Australia’s Queensland coal royalties dim investment

Australian coal producers have expressed concern over Queensland's state-level mineral royalty scheme because the progressive tax, which is linked to commodity prices, is limiting new investment and threatening existing mines.

Queensland coal producers pay marginal royalty rates of between 7pc and 40pc depending on the mineral's price (see table), under the scheme introduced in 2022.

Argus' premium hard low-volatile metallurgical coal fob Australia price was last assessed at $189.65/t on 22 August. Mineral producers would have to pay an effective royalty rate of approximately 16pc at that price, based on marginal rate calculations by Argus, up from 12pc under the previous system.

The elevated royalty rate is limiting investment into the state's resources sector. Australian producer Whitehaven Coal — which runs both coking coal mines in Queensland and thermal coal mines in New South Wales (NSW) — plans to focus new investments in NSW because of the royalty, it said on 21 August.

If companies that have investment opportunities in NSW face high royalty rates, investment dollars will naturally flow away from Queensland, Whitehaven added. Producers in NSW, Australia's main thermal coal state, pay 8.8–10.8pc depending on whether the mines are open-cut, underground, or deep underground.

Australian producer BHP, which runs multiple coal mines through its BHP Mitsubishi Alliance (BMA) joint venture, may similarly be turning away from Queensland. It reaffirmed that it would not develop new Queensland assets on 18 August, because of the royalties. Like Whitehaven, it will focus on other commodity investments like iron ore and copper.

Financial pressure from royalties

Companies moving capital away from Queensland could limit future production growth, but the state's royalty regime is also creating severe financial stress for many existing producers.

Two Australian coking coal producers have faced financing challenges in the state since the start of June, because of both coal price weakness and royalties.

Producer Bowen Coking Coal entered voluntary administration on 30 July after failing to secure a mineral royalty deferral from the state government days earlier. The company's flagship 5.5mn t/yr Burton mine complex is still operating as administrators work to sell the plant.

Weeks earlier, US-Australian mining firm Coronado signed a $150mn thermal coal-based financing deal to support its Curragh mine, which mostly produces coking coal. Coronado sought royalty relief from Queensland's government earlier in the year.

BHP also indicated that it may need to quickly close unprofitable mines, since Queensland's royalty system limits the company's ability to recoup losses when coal prices rise.

The situation is unlikely to change anytime soon, as Queensland's state government has backed the current rates. The government has not made any changes to coal royalty tiers and will not provide new royalty deferrals, said state treasurer David Janetzki on 20 August.

The government on 20 August also agreed to honour a 2020 deferral agreement with Indian-owned producer Bravus, in exchange for a A$50mn ($32mn) investment into its Carmichael thermal mine.

At this stage, it is difficult to assess exactly how much of Queensland's coal capacity is at risk because of the royalty rates, but the system does appear to have created creating a more price-sensitive domestic market. Producers that used to absorb temporary losses on projects may not be willing to anymore, and this could create long-term coal supply risks.

By Avinash Govind