BHP (ASX:BHP) has made the strongest warning yet from a coal miner about the potential damage the lift in royalties from the Queensland government in its 2022-23 budget might cause.
Last week it warned of the potential impact the boost in royalties, yesterday it said it would now review investment in its huge metallurgical coal business BMA (half owned with Mitsubishi).
Last Thursday, BHP described the decision to increase royalties on some of the state’s biggest employers without consultation as the “antithesis of considered policy”.
“It’s a backward step, and damages both Queensland’s and Australia’s reputation as a place to invest,” BHP Australian minerals president Edgar Basto said.
BHP mines metallurgical coal from seven assets in Central Queensland’s Bowen Basin as part of a joint venture with Japan’s Mitsubishi.
Its June quarter production and sales report said BMA produced 58 million tonnes of coking coal in the year to June, of which BHP’s 50% stake meant it was entitled to 29.1 million tonnes.
BMA is the biggest exporter of hard coking coal in the world and has managed, like the rest of the Australian export coal sector, to survive the arbitrary ban on Australian coal imposed by China in mid 2020 – China was becoming BMA’s growth market in 2020.
In Tuesday’s 2021-22 annual production and sales report, BHP CEO Mike Henry went further than last Thursday’s remarks.
He said its Queensland metallurgical coal business (that’s BMA) “delivered strong underlying performance for the (June) quarter in the face of significant wet weather.”
But he went on to warn that “BHP is assessing the impacts on BMA economic reserves and mine lives as a result of the increase in coal royalties by the Queensland Government.
“The near tripling of top end royalties has worsened what was already one of the world’s highest coal royalty regimes, threatening investment and jobs in the state,” according to Mr Henry.
The 10-year royalty freeze started when coking coal prices were around $A150 a tonne.
Miners will now pay royalties of 20% for prices above $A175 a tonne, 30% for prices above $A225 a tonne, and 40% for prices above $A300 a tonne.
The measures are expected to net an additional $A1.2 billion in revenue. The government expects prices to ease over the next couple of years.
They have already started easing with the SGX futures hard coking coal price in Singapore around $US247 a tonne – a couple of months ago that price was over $US400 a tonne. In fact prices are down 17% in the past week or so.
The high prices have already had a substantial impact on the state’s bottom line – coal royalties income for the current 2021-22 financial year will be more than $9 billion almost triple the projection in last year’s state budget.
Compared to the budget projections in 2021, royalties income from coal and gas producers were about $$US12 billion in the year to June.
Queensland Treasurer, Cameron Dick has justified the rise, claiming multinational coal companies had enjoyed “an extraordinary period of stability” but that royalty rates needed to take into account the unplanned for windfall prices.
Other coal companies have protested the royalties hike, as has the Japanese government (and complaints from South Korea have been reported) but BHP’s two complaints in less than a week places real pressures on the Queensland government.
BHP though is in a stronger position because its smaller rivals have only one or two mines and would be crippled if they followed BHP and started reviewing their mining businesses with a view to putting pressure on the government.
BHP can do it because of its size and clout.