Australian coal

Turning the corner, but battle ahead
Things are looking up for the Australian coal industry.

Spot prices have increased strongly over the past year, by around 100% for coking coal (used mainly for steel production) and over 50% for thermal coal (used mainly for electricity production).

Chinese demand for coal has been stronger than anticipated, with much of this benefiting imports in the face of Chinese-government moves to limit domestic production.

Shares of mining companies specialising in coal have also increased strongly over the past year – for example, nearly sixfold for Whitehaven Coal, fourfold for Yancoal Australia and threefold for Stanmore Coal.

Coal-mining companies looking to sell mines (e.g. Rio Tino, Peabody Energy, Anglo American, Vale Australia) have found ready buyers (e.g. Yancoal Australia, Mach Energy, South32, Batchfire Resources, AMCI Group).

And in recent months, the Federal government has stepped up its support for coal. For example, speaking to the National Press Club on 1 February, the Prime Minister (Malcolm Turnbull) said:

“Old, high emissions coal-fired power stations are closing down as they age, reducing baseload capacity. They cannot simply be replaced by gas, because it’s too expensive, or by wind or solar, because they are intermittent …. as the world’s largest coal exporter, we have a vested interest in showing that we can provide both lower emissions and reliable base-load power with state-of-the-art clean coal-fired technology”.

Backing its case, the government is pointing to the state-wide power blackout in South Australia in late September and subsequent blackouts in that state. South Australia’s heavy reliance on wind power (responsible for approximately 40% of electricity supply) is widely seen as contributing to these blackouts.

More generally, the increasing use of renewable energy in Australia is seen as an important contributor to increasing electricity prices.

For example, in the next two years to June 2018, residential electricity prices are expected to rise by 15% in South Australia, 12% in the ACT, 11% in New South Wales and 9% in Victoria (rises will be less in other states). These expected outcomes are well above the expected inflation rate and continue the trend evident since the early 2000s. (Source: Australian Energy Market Commission, which sets the rules for the electricity market.)

Businesses as well as households are suffering as a result.

For example, in its report for the second half of 2016 (presented this week), BHP Billiton said that power failures in South Australia in the period had cost it $100 million at its Olympic Dam mine. Many other businesses in the state have also suffered.

Last month, the owner of the Boyne aluminium smelter in Queensland (controlled by Rio Tinto) said that is reducing production “in response to elevated electricity prices in Queensland over a sustained period”.

The debate over coal, renewables and the electricity network will intensify in the next months with the release of two reports. The first will be the final report by the Australian Market Energy Operator (which manages the electricity market) on the blackout last September in South Australia; this is expected by April. The second will be final report on the security of Australia’s electricity market, being led by the Chief Scientist, Dr Alan Finkel; this report is expected by July.

Both reports are likely to underline the importance of coal for the electricity network.

In so doing, they will strengthen the hand of the coal industry. Coal’s opponents will respond strongly. Given increasing concerns about energy prices and the reliability of the electricity network, the time is opportune for a full debate on the place of coal in Australia’s economy.