Japan takes Queensland to task over coal scheme

Japan may be whingeing about the Queensland government’s new coal royalties scheme, but will the current slide in coking coal prices especially starting making a dent in the amount Premier Palaszcuk can grab from the industry before the extra income has been banked?

Japan’s Ambassador to Australia Shingo Yamagami took the opportunity of a public function at Queensland University on Wednesday to criticise the royalty rises and the way the government went about changing the tax regime.

He claimed the move could endanger not only investment from Japan in coal in Queensland, but in other areas.

From his comments the real fear is future state taxation of renewables such as hydrogen and new technologies where Japanese companies are investing with local and other companies.

Under the old Queensland coal royalties scheme, the top tier royalties rate (15%) kicked in at $150 a tonne. Queensland coking coal has been selling for between $300 to $500 a tonne – and at times more in the months after the Russian invasion of Ukraine on February 24.

The 10-year royalty freeze started when coking coal prices were around $150 a tonne. Miners will now pay royalties of 20% for prices above $175 a tonne, 30% for prices above $225 a tonne, and 40% for prices above $300 a tonne.

The measures are expected to net an additional $1.2 billion in revenue. The government expects prices to ease over the next couple of years.

That easing has become apparent in the past three weeks. Prices for coking coal were falling before the budget on June 21, when the Singapore Exchange futures price closed at $US360.33 (or around $A520 a tonne).

On Wednesday, the Singapore futures price was $US265 a tonne, (or $A389).

Global thermal coal prices have seen a smaller slide because of the shortage in the product caused by the sanctions imposed on Russia after its invasion of Ukraine. The ICE Newcastle thermal coal index ended at just over $US399 a tonne on Wednesday. That’s up from $US390 a tonne on June 20, the day before the Queensland budget was delivered.

Thermal coal prices will continue to be boosted by shortages in Europe especially. Chinese demand will not be a factor and despite their complaints, Japanese buyers will continue to buy the higher quality Australian coals compared to the cheaper and lower coal product from Indonesia.

The sanctions on Russian coal means the Japanese will not want to upset America or the EU in dealing with the Putin regime in the way that the Chinese are (and buying coal and oil from Russia at big discounts).

Solid demand from South Korean buyers is also helping keep prices higher, as are continuing inquiries from European utilities and traders.

Japan has consistently over the years complained about Australian resource taxes and policies – from the resource rent tax ideas of former labor governments to royalty rises for coal, and oil and gas.

Mitsubishi is the biggest Japanese investor in Queensland coal with its 50% of BMA with BHP, the world’s biggest single coking coal exporter. Other Japanese companies – especially trading houses, have wound back their involvement in Australian coal. They still have stakes in iron ore (with the likes of BHP) and in LNG (with Woodside, Shell and other projects in WA).

Mitsui is trying for a second time in three years to sell interests it has in the South Walker and Poitrel coal mines in Queensland – the latest sales process started just before the budget was brought down with the higher royalties (which won’t make Mitsui’s efforts to sell any easier).

The Queensland government said that after a 10 year freeze it was time miners paid more seeing coal prices were higher – Treasurer Cameron Dick nominated $500 a tonne in a comment in June.

Coking coal prices are no longer near that level and will continue to weaken as demand from steel mills weakens, according to the latest forecasts in the Federal Government’s Resource and Energy Quarterly for June.

“The Australian premium hard coking coal price is forecast to average over US$420 a tonne in 2022, but is expected to fall by almost half as supply conditions normalise. Prices are ultimately expected to reach around US$220 a tonne by 2024,” the Quarterly said this week.

“Higher production in NSW and Queensland is expected to push Australia’s exports up from 171 million tonnes in 2020–21 to 174 million tonnes by 2023–24.” That 3 million tonne increase is incidental and a sign that demand for coking coal has peaked.

Thermal coal prices are for the moment stickier as energy supply/demand levels sort themselves out in the next few months leading into a northern winter, especially in Europe.

But the Resource Quarterly sees thermal coal prices fading as well “As more normal conditions return, the Newcastle benchmark price is forecast to ease from a peak of US$280 a tonne in 2022, to average around US$115 a tonne in 2024.”

“A resolution of recent supply disruptions is expected to see Australian thermal coal exports increase from 192 million tonnes in 2020–21 to 207 million tonnes by the end of the forecast period.”

That extra 15 million tonnes of demand is also marginal and will be driven by demand from Europe and the fate of Russian gas and oil supplies as well as new supplies of lNG from Australia, the US and Middle East over the next three years.

That could very well do a lot of damage to the Queensland Government’s royalties grab.