According to NSW treasurer Michael Egan, the new royalty scheme will raise $44 million in 2004-05. The ad valorem rate will be 5% for deep underground mines, 6% for underground mines, and 7% for opencuts.
This is the first time the royalty system has been changed in 23 years.
Egan maintained the scheme was a fairer system. "The main advantage of ad valorem royalties is that coal producers will pay more when coal prices are high, such as now, and less when prices are low," he said.
Xstrata begged to differ. "With the proposed value-based royalty system, coal prices would have to fall to A$26.66 to bring royalty payments back to, and in line with, the existing system. Were this to happen, the industry would face bankruptcy," Xstrata CEO Peter Coates said.
"As we come out of one of the toughest years our industry has faced, the government now plans to increase royalties. This will see, in the second half of this year, an 86% increase in royalty charges for Xstrata Coal's opencut operations and a 105% increase for undergrounds in terms of export production.
"Using our long term pricing assumption, the increase over the current rate is 60% for open cuts and 77% for undergrounds. This is not sustainable," he said.
Coates said the royalty would have the biggest impact on marginal operations. In light of the announcement Xstrata said it planned to reassess future investment decisions.
Coates also lamented on the rail and port difficulties Hunter Valley producers have faced of late, advising the government to invest in the capacity of the rail infrastructure in a bid to raise revenue via increased exports.
Centennial Coal also issued a statement announcing its "disappointment" in the change.
Centennial was unsure of the impact on operations, however, it hoped the effect would be dampened by the company's sale contracts, which cover changes in government charges.
Around 80% of Centennial's sales are under contract.
The change could also impact development projects and floats. Excel Coal recently announced its IPO with ASX trading to begin May 3. In an announcement late last week the company said the royalty change was opportunistic and unreasonable, however it remained positive it would meet prospectus forecasts.
Energy Economics director Clyde Henderson said at this point the tax change was still at a conceptual stage, and therefore impossible to calculate the additional cost to industry.
On principal, Henderson defended the concept of the ad valorem system. “During cyclical downturns government take falls, buffering the industry so that redundancies and mine closures are reduced. During periods of high prices the government then shares in the windfall. Furthermore, the ad valorem royalties provide automatic adjustment for inflation. Queensland royalties are ad valorem and are around the same level as those proposed for NSW,” he said.
However, he said the main problem of ad valorem was its impact on an already struggling steam coal sector.
“Steam coal sector Australian exporters have already suffered a major fall in cost competitiveness as a result of the strengthening A$. The US$ exchange rates of our two major competitors in the Asia-Pacific steam coal trade, Indonesia and China, have remained flat over the past year or so. Both of these countries are also advantaged by the current high ocean freight rates,” he said.
“As a result of the exchange rate movements and high ocean freight rates the cost of Australian steam coal delivered into major East Asian markets is now 30 - 40% higher than it is from China and Indonesia.
“This fundamental problem is currently being masked by tight markets and huge price increases, but will certainly become a major issue over the next couple of years as US$ prices start to fall. The increase in royalties will exacerbate the already poor cost competitiveness of NSW steam coal exporters.”
