Finbarr Bermingham travels to the Sunshine State to find an economy that is in the process of getting burnt.
It never rains in Queensland. But lately, the woes coming down on its critical industries have certainly poured. Queenslanders are a notoriously hardy bunch, but with commodity price crashes, extraordinary weather events and governmental upheaval, the past few months have proven extremely challenging for even the toughest.
In the coal mining sector, miners are desperately seeking to cut costs, as they attempt to ride out the chastening price downturn.
The Chinese government has made a clear directive to cut coal imports by up to 10% due to oversupply and in an effort to boost local producers. This comes after China slapped customs duties on coal imports, on top of quality controls. Authorities have also been attempting to cut domestic production in a bid to stabilise prices.
These policy moves would heap more misery on the plates of miners in Australia’s coal heartland, many of which are scrambling for survival in the post-boom landscape. China accounts for 20% of Queensland’s overseas merchandise trade, with coal making up 43% of the state’s total exports. In 2013-14, coal contributed A$39.8bn to the Queensland economy.
It’s impossible to overstate the importance of the coal industry to the local economy, and for much of the last decade it was viewed as the rising tide which lifted all boats.
In Mackay, a mining port in Northern Queensland, one resident tells GTR that his house dropped A$100,000 in value over the course of a week, due to the falling price of coal, while the health of the mining economy is frequently gauged by counting
the number of high-viz vests in the Qantas lounge of regional airports.
With the global markets awash with excess coal and the property sector slowdown in China, prices have tumbled and miners of all scale are seeking ways to cut costs and offload assets, but in many cases the buyers simply aren’t forthcoming.
The big majors are lowering their per-unit cost, this is a by-product of the downturn. Keira Brennan, Norton Rose Fulbright
Large corporations such as Glencore, Rio Tinto and Vale have looked to restructure their Australian mining investments in recent months. Glencore is to cut coal production by 15% this year, after previously attempting to merge its coal division with that of Rio Tinto in a cost-saving exercise. Brazilian miner Vale, meanwhile, has downgraded the value of its Australian coal assets by 71%.
There’s a sense here that in the boom years, companies were negligent when it came to balancing books (indeed, one local rag rechristened its monthly business supplement Boom in 2012. It has subsequently reverted to the more sensible Queensland Business Monthly). Instead of repairing a piece of machinery, companies would splash out on a new one. Mines became inefficient and uneconomical; their owners became lazy.
“People are looking at their capital and seeing what they can get out of it,” Keira Brennan, a resources partner at Norton Rose Fulbright in Brisbane, tells GTR. “The big majors are lowering their per-unit cost, this is a by-product of the downturn. Now they realise that with a few tweaks they can get an extra 10-20% from their investments.”
Miners are looking to conduct better and more regular maintenance and to share assets among different sites. “Even though they’re pulling assets to offline costs in the short term, if it works better, this provides better value in the long term,” Brennan said.
Joint ventures have also been mooted, with Glencore and Rio having discussed partnering to purchase some rolling stock mining infrastructure. (Indeed, the mining downturn has had a significant impact on rolling stock sales too. Previously, where orders would have been placed 24 months in advance, they now need just 12 months’ lead time.)
For junior miners, the picture is bleaker still. Accountancy firm BDO found that just 53% of explorers had cash available to continue operational spending at their current rates in December, with just 46% of companies reporting positive cashflows.
“These are difficult times for small producers. If you’re still developing a project, it’s difficult to attract capital,” Michael Roche, the CEO of the Queensland Resource Council says in a telephone interview.
Distressed asset sales are yet to emerge, but this is expected to arise soon. The feeling is that miners are holding onto their assets in an effort to sell them at peak prices, despite the downturn. Those in the sector are sceptical as to the efficacy of this tactic, and also as to whether the buyers exist.
There has been a significant rise in off-balance sheet financing, with sale and leaseback transactions emerging across the resource sectors, in particular mining and agribusiness. This frees up capital for core business and is apparently more within the risk appetite of creditors and investors.
It’s unlikely India will be able to satisfy its requirements with its own coal. Michael Roche, Queensland Resource Council
Miners are also struggling to deal with take-or-pay repayments: contracts which mean miners have to pay the rail or port operators a pre-agreed minimum fee for access to infrastructure, whether they use it or not. Wood McKenzie reported in 2012 that this was leading miners to produce at a loss – the logic being that if they’re going to incur these fees anyway, they may as well keep mining coal. With the deterioration in the intervening period, the problem has been exacerbated.
The industry is looking to India to take up thelag let by China, despite uncertainty over the Indian market. Narendra Modi, India’s prime minister, has tackled coal head-on, attempting to break up Coal India and open the industry to the private sector. Furthermore, Modi has doubled the tax on coal production in an effort to reduce carbon emissions, all while voicing support for using local coal, over imports.
“It’s unlikely India will be able to satisfy its requirements with its own coal. They’ve talked about developing it locally, but the International Energy Agency predicts that Indian coal imports will more than treble,” Roche says.
Australia’s Liberal government has deepened ties with India over the past year, with the acceleration of talks over a bilateral trade agreement making news last year. Furthermore, the continued presence of the Indian conglomerate GVK in Queensland’s A$18bn Adani project suggests there may be scope to expand the trade.
“GVK is still there and while nobody’s quite sure what the state of play is, the view is that they’re waiting for the right time in the market, when the mine will be ready and they can press ‘Go’,” one source, familiar with the affair, tells GTR.
Service game
While the mining community prays for an upturn in price and investment, others are placing their bets on other sectors.
In Brisbane, the Australia China Business Council (ACBC) tells GTR that Queensland in particular will be hoping to benefit from the growing imports of services in China, particularly in the fields of education, tourism and professional services. With an increased number of Chinese students enrolled at Queensland’s universities and hordes of Chinese tourists descending on the Sunshine State every year, the interest is at an all-time high.
Architecture firm Populous has been one of the beneficiaries of China’s infrastructure boom and has also taken advantage of China’s increased global profile, with the country hosting a series of important sporting events.
“Export sales to China vary each year depending on the size of our projects. Over the course of the last 15 years our revenue from China has been a significant proportion of our export income. We have designed several successful high-profile major sports venues in China including the Nanjing Sports Park for the 2005 China National Games; Datong Sports Park, and Zhuhai Tennis Centre which will be completed mid-2015 in time to host its first WTA event in November,” Michele Fleming, associate principal at Populous’ Asian headquarters in Brisbane tells GTR.
There can be payment delays because of the inexperience of some Chinese clients of the payment process required for overseas services. Michele Fleming, Populous
However, the same issues which make China a tricky place to do business for goods exporters also present challenges for the service sector.
“Payments can be delayed for various reasons beyond our control so it is important to plan for that and to be patient and persistent and spend real face time with clients so they know and trust you. We have always been paid for our work in China,” Fleming explains. “There can also be issues with varying withholding taxes from region to region and there can also be payment delays because of the inexperience of some Chinese clients of the payment process required for overseas services.”
A figure from Trade & Investment Queensland privately admits that the service sector would never be able to replace the extractive industries in terms of business with China. However, they are optimistic that it will expand rapidly over the coming years.
Earmarked for progression is the pharmaceutical and healthcare sector, particularly out of Brisbane, with a number of world-class research facilities in the third-level education institutions of the city.
Furthermore, despite the cleantech sector in Australia taking a hit at home due to government spending cuts, it has been making big inroads into the Chinese market and taking advantage of Beijing’s desire to fix certain elements of its own economy.
The Commonwealth Scientific and Industrial Research Organisation (CSIRO) recently entered into an agreement with a Chinese organisation – the Beijing MCC Equipment Research & Design Corporation – to trial a green technology which converts waste iron ore to cement. Given that 60% of the world’s iron ore waste is in China, the solution could have a radical impact on China’s efforts to clean up its act, environmentally.
Those in the know often warn against worrying about things we can’t change – the weather in most cases being high among those, the Chinese economy another. And while this may be scant consolation to farmers facing the prospect of an El Niño-induced drought and coalminers struggling to sell even the most distressed assets, it may be advice worth bearing in mind for the new government in Queensland.
One Australian diplomat recently told GTR that successive Queensland authorities have “sleepwalked” into the current predicament by placing their eggs in a couple of very flimsy baskets. The government would be well-advised to step up support for other sectors, and try to restructure the local economy along less volatile lines.
