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SELECT COMMITTEE ON FUEL AND ENERGY - 02/04/2009 - Issues relating to the Fuel and Energy Industry

CHAIR —Welcome. I invite you to make a brief opening statement and then the committee will ask you some questions.

Mr Hillman —Thank you very much. First let me apologise to the committee for not turning up in Wollongong yesterday. That was a terrible logistical error on our part. We were looking forward to giving evidence in one of Australia’s key coalmining areas and we had a range of other visits and talks with people arranged.

CHAIR —Including your mother, I believe!

Mr Hillman —Including my mother. So we really regret that. Anyway, we thank you for the opportunity to appear this morning in Canberra. The ACA gave evidence to the committee a month or two ago. I do not propose to go over that again. It set out the coal industry’s general approach to climate change matters, our $1 billion commitment to low-emissions coal technology, and the size and importance of the industry to Australia and its exports. Also, there were some preliminary comments in that evidence on our views on the CPRS, on the white paper.

Today I would like to focus more closely on the coal industry’s position on the CPRS, how we see the CPRS impacting on the coal industry, and the policy proposals we would like to put to secure a better outcome for jobs and ongoing growth in the Australian coal industry. Our fundamental proposition is that coal should be treated fairly in the CPRS. Coal is above the 1,000 tonnes of CO per million dollars of revenue threshold, and we therefore qualified. There was a political decision taken to exclude coal from the arrangements for the EITE. We want to redress that now and have ourselves included as the legislation is passed. Do you have a copy of these documents?

CHAIR —I have one, but you may seek to table it, for the benefit of Senator Hutchins.

Mr Hillman —I would like to table then this slide presentation which sets out our arguments. I can take you through it. The slides are clearly numbered in red at the bottom right-hand corner of each slide. Let me talk a bit about the political decision. This is, of course, our assessment. There were two things driving it. If you look at slide 4, you will see what has happened to the metallurgical coal price since 1991 and what will happen projected out to 2011-12. You can see it was flat from 1991 through to 2005-06 and then we had the China-driven commodity boom. I should clarify that we do not actually export very much coal to China, but China was underlying the resources boom. You can see the prices for metallurgical coal rose enormously. They in fact trebled. I can show you a similar chart for thermal coal. I should also point out that this flat line from 1991 to 2005-06 can be extended backwards to 1980. Coal prices have been flat for 20 years, virtually, and coalmining has been a fairly low-margin industry in Australia.

The decision to treat coal differently from other trade exposed emissions intensive industries was taken right at the peak of the boom. The green paper came out right at the apex, and I think the white paper came out about a 10th of an inch down it, so coal was seen as doing extremely well, with very strong prospects. I think it was thought that coal could afford to meet the costs of the CPRS without any assistance.

The second factor which I think weighed in the government’s decision was that coal is perceived by many as being a contributor to climate change, one of the underlying issues for climate change, and there was political sensitivity about being seen to hand permits to coal. That is not really fair, because the coal industry in Australia is very conscious of its responsibilities with regard to climate change and, as I said before, is leading the way in developing technologies to address emissions from coal-fired power.

Anyway, the whole world has moved on since the white paper and the green paper and of course we have had the global financial crisis, which has had an enormous impact on the coal industry here. We have 3,000 redundancies already declared. There is the prospect of more, depending on just how bad things get. The medium-term prospects are still very uncertain.

Senator HUTCHINS —Can I just interrupt you there. Is that 3,000 direct employees of the coal industry?

Mr Hillman —Yes.

Senator HUTCHINS —They are not the contractors or people that are associated with the industry?

Mr Hillman —They are considered direct employees. They may be contractors directly mining at the mine site. That does not include the other 9,000 jobs which depend on those 3,000 jobs, no. There is a multiplier of three on jobs in the coalmining industry.

Mr Morris —If I could just clarify: we consider contract miners to be full-time equivalent employees for the coal industry. The Australian Bureau of Statistics really should include contract miners within the mining industry, as services to mining, and they do to some extent, but, for collection reasons, some of the data is collected in other areas, particularly construction.

Senator HUTCHINS —Thank you. So it is direct employees, whatever their status, and a multiplier of three from that?

Mr Hillman —Yes.

Senator HUTCHINS —And you can tell us which regions that is in? If that is in your presentation, I am sorry to pre-empt you.

Mr Hillman —I think that about 2,700 of the jobs are in Queensland and about 300 are in New South Wales, so far. So the bulk of the job cuts have been—

Senator CORMANN —Where in New South Wales are those 300 jobs?

Mr Hillman —They would be in the Illawarra and the Hunter.

Senator CORMANN —And the 2,700 in Queensland?

Mr Hillman —In the Bowen Basin, around Mackay.

Senator CORMANN —Okay. We are going to Mackay next week, by the way.

Mr Hillman —Good. These 3,000 job cuts have already been announced. Mine lives are being re-evaluated—some have been moved into care and maintenance—and investments are being reconsidered, both in new mines and in the infrastructure to support coal exports. Both the Wiggins Island Coal Terminal and the Northern Missing Link rail project in Queensland, which you will hear about when you are in Queensland, have been put on hold for at least 18 months. That is the impact of the global financial crisis. We are in a different world. I think Australians are still concerned about climate change, as is the coal industry, but I think the focus now is really a lot more on jobs and I think that should be the focus when making a decision on the treatment of coal in the CPRS.

As I said before, coal qualified over the 1,000 threshold for receipt of the EITE arrangements, because coal is both emissions intensive and trade exposed. I will move to chart 6, just to give you an idea of what trade exposure means to the Australian coal industry. Eighty per cent of our black coal is exported, and there are three interesting stories here. The first story is climate change and the global response to climate change. The countries on that list—unfortunately the print is very small—are our competitor countries. They are the countries we play against to keep our share or increase our share of global coal markets. You can see that most of them are developing countries, which will not take on targets in the next 15 years. It is highly unlikely that any of those developing countries, including China, will take on the sort of hard target, involving costs, that Australia is proposing to take on.

I should also point out that the three developed countries there, particularly the United States, Canada and Russia, who are currently our main competitors in the metallurgical coal market, are unlikely to include fugitive methane emissions in whatever arrangements they adopt. That is currently not being contemplated. So their coalmining industries would also be advantaged compared to ours under a global arrangement. That is the first point.

The second point is just how easy it is to lose market share—how competitive this industry is. If you look at the Indonesian performance—which is the purple bar; Australia is the ochre coloured bar—you can see how Indonesia’s share of the thermal coal market has increased quite dramatically since 1998. Basically, they have taken 15 per cent of our market share. We lost 15 per cent of our seaborne thermal coal market share. That was due to infrastructure constraints in Australia. Any constraint on Australia’s ability to export, be it a cost constraint or a physical constraint, will immediately result in loss of market share, and that is what we are predicting will happen under the CPRS unless proper arrangements are made for the coal industry.

The third interesting point to watch there, particularly in the global recession, is China, which I think is the brighter green bar on the chart. China is the biggest producer of coal in the world but consumes most of it domestically. Of course, with the downturn of their economy, their own consumption will decline, and they have a very strong track record of getting their coal very quickly onto the export market once their domestic market declines. So you can see that Australia operates in a highly competitive and contested global coal market.

As to emissions intensity, I will refer you to slide 7. Five per cent of Australia’s total greenhouse emissions arise from coalmining. We are not talking about burning the coal; we are just talking about mining it. Four percentage points of that arise from fugitive emissions. They come out of the coal as you mine it, and it is determined entirely by geological factors. Abatement options are very limited. In the case of open-cut mining, there are virtually no abatement options currently available. In the case of underground mining, you can actually use methane from underground mining to generate power or you can flare it, so there are some options. But, even if you do exercise those options, there is still a lot of methane that gets away and cannot be dealt with.

Slide 8 shows you vocsidizer technology which is in place at the West Cliff colliery, near Wollongong. It is a BHP colliery. This is a first-of-its-kind demonstration in Australia. I think there was a view in the government, in the lead-up to the white paper, that this was pretty well universally applicable to underground mines. In fact, it is highly dependent on the concentration of methane in the mineshaft ventilation air. If it is highly variable you cannot use a vocsidizer. If it is too high or too low you cannot use it. In addition, many mines have physical space limitations around the minehead. These things take up a lot of space and they may not be applicable for that reason. In fact, technology for the abatement of fugitive emissions is problematic.

Let us look at what we did get under the CPRS. The government did not ignore the coal industry entirely. They allocated, from the revenues that they would obtain from the sale of permits under the CPRS, $500 million over five years to directly assist the 20 or so gaseous mines to meet their permit bill, so to speak, and another $250 million over five years to assist with the implementation of abatement technology at mines on a matching basis by companies. This is a five-year package and EITE is a 10 year package. This was done at an assumed price of $20 a tonne. Of course EITE assistance is actual permits, which fully reflect of course the price of the permit. In addition, the quantum is substantially less than what we would have received under EITE.

You can see from slide 10 the total coal industry bill for permits over a five-year period using white paper assumptions as to price; that is, $25 per tonne rising four per cent annually. The coal industry bill for the five years totals about $5 billion. So, out of the $5 billion that the coal industry will pay to the government in permits under the current proposals in the white paper and the legislation, we will receive back just $750 million. That is a very meagre level of assistance compared with that for other emissions intensive, trade exposed industries. You can see in table 10 that LNG is getting 60 per cent; we are getting less than 10 per cent. Cement is getting 83 per cent, with aluminium getting 90 per cent.

I described the decision to exclude coal as a political decision based on a perception that the coal industry was doing really well and we could afford to pay CPRS costs and based on a certain nervousness on the part of the government to be seen to be handing permits to this industry, which is widely viewed as a major contributor to climate change. The white paper did not mention those reasons, but it did mention two other reasons. These are in slide 10. The first one is the technology point that I was talking about before. There was a view in the government that there were plenty of technological options available and mines could very quickly switch them on, be receiving permits under EITE, switch on these technological options and be running off with the money, so to speak. Well, that is just not realistic. Australia is a leader in implementing mine emissions abatement programs, particularly as to underground mines, but the few options are not all that great, there are still lots of emissions getting out there and it is going to be very difficult to do anything about them. So we refute that point.

The other point is a very interesting one. Under the white paper methodology, if we were in the EITE, you would allocate permits mine by mine according to production. That is how it is done for aluminium and cement, so a factory produces X tonnes of cement, it receives permits based on its level of production of cement, not on the actual emissions of that cement plant. That was based on an assumption that, if you took an activity—we would call it an industry, but in the white paper it is called an activity—in general, each unit of production in that industry has pretty much the same emissions profile factory by factory. But of course, coal mining is entirely different. It is uniquely different. If you look at the blue bars in chart 12 which, running from left to right, go from zero up to a very high level of emissions intensity, you can see how big the variation is. Some mines have no gas and you can strike a match and light a cigarette in them and not blow up and others are intensely gassy—some of them go up to over 8,000 on the white paper methodology for measuring emissions intensity.

If you allocated the permits according to the white paper methodology, you would get windfall gains. You can see the red bars there. You would have low emission mines which, because they have high production and low emissions, would get more permits under the EITE than they emitted in greenhouse gas. So they would make windfall gains. And for the unfortunate gassy mines you can see, they would receive far fewer permits than they need to meet their emissions obligation—they get a miniscule allocation because their production is low but their emissions are very high.

There is a very straightforward solution to this. It involves tweaking the EITE allocation policy for the coal industry so that instead of allocating the permits on the basis of mine production, you allocate them on the basis of mine emissions. If you look at chart 13, there is the result: allocating 60 per cent assistance to the mines produces an allocation of permits which is always below the level of emissions to the mine. It completely eliminates the windfall gain issue.

I would like to turn briefly to the question of captured mines. If you include coal in EITE, the captured mine problem is addressed. If you include the industry in it, captured mines like export mines would receive 60 per cent permit allocation and this problem pretty much goes away. This problem, however, is particularly difficult if coal is not included in the EITE. While these mines would receive some assistance under the $750 million package, it is very small indeed and they would not be able to pass through their CPRS cost to power generators whom they supply because they are locked into 20-year contracts and there would be no cost pass-through of any description other than CPI permitted. In many cases they are very low-margin operations. Some of these would become financially non-viable. The implication is bankruptcy and closure. The Treasury people would tell you, ‘But someone else would buy it and take it over,’ but in the meantime, production might stop, the power generator stops, lights go off, people get grumpy. That is something which needs to be thought about very carefully. If we are included in EITE, this problem is also addressed. That is our presentation. I am very happy to answer questions.

CHAIR —We have six minutes for some questions but it was a very insightful presentation. Are you happy for us to have your tabled document incorporated in Hansard?

Mr Hillman —Yes.

CHAIR —On slide 2, you talk about the cumulative effect of the global financial crisis, increased royalties and you say that the CPRS, if it stands, will be reduced investment, job losses and damage to regional communities. I note you have told us that there have been 3,000 redundancies so far and that there has been a loss of a further 9,000 jobs elsewhere. Have you any figures for how much reduced investment would result from the CPRS as it currently stands if it were implemented?

Mr Hillman —No, not specific figures. But let me tell you what is happening. Individual companies are speaking to the government about the likely impact of the CPRS on their operations, but this information is actually very sensitive. If it were put in the public domain, it would impact on share prices.

CHAIR —Let me rephrase the question. Do you have the information but are not prepared to share it?

Mr Hillman —I do not have the information. They do not provide it to the ACA because it is so sensitive. But what they are doing—

CHAIR —Could I put this to you on notice. As a committee we do have a capacity to take commercial-in-confidence submissions on a confidential basis. I think it is important for this committee, as we are trying to assess the impact of the CPRS as proposed on the economy and jobs, to have as much information like that as possible. If you could go back to your member companies and ask them for whatever information they are able to share with us on the impact on jobs, the impact on investment and the impact on regional communities, we could take that on a commercial-in-confidence basis and use it to draw conclusions without actually releasing the information. Would you be prepared to take that on notice?

Mr Hillman —I certainly will take that back to the members of the association. Can I also point out that we have got the companies to agree to convey that very sensitive information—which they have done—to ACIL Tasman, who are preparing case studies modelling the impact on the operations of these mines. Is it about 40 mines?

Mr Morris —It is over 70.

Mr Hillman —It is over 70 mines out of a total of 118.

CHAIR —Have you provided that information to the government?

Mr Hillman —No. This information is very sensitive and companies have had to look very carefully at what they have handed over. They have done it. The modelling is being done and we expect to have it when?

Mr Morris —In the next few weeks.

Mr Hillman —That will show—without naming the companies or the mines—the impact on—

CHAIR —Could you take perhaps two requests back. The first is to see whether it is possible for that information to be provided to our committee on a confidential basis so that we can use it for our purposes. We would not release it, obviously. Secondly, once that modelling becomes available could you provide that to the committee—again, if it is necessary—on a confidential basis but otherwise as a submission? Senator Hutchins?

Senator HUTCHINS —I have just a handful of questions. Senator Joyce can go ahead if he would like to.

Senator JOYCE —I will be really brief. As you are aware, the next witnesses are from Frontier Economics. They did modelling that the effect will be a 20 per cent reduction in regional economies’ 2007 levels over the next 40 years, of which the centre will be coal based sections of the economy. That would be absolutely disastrous. There are two questions I want to ask you. They did the modelling for the New South Wales government and it was shelved. Do you think there is reason and logic behind that effect of the ETS on coal based economies such as Gladstone and Mackay? The second thing is this. The proposition has been put to us that jobs lost from the coal industry will be able to be picked up in alternative green jobs. Do you think that is a reasonable scenario?

Mr Hillman —We have not been able to examine the Frontier modelling. We have read about it in the press. Our proposition is that there will be job losses as a result of the CPRS and that they will impact regional areas. We are at this stage unable to put numbers on it, as I have just described, but there will be a substantial impact. Mines will be closed. Companies have told us that mines will be closed and that new projects are at risk. The new projects that are at risk have associated with them substantial construction jobs as well as ongoing jobs for the actual mining operation. That is about all I can say to you in response to your first question.

In response to your second question, it is always a problem when you look at the Treasury modelling of that sort. It assumes away the transitional pain of structural adjustment. The transitional pain would be considerable for people in Wollongong, in the Hunter Valley and in the Bowen Basin of Queensland from mine closures and from them then having to try somehow to reintegrate themselves into the economy. Jobs may not be in those regions and it would involve them moving and it would involve family disruption. And, of course, what will the green jobs be? I mean, we do not even know what green technologies are going to be economically viable. We know that wind is viable as a certain proportion of your generating capacity, but not the predominant part. We do not know really what the new baseload low-emission or renewable technologies are going to be that will be the winners. We think that carbon capture and storage will be one, so that is encouraging. Geothermal may be, but we do not know when these jobs are going to emerge either. Especially in these sorts of economic circumstances, with rising unemployment, this sort of structural change is made extremely painful.

Senator JOYCE —How many coalminers does it take to drive a wind turbine?

Mr Hillman —Well the wind turbine for a start is manufactured in Denmark or Germany, and it is really an erection job here and that is about all. There will be no coalminers probably, no. They would be structural engineers and the people who erect industrial structures.

Senator JOYCE —That is a good term for green jobs: erection jobs!

Senator HUTCHINS —We have had the National Institute of Economic and Industry Research appear before us. I do not know if you have seen their submission but they have painted a fairly bleak picture, as I recall. They say that to create alternative jobs for industries that will be lost will cost about $100,000 per employee. In the paper that you are preparing, do you suggest the issue of alternatives like the green jobs and what the cost might be?

Mr Hillman —What we look at is how the profitability of mines will be affected: what will happen to the earnings before interest, tax, depreciation and amortisation to see whether you would invest in that mine again, whether you would invest further in that mine or whether you would close that mine or shorten its life. Can I just come back to this point of alternative jobs. Of course, coalmining is globally competitive and a totally competitive industry. It can stand on its own feet without any government assistance, and we are constantly irritated to see references in the press to coalmining receiving assistance. The only assistance it receives is the fuel rebate that every other operation in Australia receives. So what you are going to do is replace globally competitive jobs, something Australia does better than anybody else in the world, with jobs which are probably going to have a substantial element of subsidy—such as wind farms that are based on a substantial element of subsidy provided by the proposed renewables target. So in a way they are second-rate jobs in that respect.

CHAIR —A final question before we move on to Frontier Economics. Given the number of jobs that are at risk and given the current economic circumstances and the CPRS putting additional pressure on to it the way you have described, are you surprised that the union movement is not taking a more assertive position towards the government? They are, by and large, being totally supportive of the proposal.

Mr Hillman —I have not seen that the union movement has been totally supportive of the CPRS. I have heard various different views—

CHAIR —The AWU has not been, but overall, compared to what we would have seen under the previous government, it is fair to say that they are being somewhat protective of the government on the ETS. Would that be a fair description of it?

Mr Hillman —I think we have a job of work to do with unions to convince them of just how serious the economic and the jobs impact on the industry is going to be. And we are doing that; we are talking to them, and the individual companies have now engaged more closely with them to convey some of the message that jobs seriously are at risk. We would like to see them. They have been very supportive in terms of the industry’s work in low-emissions coal technology, but we would like to see more recognition of what is happening to jobs in this industry.

CHAIR —But you would expect unions to assist the cause to get the government to, I guess, see the error of its ways in terms of some of the design features of the ETS?

Mr Hillman —We would like to see them speak up on it, yes.

CHAIR —Thank you very much. Thank you very much for your contribution to the committee.

Mr Hillman —Thank you, Chair, thank you, senators.

[9.50 am]