The cash-strapped government surprised the industry by announcing it would lift the royalty rate for coal sold above $100 per tonne by 25% and introduce a new levy of 15% once the price hits $150/t – effectively a 50% increase. It will rake in $1.6 billion over the next four years with the new measures.
The royalty hike may lead to more job losses following this week’s announcement of 900 retrenchments from the BHP Billiton Mitsubishi Alliance and Xstrata and the near certainty that numerous major new coal projects will not see the light of day, Queensland Resources Council chief executive Michael Roche said.
“[The] announcement confirms that they have failed to hear the message about how investment decisions for new projects are evaluated by mining companies,” he said.
Coal companies would not be able to offset these new state taxes against federal Mineral Resource Rent Tax obligations, according to Roche.
“The MRRT is a federal tax on super profits, and right now, it’s hard work to find a coal mine in Queensland making a profit, let alone a super profit,” he said.
For some existing high cost coal mines, the new royalty structure could be the final straw, Roche said.
“The combination of company income tax and the new royalty rates will mean Queensland carries an effective taxation rate of 50 per cent on a typical coking coal operation.
“The government was told that the average cash cost for Queensland coking coal mines – before imposts such as carbon tax, company tax and depreciation – is now over $US100 per tonne.”
Roche said the royalty hike could see Queensland “grab the dubious honour of being the highest taxing coal jurisdiction in the world”
Rio Tinto Coal Australia managing director Bill Champion said “we are shocked, surprised and very disappointed by the size of the royalty increase that has been imposed by the Queensland government”
“This increase will further endanger jobs and investment in the coal industry, at both existing mines and new projects,” he said.
“We had met with the Queensland government on several occasions to explain the challenges facing the coal industry due to increasing costs in an environment of significantly lower coal prices and a high foreign exchange rate.
“Their decision to increase royalties in this way flies in the face of the efforts being made by mining companies to improve the competitiveness of their operations by reducing costs.”
AMEC regional manager for Queensland and Northern Territory Bernie Hogan said he applauded the state governments attempt to assist the exploration industry through the removal of transfer duty for farm-in arrangements, the increase of royalties by 2.5% simply adds to the costs of doing business in Queensland.
“For junior mining companies that do not have the luxury of offsetting their losses overseas, or ‘shelving’ projects for later years, this compounding of costs will have a detrimental effect to the industry in Queensland,” Hogan said.
The Queensland government has forecast a $10.768 billion deficit for this financial year. Treasurer Nicholls is forecasting a return to surplus in 2014/15 and predicting that the state could be in a position to reclaim its AAA credit rating from that time onwards.
Moody's Investors Service notes that Queensland's budget for the current fiscal year of 2012/13 projects a further deterioration in its financial performance, but also estimates that Queensland will return to a small surplus position by 2014/15 due to a new program of budgetary redress.
Preliminary results for 2011/12, last fiscal year, indicate that the general government sector deficit is estimated as a still large, but smaller-than-forecast $5.6 billion, or equal to 12.3% of revenues, and down from the higher budgeted level of 19.5%.
Roche said that rubbing salt into the industry’s wounds, the government had also refused a plea to index coal royalty thresholds.
“Like tax bracket creep, over time royalty thresholds erode with inflation and indexation is a way of offsetting the negative project value impacts of higher royalties over the 20-year-plus life of a coal mine investment,” he said.
The first tranche of the Queensland government’s $495 million Royalties for the Regions program is rolling out in the budget – with $60 million available for critical infrastructure.
Deputy premier Jeff Seeney said the funding would be available in rapidly growing resource regions where mining development was racing ahead of their ability to provide services and facilities.
“This is the first time these communities will get a dedicated share of the wealth they generate and it will increase significantly over coming years as we strengthen the state’s fiscal position,” he said.
Seeney said the government had taken the decision to freeze royalties from October 1 to provide long-term certainty for the industry.
"Coal mining is critically important to Queensland and this guarantee to keep royalties unchanged for the next decade allows companies to make investment decisions with total confidence," he said.
"This is a first in Queensland - no other government has given this sort of guarantee.
"It provides security and certainty for the years ahead and we realise how important that is to this industry.
"We have been forced by the fiscal circumstances left by Labor at the state level and the threat to our royalties posed by Federal Labor's Mineral Resources Rent Tax to increase royalty rates in this budget.
"But we want the industry to know that it will not be followed by further rises in coming years.
"Coal is our most lucrative mining commodity and when the industry is at full production, it is worth millions of dollars a day to the state in royalties.
"We will do everything we can to grow the industry and protect that income stream for Queenslanders.”
Seeney said that on top of the royalty rate freeze, the Newman government would aggressively examine the costs government regulation imposed on mining.
In the 2012-13 budget, $10 million dollars has been earmarked for floodplain mitigation works, $10 million for improved community infrastructure such as sporting, health or education facilities and $40 million for enhancing the safety and capacity of roads.