For investors in coal and other fossil fuels, the outlook is not rosy. In recent weeks the industry has been rocked by divestment announcements from a range of institutions including, it turns out, the highly influential Australian National University. Now former Citibank and Deutschbank managing director Tim Buckley points to why divestment is such a good idea.
According to Tim Buckley, director of Energy Finance Studies Australasia, Minerals Council claims that divestment campaigns constitute some kind of unfair secondary boycott look “spurious”.
“Having 25 years of financial analyst experience, I’m entitled to a view, and it is a view based on research, analysis and facts,” he says.
“I would argue that coal is in structural decline, and the Minerals Council didn’t see it coming.”
See our reports:
- News from the front desk, Issue No 212: divestment, free enterprise and why miners are scared
- Divestment campaign starts to bite
Buckley also says that claims that wind power is vastly more expensive than coal fired power are manifestly false, relying on financial analysis that ignores the cost of externalities.
“I would call the Minerals Council to account for saying wind is four to five times more expensive,” he says.
“The coal industry got away with a whole bunch of externalities for decades such as pollution and carbon emissions, and they use more water than any other industry. Obama understood this which is why he has introduced new water standards.”
Buckley also points out that there are many ways in which the coal industry escapes paying taxes, is made exempt from levies such as the diesel fuel excise, and benefits from infrastructure provided by state governments that do not recoup the cost of their investment.
In the July 2013 Queensland Treasury Response to Terms of Reference for the Commonwealth Grants Commission 2015, in relation to infrastructure investments that are directly related to the needs of the mining industry, Treasury says:
“Some costs may also be recovered by the government over time if they are directly industry related. However, there is a real opportunity cost for governments in undertaking the initial capital expenditure. Governments face budget constraints and spending on mining related infrastructure means less infrastructure spending in other areas, including social infrastructure such as hospitals and schools. For many projects directly related to assisting mining industry development, such as land acquisitions for state development areas, the expected timeframes for cost recovery are extremely long (sometimes decades). The opportunity cost of this use of limited funds is a real cost to government and the community.
“One view expressed during the GST Distribution Review submission process was that infrastructure costs borne by government in support of the mining industry should not be recognised in the HFE process because the majority of these expenditures are cost recovered from industry. However, little evidence has been presented to support this assertion, and Queensland has substantial costs that are not recovered from industry, particularly in the area of roads construction. It seems likely that other mining states have similar expenditures.”
The Queensland Government has offered Adani, an Indian coal mining company, an open-ended exemption from paying full coal royalties to encourage the company to commence operations in the Galilee Basin.
Buckley says the resource is estimated as worth about $15 billion, and that if production equated to 40 million tonnes a year, selling at around $50 a tonne, the foregone royalties would be in the vicinity of $140 million a year. This on top of the diesel fuel excise exemption, subsidisation of infrastructure, and statements by the Australian Minerals Council that mining pays two-thirds of the standard Australian corporate tax rate of 30 per cent.
“And that’s 20 per cent tax on what profits they actually declare, many firms transfer a lot of money offshore as they are international firms,” Buckley says, explaining there are a range of strategies companies use including transfer pricing.
The 50,000 or so unremediated mine sites around Australia are also a form of subsidy for the industry, as it is the public that inevitably ends up paying for the sites to be repaired.
“There are an endless amount of subsidies and exemptions they are allowed, and in my view a lot of that comes back to the majority not being Australian companies, and therefore not having the same degree of [Environment, Social and Governance] accountabilities as an Australian-domiciled firm,” Buckley says.
“When you add it up, they seem to have a larger than normal number of exemptions.”
After subsidies wind starts to look very competitive
When all the exemptions and externalities are factored in, wind power projects are extremely price competitive, Buckley says. The other aspect with wind farms and solar farms is the capital expense is largely in the construction phase, in contrast to the high project lifecycle costs of coal mining.
In many ways, the Minerals Council has failed to look after the interests of its members in terms of anticipating the decline in demand for – and prices for – thermal coal worldwide, and as an industry association should have been looking at the risks and opportunities and had a forward-looking strategic plan for the impact of structural decline.
“It all raises the questions of the social license to operate,” Buckley says.
“And also, are [coal companies] sensible long-term investments for their shareholders? In the last four years the price has gone right down to the bottom in the thermal coal market, and investors are bearing the cost of the intransigence of those companies.”
The result of the price decline has been for some shares to decrease to more than 90 per cent less than their original value, and in some cases, companies have gone to the wall leaving investors empty-handed altogether.
Some of the factors contributing to the decline in price include China’s reform of its electricity market, Korea implementing a tax on thermal coal to reduce the economy’s carbon intensity, and reductions in demand across the US, Europe and Australia. The US already has 20 per cent less demand for thermal coal, and plans to reduce that even further by between 20 and 30 per cent, Buckley says.
“The fossil fuel industry seems to have this huge voice that is actually drowning out the facts,” he says, pointing out that the Australian coal industry is also largely foreign-owned, with only 1.5 firms being Australian.
The 0.5 comprises the Australian share of BHP Billiton, and the only wholly Australian company, Rio Tinto, is actually 40 per cent owned by foreign shareholders according to the share register, Buckley says.
“The [coal industry] lobbyists are trying to prevent the shift of the Australian economy to an inevitable future.”