Xstrata speaks out on supporting coal

By Paula Wallace

Whilst Xstrata Coal’s chief executive Peter Freyberg was expounding the benefits of discussing coal synergies with Anglo Coal, his Australian colleague was talking about the challenges facing its operations in New South Wales.
Suggesting that “coal is going to boom”, Freyberg reportedly said that $1 billion in cost savings could be attained in the merger of equals proposed by Xstrata to Anglo American.
Xstrata is currently the largest exporter of thermal coal in the world, and the fifth largest exporter of metallurgical coal.
There is 6.8 billion tonnes of coal produced globally, of which Xstrata produces 109 million tonnes per annum (mtpa) – New South Wales (40mtpa); Queensland (26 mtpa); South Africa (24 mtpa); and the Americas (9 mtpa).
According to the International Energy Agency, there will be a 36 per cent increase in demand for coal between now and 2030.
Buffier’s message was that coal remains an important economic driver for New South Wales. And with 15 operating mines and a significant project pipeline, Xstrata is the biggest producer with a cash spend in the last financial year of around $2.2 billion.
However, costs are a real challenge to investment according to Buffier who said NSW royalties had increased by 18 per cent in the last year.
“The real issue is…when you’re investing in a 20 to 30 year project what do you build into your cost structure when you try to determine your return on investment?”
“We seem to have been hit from left, right and centre over the last couple of years…that increase [NSW waste levy] could potentially add $36 million to our costs.”
It was only a few weeks’ ago that Xstrata was announcing redundancies at its coal operations in NSW, a combination of the dramatic drop in coal prices and increasing costs.
“This time last year for semi-soft coal out of NSW we were getting $225 per tonne which is obviously a huge record, but that’s dropped back to $80.
“The regulatory burden, particularly the National Greenhouse & Energy Reporting System, just the burden on our business to meet those is quite enormous,” said Buffier.
Xstrata Coal recently acquired Centennial Coal’s Anvil Hill project located in the Hunter Valley, and has renamed it Mangoola in a deliberate strategy to try and “take away some of the stigma that has unfairly labelled this operation”.
In terms of opposition to the mine, from community and environmental groups, Buffier believes this was not just related to potential impacts of that operation but “a broader story in terms of widespread opposition to coal.”
The project is expected to be in operation in late 2011 and capable of producing 8 mtpa at a capital expenditure of about $1 billion.
But without the vocal support of Government, Buffier said that such public opinions are “very hard to turn around”.
“One of the issues I see for the NSW Government is that there’s little public support for the industry, and let me just qualify that.
“I was in Queensland in a meeting with the Premier, Anna Bligh, talking about her concern over CPRS and what it’ll do to the Queensland resources industry…and you have no doubt when you’re in Queensland that resources are important for that State.
“We don’t get the same sense here and I think that is a challenge for us and Government,” said Buffier.
He said there is no doubt that one of the factors influencing the Government in NSW is that some seats, particularly in the inner suburbs of Sydney, are “a bit marginal and could easily go to The Greens”.
“…maybe that explains why at times they don’t speak out as a Government in the same way that we see in Queensland.”
Buffier said that more could be done to engender acknowledgement of the coal industry’s role and the benefit it brings to regional communities.
He devoted some time to outlining Xstrata Coal’s view of the Federal Government’s proposed Carbon Pollution Reduction Scheme (CPRS).
“The CPRS represents a very significant challenge to this industry and also the economic input into NSW.
“The industry’s been singled out, it’s been treated unfairly, it’s been excluded from the Emissions Intensive Trade Exposed (EITE) scheme when it does qualify.
“The majority of our competitors in developing nations and unlikely to face any carbon costs in the foreseeable future,” said Buffier.
He said the proposed CPRS is the toughest in the world with 75 per cent permit auctioning compared to other schemes, and that fugitive emissions have been included unlike other schemes in Europe and that being proposed in the USA.
“The cost to the coal industry in the first ten years is $14 billion and the Government is going to give back $750 million to the industry…under EITE that assistance would be more like $8 or $9 billion.
“…the annual carbon cost under CPRS to us, probably by second year, will be $225 million a year. By the time it reaches the $40 cap it will be $350 million a year.
“People are saying it won’t affect investment in Australia, let me tell you it will,” said Buffier.
He said adding such a cost to the Xstrata business will reduce its global competitiveness and place its operations at risk – the company has estimated that 4,000 jobs are at risk and 3-4 mines.
“But what will happen is effectively the mine production that gets cut back from Australia will get produced elsewhere whether by Indonesia or Russia or South Africa.
“In 1990 Indonesia produced 2 per cent of global seaborne coal, Australia produced 29 per cent. By 2008, Indonesia’s 34 per cent and Australia is 19 per cent.
“You can make you mind up what would happen if we closed mines here in Australia in terms of the impact on global production,” said Buffier.
At the conclusion of the presentation, industry consultant Bede Boyle said it would be a “horrible outcome” of the CPRS if it became a tipping point for investment in the Indonesian coal industry, and if that country’s sovereign risk was seen by companies such as Xstrata as being superior to Australia’s.
In response, Mick Buffier said, “We as a company continue to look globally and we have looked at Indonesia…it would be unfortunate if that was to happen at the expense of NSW…it’s a good place to do business, we’re very comfortable here.
“But things could ultimately drive it that way and I think when Australia has 1.5 per cent of global emissions it would just be the wrong thing to do in terms of the investment and standard of living of this country if we exported our jobs and our investment….with no global reduction in emissions.”
Buffier said the only “proper” response to global climate change is to have investment in low emission technology, and to date Xstrata has invested $250 million in a range of such projects.
“That’s why I think it’s essential to keep a healthy Australian coal business, that’s at the forefront of the development of low emission technology and commitment,” said Buffier.