Prime Minister Julia Gillard has claimed that US-based Peabody Energy’s $5bn takeover bid for Queensland’s Macarthur Coal represents an endorsement for the government’s carbon tax.
But does Peabody’s bid indicate that international investors see a good future for coal in Australia?
Gillard’s claim assumes too much. Important aspects to consider include:
Macarthur Coal specialises in (although is not limited to) a coal product that is particularly useful in the production of steel. It accounts for 30% of the global trade in this niche market. Therefore, Macarthur Coal is not a “typical” coal mining company and as such this takeover bid does not indicate anything about the coal industry in general.
Takeover bids take a long time to formulate. Peabody’s announcement is a result of months, if not years, of work. Importantly, this is not Peabody’s first attempt to buy a controlling share in Macarthur Coal. This indicates that Peabody has harboured a desire to assume a controlling stake in Macarthur for a considerable amount of time.
Peabody may be of the opinion that the carbon tax scheme may not be legislated.
It may also be the case that Peabody has timed the takeover bid deliberately to capitalise on any concerns that shareholders may have about the future of the Australian coal industry. It is interesting to note that they are reportedly offering $15.50 a share which is lower than last year’s (initial) offer of $16.00 per share.
More broadly, another major question to address is whether the compensation for the coal industry enough.
The current design of the proposed carbon tax scheme means that dependence on coal-fired electricity and coal mining in general will be reduced. Therefore, significant job losses will occur in this sector.
A report by ACIL Tasman suggests some mines will be at risk of closing prematurely and the economic contribution of new projects will be significantly inhibited as a result of a carbon tax.
Although the details are yet to be determined it is my opinion that compensation packages will be unable to offset the true economic costs. Coal is a very important sector that is interwoven into the Australian economy. It plays a particularly important role in regional areas where the effects of this policy will be felt most.
Future of the industry
There are three dimensions to the Australian coal industry. In each of these areas coal companies face significant challenges in the future if the package is approved.
Electricity generation. Treasury Modelling indicates that brown coal-powered electricity generation will be phased out in approximately 30 years, black coal-powered electricity generation will be either phased out or represent a very small proportion of aggregate electricity generation by 2050. It also shows that only a relatively small percentage of power generation is anticipated to be sourced from coal-fired power plants (new commercial-scale coal-fired power stations without carbon capture and storage technology will not be approved).
Construction. Coal is a key input into the cement manufacturing and steel making industries. These industries are key components of the construction industry. An increase in the cost of coal is expected to reduce output of these industries as profit margins shrink.
Exports. Competition in the international coal market is tight. Any increase in costs of production will significantly erode Australia’s international competitiveness. It is important to appreciate that Australia is not the largest producer of coal and therefore faces significant international challenges if the policy is implemented.
The imposition of a carbon tax will significantly decrease the level of economic activity in all three dimensions of the coal industry. This will have major ramifications for the Australian economy.
Importance of the coal industry
Results of a recent report a colleague and I authored for the Minerals Council of Australia measuring the economic effects of closing down the coal mining sector found this would cost almost 200,000 jobs across the economy, have a negative $6 billion impact on the federal budget, and reduce GDP by $29 billion to $36 billion. It’s worth noting this is a stated policy aim of the Greens.
In terms of potential output and lost jobs the cost of closing down the coal industry would be very high.
Interestingly, our findings also indicated that coal exports saved Australia from experiencing a technical recession.
The proposed carbon tax will significantly impede the economic performance of coal industry and thus represents a heavy cost to the Australian economy.