Queensland's miners will need a miracle to profit from coal now
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Version 0 of 1. The Sea of Galilee is known, in Biblical tradition, as the location of the miracle of the loaves and fishes. According to the gospels, Jesus fed a multitude (variously reported as 4,000 or 5,000 people) with only five (or perhaps seven) loaves of bread and a few small fishes, and still had many baskets of food left over. The Galilee Basin, in central Queensland, is on the opposite side of the world. It appears that a similar process is happening, but in reverse – with even greater doubt about the exact numbers involved. Related: Solar has won. Even if coal were free to burn, power stations couldn't compete | Giles Parkinson In the leadup to the Queensland state election Campbell Newman’s Liberal National party promised to deliver 22,000 jobs in the Galilee Basin, of which Adani’s Carmichael mine alone was supposed to provide 10,000. These claims were used to justify an injection of government equity into a rail line connecting the mine to the Abbot Point coal terminal. With the election behind us, and the LNP out of office, this bonanza has suddenly shrunk. Appearing in the land court of Queensland, Adani’s economic consultant, Jerome Fahrer of ACIL Allen, presented modelling estimating that the project would create a grand total of 483 extra jobs in the Mackay Isaacs Whitsunday region, where the proposed mine, rail line and port are located. Another 1,000 or so jobs are modelled to be generated elsewhere in Australia. An increase in employment of almost 500 jobs is trivial in the context of region where total employment is around 80,000. It would be swamped by minor fluctuations in the regional economy, not to mention the adverse impact that might arise if the Great Barrier Reef incurred serious damage from the project and the carbon emissions it would generate. How can claims of 10-20,000 jobs suddenly shrink to 500? In part, the coverage of the claims is different. The LNP estimate was based on the presumption that not only Carmichael but all the mines in the region would go ahead, although such an outcome would surely swamp the global market for coal. The bigger problem though was that, until now, modelling estimates have been based on a discredited technique, commonly referred to as “input-output analysis”. There are legitimate applications of this form of analysis, but project evaluation is not one of them. To quote Fahrer’s report, prepared for Adani, the unconstrained input-output “case is not realistic, for it effectively assumes labour market conditions associated with a deep recession, but lasting for over 30 years”. Thanks to the efforts of groups like The Australia Institute, the results of input-output analysis are no longer generally accepted in court proceedings. Since the institute is providing expert advice to the Coast and Country group, who are opposing the mine, Adani had no alternative but to commission modelling using a more realistic technique, known as computable general equilibrium analysis (CGE). The CGE approach still leaves plenty of room for judgement about parameters and assumptions and the experts have been at it hammer and tongs disputing these assumptions in the land court this week. There are, however, enough constraints in a CGE model to prevent the derivation of ludicrous claims of tens of thousands of jobs from a project which will directly employ only a few hundred people in its operational phase. Inflated as it is, the Adani jobs claim looks more plausible than the suggestion that its main rival, GVK Hancock, will generate $44bn in royalties and taxes for Australia’s public coffers from its Alpha mine. The project is currently on hold, following the failure of GVK to come up with the final tranche of $560m owed to Hancock Prospecting as part of the purchase price agreed in 2011. The royalty rate in Queensland is 10% for coal prices below $100/tonne (prices above that level will almost certainly never be seen again). At the current price of around $65/tonne, that’s $6.50/tonne. Alpha claims to be able to produce 32m tonnes a year. If realised, that would generate royalties of a little over $200m a year. That is, to realise the amount claimed, the mine would have to produce at its maximum capacity for over 200 years. Related: Adani coalmine would not deliver jobs and royalties promised, land court hears How about profits on taxes? GVK Hancock’s own estimate of the cash costs of extracting coal is $55/tonne and others are as high as $70/tonne. So, even at the most optimistic estimates of cost and extraction rates we are looking at a margin of $10/tonne for 32m tonnes or $320m a year, out of which a variety of corporate overheads will have to be paid. The capital cost of the project will be at least $10bn. So, at current prices, the gross return on capital before interest, depreciation and amortisation is at most 3.2%, barely equal to the rate of interest on Australian government bonds. Even if lenders can be found, there’s not going to be lot of profit on which to pay tax. Regardless of the outcome of current court cases, it seems unlikely that lenders will be found to finance these projects unless the long-term decline in thermal coal prices, which have halved sine 2011, is suddenly reversed. The miners are, in effect, hoping for a miracle. |