An increase in royalty rates for Queensland's metallurgical coal producers in Australia is expected to cap investment in the sector and push up costs in the long term, although short-term spot prices are unlikely to be affected.

Queensland's state government is introducing upper tiers to its coal royalty regime from 1 July. Existing coal royalty tiers remain unchanged. From 1 July mining firms will pay 20pc royalty on prices exceeding A$175/t, 30pc over A$225/t and 40pc over A$300/t. The higher tiers take effect on the portion of the royalty price above the relevant price. If coal prices are A$302/t, the 40pc tier will only apply to the $2 portion.

The Argus fob Australia premium low-volatile coking coal index average is $472.87/t so far this year, the highest in over a decade. The index was $324/t on 27 June. The US dollar was worth 1.44 Australian dollars on 27 June, implying a spot price of A$466.60/t for metallurgical coal.

Any support to coking coal prices is limited in the short term with a global steel market slowdown.

"I do not think higher costs would mean higher coking coal prices in the short term," a Queensland producer said, adding that it will take 6-12 months before any impact from the new royalties is apparent. "It drives volatility in the coking coal market. If there is any supply tightness in future, miners will not be there to react."

Coal producers expect the move to deter future mine investments.

"This proposed tax grab would permanently bake in Queensland as the regime with the highest royalties in the world, ostensibly to solve a near-term government funding issue. This raises substantial risks to further investment in Queensland mining and regional Queensland jobs," Bowen Coking Coal executive chairman Nick Jorss said on 22 June. The producer began railing coal from its 1.2mn t/yr Bluff pulverised coal injection mine to Gladstone this month.

"This will be a strong disincentive to investment as it weighs on the mindset of coal miners. Down the track it will lead to more volatility," another Australian producer said. Mining requires investment on a steady basis so the high royalties cause a shock to capital expenditure, so instability will occur during the medium term, he added.

Chris Bowen was appointed climate change and energy minister in the new Australian federal Labor government's cabinet this month, promising to push for a 2030 greenhouse gas emissions cut of 43pc without halting all new gas and coal projects.

Cost to customers

The cost increases incurred by coal producers are expected to be passed along to customers.

"It is bad for customers eventually as it incentivises higher pricing by vendors," an Indian steel producer said. "I see this changing the cost structure for Australian coal producers and pushing the cost curve higher. Prices will be higher for longer. This happened with Indian iron ore too where higher taxation eventually pushed up prices," referring to the hike in royalties from 10pc to 15pc implemented by India in 2014.

"Mining is not a short-term industry. When such short-term decisions are made, they often have adverse effects a few years down the line," another Australian supplier said.

The move by the Queensland government could set a precedent for other Australian state governments. New South Wales has so far kept its royalties unchanged at 8.2pc of the value of open-cut mined coal, 7.2pc of underground coal and 6.2pc of deep underground coal.

By Parvin Chong and Deepali Sharma