What will become of Powercoal?

AFTER years of electricity privatisation being on and off party agendas, the NSW government appears ready to commit to the sale of coal mines owned by subsidiary Powercoal, and which employ about 850 people in Lake Macquarie.

Staff Reporter

Everyone, the government and unions included, agrees that urgent change is now imperative. Just how this change can be accomplished in a socially responsible way, is one of the major issues under debate.

Powercoal’s owner, Pacific Power, produces about 11% of electricity generated in the National Electricity Market (NEM), and owns various generation assets, including the 2,640 MW capacity Eraring coal-fired power station, which is partly supplied by Powercoal mines.

Powercoal owns and operates eight underground coal mines in the Newcastle, Central Coast and Lithgow regions of NSW. The mines, which include longwall operations, Angus Place, Newstan and Wyee, produce around 9 million tonnes per annum which is mostly sold under medium and long-term contracts to Eraring and Delta Electricity’s Vales Point and Munmorah stations.

Originally established to provide a guaranteed source of coal to the NSW power generators, the Powercoal mines were never structured to be highly competitive. Mine sites have, for example, served as centres for research and development, benefiting the rest of the industry, but ensuring that the focus was never on being cost competitive.

With the emergence of a mature supply/demand market in domestically traded thermal coal over the last five years, the original reasons for establishing mines to guarantee coal supply, no longer exist. State-owned power generators can now buy coal from highly efficient, well-capitalised mines run by private enterprise, at far lower prices than the coal Powercoal mines produce.

In addition, limited investment in recent years in new equipment has dramatically reduced Powercoal’s ability to compete with other cheaper suppliers. According to analysts, Powercoal’s production costs are in the top third to fourth quartile. The three longwalls are 15-20 years old and need upgrading.

Other new technologies such as hydro-power and the availability of alternatives such as gas have also challenged coal’s once unassailable position as the power source for electricity generation.

Against this backdrop, changing the current structure of the mines has become urgent, with even the Construction Forestry Mining and Energy Union (CFMEU) acknowledging that change is well overdue.

“We recognise that to leave the mines the way they are would lead to job losses,” CFMEU official Peter Murray said, “and saving jobs is what we’re about.”

In the next two years alone, it is estimated Powercoal mines need an injection of $35-$40 million merely to stay in business. Development of the Mandalong mine will need $350 million over five years. The NSW government has balked at coughing up this kind of capital, arguing it is not in the coal mining business. Simply leaving the mines the way they are, without sufficient ongoing funding, has been the easier decision to make over the last ten years.

A Treasury discussion paper released last year endorsed the sale of the Powercoal coal mines and a new report being undertaken by the Market Implementation Group, and commissioned by the NSW government, is due to be presented in June. The report will outline the pros and cons of four possible scenarios, but will almost certainly lean toward privatisation.

The four scenarios on the table are: retain the mining operations the way they are; tie the mines to independent generators; restructure Powercoal’s ownership structure under state-owned corporatisation; or, privatise the mines.

While there is no consensus among the various parties involved about the best route, everyone appears to agree that the first two options are no-shows.

A 1997 report, Committee of Inquiry into Sale of Electricity Assets, found that restructuring and job losses were inevitable to keep the industry competitive, and criticised the inherent conflict of interests if a Government both owns and regulates an industry.

“To remain competitive it [the state-owned electricity assets] would have to reform at the rate that a commercial operation would demand and it would have to perform to the same or better standards in productivity, and have access to more capital when required whilst having no benefits from depreciation,” the 1997 report said.

It also found that sale value exceeded retention value, largely because a private owner was thought more likely to increase efficiency. A number of separate private owners would be better equipped to manage the risk involved in running a competitive commercial operation of this kind, the report said. Finally there were tax depreciation benefits available to a private owner.

Any sale of the Powercoal mines comes, of course, in the wake of a massive industry reshuffle which has seen in recent years in Australia alone, the sale of the Shell assets to Anglo, and most recently the sale of Peabody’s coal holdings to Rio Tinto. Despite the world-class nature of many of the operating assets included in these deals, coal mines have not sold for very much in recent years. Sentiment about coal investment though has shifted profoundly recently as the prices have improved. Numerous producers – Centennial, Macarthur Coal, Austral, Glencore, Peabody, to name a few – are in the process of raising money for coal projects. Most observers agree that Powercoal would have to be sold at a discounted price.

Potential buyers of the Powercoal assets will need to consider a raft of issues. Does the value of the assets lie in the reserves, or in the current contracts? The industry has moved a long way from the situation prior to the 1980s where power stations owned mines, ensuring security of dedicated supply. Today stations are embracing competitive coal sourcing via open tendering. What is certain is that long-term contracts into power stations are no longer guaranteed. Increasingly, power stations are taking as little as 30% of their coal on long-term contracts; and the rest in a combination of short-term (1-2 years) contracts and spot buys. Many stations (such as Eraring) are in fact looking to get out of long-term contracts which include escalator clauses, linked to labour costs.

When escalator clauses were built into long-term contracts no-one expected the changes in workforce productivity to be so profound. Reductions in employment numbers have been accompanied by rising levels of productivity. The bottom line is that some power stations with long-term contracts are paying a premium for coal while the mines are benefiting from reductions in labour costs and productivity improvements.

The pressing issue then, for any potential Powercoal suitor will be an immediate attack on costs and finding markets for the coal.

Exactly what conditions the NSW government tries to embed in the sale contract is unclear. The government will almost certainly offer a substantial retrenchment package to the 1000 odd mine workers. The CFMEU’s Murray believes this could effectively buy a privatisation vote from union members, whose average age is over 45.

The Powercoal group of mines, stripped of labour, effectively offers a new owner a clean slate to radically restructure the operations.

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