Coal Industry Competitiveness Assessment

Transcription

1 Coal Industry Competitiveness Assessment Report on the Framework, Baseline Score, Insights and Opportunities December 2016

2 Registered office: Australian Resources Research Centre Level 3, 26 Dick Perry Avenue Kensington WA 6151 ABN T: (08) E: W: NERA National Energy Resources Australia 2 National Energy Resources Australia Coal Industry Competitiveness Assessment

3 Contents Introduction 5 Australia and the Global Coal Market 6 Methodology 9 Industry Competitiveness Results and Insights 12 Industry Competitiveness Score 12 Exploration and Development 13 Extraction and Production 16 Coal Transportation 17 Closure and Rehabilitation 20 Priority Areas and Opportunities 22 Supply Chain 22 Research and Innovation 23 Workforce 23 Government and Public Involvement 24 Other Opportunities 24 Industry Competitiveness and Value Potential 25 Conclusion 27 References 28 Appendix 29 Glossary 29 Competitiveness Pillar Descriptions 29 Peer Group 29 Data Sources 30 Figures Figure 1: Global Black Coal Market 6 Figure 2: Australian Black Coal Market 7 Figure 3: Share of World Primary Energy Consumption Figure 4: Global Thermal Coal Demand Figure 5: Global Steel Production Figure 6: ICF Value Drive Tree 10 Figure 7: ICS Structure 11 Figure 8: Industry Competitiveness Dashboard 12 Figure 9: Industry Competitiveness Leader Board 13 Figure 10: Exploration Spending and Australian Coal Price 13 Figure 11: CAPEX to Production Ratio 14 Figure 12: Adani s Carmichael Project Source: IEEFA Remote Prospects Report 15 Figure 13: Margin Rate for Australian Coal Mines in Figure 14: Labour Performance Comparison 17 Figure 15: Australia Coal Mines and Transportation Infrastructure 17 Figure 16: Australia Coal Exports and Transportation Costs 18 Figure 17: Port and Shipping Costs 18 Figure 18: HVCCC Operations Map 19 Figure 19: Production Outlook from Operating Mines in Australia 20 Figure 20: Coal Industry Contribution to Community against Public Perception and Support 20 Figure 21: Scenario Modelling Australian Increase 25 Figure 22: Industry Potential Cost Reductions 26 Figure 23: Potential Industry Value Added Increase 26 National Energy Resources Australia Coal Industry Competitiveness Assessment 3

4 NERA (National Energy Resources Australia) is an industry-led, not-for-profit initiative, which aims, through a national focus, to improve competitiveness, collaboration and productivity, in energy resources industries, by focusing on reducing cost, directing research to industry needs, improving work skills, facilitating partnerships and reducing regulatory burden. We support the Australian energy resources sector to identify and deliver projects and activities to enhance the sector s innovation, competitiveness and productivity. 4 National Energy Resources Australia Coal Industry Competitiveness Assessment

5 Introduction NERA, in association with Accenture, has completed the Australian Coal Industry Competitiveness Assessment (ICA), including an Industry Competitiveness Framework (ICF) and Industry Competitiveness Score (ICS). The score provides NERA with data-driven analysis of how to effectively allocate and direct their resources to deliver maximum industry impact. It also delivers a baseline against which the industry can measure its performance in future releases. This report outlines the methodology utilised and the results and insights gained from the ICS. From the baseline results, Australia s black coal industry has an overall competitiveness score of 5.8 out of 10, placing the nation third on the Leader Board of global peers, marginally above the world average of 5.4, and lagging behind the world best, China, at 6.5. Modelling and analysis finds that improvements across several priority areas have the ability to improve the country s competitiveness score by 18%, and increase the value added to the Australian economy by AUD$4.5 billion. Australia performs poorly across the Exploration and Development and Extraction and Production phases of the value chain, resulting in a mediocre standing for the country amongst the peer group. With the world undergoing an energy generation transition, moving away from fossil fuels to cleaner energy sources, the competition between energy sources is set to increase. Success for the Australian coal industry lies in performing consistently well across all eight pillars of competitiveness and ensuring the energy and steel demands of the developing world are met with Australia s high quality coal. To achieve improvements in Australia s overall industry competitiveness, this report identifies five priority areas where changes in the short term have the ability to affect the country s performance: Supply chain: Supporting the industry by setting up regional supply hubs, and coordinating key activities across the industry to increase standardisation and utilisation rates. Research and innovation: Resolving the gap between research and commercialisation, and investing in the connected mine, with the goal of increasing overall productivity and lowering costs. Workforce: Upskilling the workforce to be competent in the new way of working, and investing in local capability for the Closure and Rehabilitation phase to maximise potential value and increase workforce agility. Regulatory reform: Shifting the interaction between government bodies and industry to a partnership-based model, establishing clear requirements and regulations, and developing greater transparency on the tax and royalty system, to reduce red tape costs and increase cross-stakeholder collaboration. Social License: Building a consistent message for the Australian public, with a focus on growing mining literacy, and articulating the important role Australia s coal industry has to play in the global energy transition; and also, focusing on rehabilitation of heritage sites. The ICS provides a comprehensive, data-driven assessment of the Australian coal industry from a global viewpoint. The results identify numerous areas for more rigorous study and suggests a number of innovative and collaborative improvements, that if implemented, will have a significant impact on overall industry competitiveness. NERA has a role in helping to increase engagement across the industry on a national level to ultimately deliver greater value for the nation. In future years, the ICS will provide a solid baseline against which the industry can measure improvement. National Energy Resources Australia Coal Industry Competitiveness Assessment 5

6 Australia and the Global Coal Market Given the export nature of Australia s coal industry, the global coal market has a significant influence on the country s competitive position. As of 2015, Australia had a 36% share of the world s coal exports (26% thermal and 63% metallurgical). Figure 1 provides a view of the supply and demand structure of the global coal market. Asia fuels the majority of global demand and even though they are major producers, both East and West Asia are significant importers of coal. Australia s large potential production volume, high quality, reserves, reliability of supply and unique location creates a structural advantage compared to other major exporting nations. Figure 1: Global Black Coal Market Australia is well positioned geographically to meet the significant Asian coal demand Production Demand Exporter Importer Imports Exports Imports Exports Imports Exports Exports 738 Mt 829 Mt 3 Mt 86 Mt 298 Mt 255 Mt 167 Mt North America South America Europe Africa West Asia Australia East Asia 246 Mt 912 Mt 691 Mt 56 Mt 454 Mt 4187 Mt 3929 Mt Source: Wood Mackenzie Ltd. Coal Supply Service Q4, 2015, IEA 2015, Accenture Research National Energy Resources Australia Coal Industry Competitiveness Assessment

7 Figure 2 breaks down Australia s black coal industry across the four producing states, clearly illustrating strengths and weaknesses of the local industry. Coal production in Australia is concentrated within Queensland (QLD) and New South Wales (NSW), with over 97% of the country s black coal production occurring in the two states 1. The significant brown coal production and reserves concentrated in Victoria is not covered in this study. The tight clusters of mining operations create a critical mass of infrastructure and suppliers that is vital for a cost competitive exporting industry. Across all four states, mining and preparation costs are well above the world average 1. This contributes to the poor performance in the Extraction and Production phase of the value chain. Fortunately, QLD and NSW have high quality product and sizeable reserves. This combination positions the country as a key supplier of world coal, now and in the future. The global coal industry produces two key products; thermal and metallurgical coal. While similar, they have fundamentally different applications, affecting market dynamics. Thermal coal is used to produce energy, while metallurgical coal is a key input into the production of steel. Figure 2: Australian Black Coal Market Australia s high quality and sizeable coal reserves combined with concentrated operations outweigh the industry s low cost competitiveness Thermal Metallurgical Exporter Domestic Producer WA 2% NT SA 1% QLD 55% NSW 42% VIC TAS Thermal 7 Mt Thermal 2 Mt Thermal 160 Mt Thermal 81 Mt WA SA NSW QLD Metallurgical 27 Mt Metallurgical 164 Mt $60/t $60/t $60/t 10 $100/t 10 WA World Best SA World Best NSW World Best NSW World Average QLD World Best QLD World Average $0/t Thermal FOB Cost $0/t Thermal FOB Cost $0/t Thermal FOB Cost 0 Thermal Quality & Scale $0/t Metallurgical FOB Cost 0 Metallurgical Quality & Scale Source: Wood Mackenzie Ltd. Coal Supply Service Q4, 2015, IEA 2015, Accenture Research 2016 National Energy Resources Australia Coal Industry Competitiveness Assessment 7

8 The world is undergoing an energy generation transition, moving away from fossil fuels to more environmentally sustainable sources of energy. World energy consumption share of coal is projected to decline by 3.5% over the next 15 years; however, total coal consumption is still expected to grow by 419 Mtoe during this same period. This is illustrated in Figure 3. Due to rising populations and economic growth, demand for coal fired power is expected to grow in developing nations; India, in particular, will see electricity requirements double by With aggressive environmental targets, it is expected that future demand will shift to high-efficiency, low-emissions coal-fired power, requiring high quality inputs. Against these conflicting trends, thermal coal is forecast to grow 8.5% by While still positive, this growth is significantly lower than the last 15 years as shown in Figure 4. Over the last three decades, China has experienced an unprecedented level of urbanisation. The resulting economic growth has seen global steel production grow by 75% (5.5% per annum) over the last 15 years alone 5,6. This was the key contributor to the enormous growth in Australia s coal industry over the same period. As China s economy matures, growth has begun to slow, resulting in softer steel demand shown in Figure 5. However, due to economic growth throughout the rest of Asia, metallurgical coal will still be in demand. The IEA and the World Steel Association expect steel production to continue growing at 2% per annum) until 2030, which is slower than the previous 15 years 7,8. India is set to be the largest source of this growth however, the country has very few high quality metallurgical coal reserves 8, so any major increase in demand will have to be imported, placing Australia, and Queensland in particular, in a favourable position. Figure 3: Share of World Primary Energy Consumption Coal may decrease in overall energy consumption share, but total consumption is set to increase World Primary Energy Consumption (Mtoe) Figure 4: Global Thermal Coal Demand Thermal Coal Demand (Quad Btu) The demand for Thermal Coal is still expected to grow, but at a much slower rate over the next 15 years F Steel Production (Mt) Share of World Primary Energy Consumption (%) Coal Oil Gas Nuclear Hydro Renewables Coal Oil Gas Nuclear Hydro Renewables 4.5% p.a. forecast 0.5% p.a. Source: BP Statistical Review of World Energy 2016 Figure 5: Global Steel Production Steel demand is expected to grow steadily as India while, demand in China will plateau % p.a. forecast 2.0% p.a World China India World China India Source: EIA International Energy Outlook 2016 Source: IEA 2015, World Steel Association 8 National Energy Resources Australia Coal Industry Competitiveness Assessment

9 Methodology Overview and Approach The results and findings from this report are based on research conducted over ten weeks from October to December The objective was to create an industry relevant measure of the coal industry competitiveness that was robust and repeatable, allowing improvements to be tracked over future releases. The general methodology and process used to perform the initial oil and gas industry competitiveness assessment was applied to the coal industry competitiveness. The ICA comprises of two core components: a framework for measuring competitiveness (ICF), and an index score of country competitiveness (ICS). The ICS is displayed in a dashboard to illustrate Australia s relative performance (Dashboard), and a leader board to rank the world s most competitive countries (Leader Board). To assess competitiveness effectively, a clear definition of the scope of the measurement is required. The business dictionary defines competitiveness as: Ability of a firm, Industry, or a nation to offer products and services that meet the quality standards of the local and world markets at prices that are competitive and provide adequate returns on the resources employed or consumed in producing them. This analysis considers competitiveness of the industry in the context of a system of interdependent entities who participate in the industry. Within this context, the extent to which a single actor can excel in terms of overall performance is dependent on the capacity and capability of the system as a whole. The competitiveness framework considers the four phases of the coal value chain; Exploration and Development, Extraction and Production, Coal Transportation, and Closure and Rehabilitation, while also considering operators, supply chain entities (including entities that manufacture, and or deliver products and services), as well as the regulatory environment and local communities within which the industry operates. Industry Competitiveness Value Driver Tree To identify a collectively exhaustive list of factors that influence industry competitiveness, value driver trees (VDTs) were created to address four key questions. Capacity Does the coal industry have the required skills, infrastructure and equipment to produce oil and gas to meet market demand? Capability Does the coal industry, collectively, have the capability (labour, capital and technology) to deliver coal to the market at competitive prices? Regulatory Environment Is the regulatory environment contributing to and enabling the success of the coal industry? Political and Social Environment Are the political and social environments conducive to and supportive of the coal industry? These broad drivers are further broken down to specific metric level data points. A high-level breakdown of the VDT is shown in Figure 6. National Energy Resources Australia Coal Industry Competitiveness Assessment 9

10 Figure 6: ICF Value Drive Tree Capacity Infrastructure Assets Labour Force Industry Competitiveness Capability Regulatory Environment Capital Knowledge and IP Taxation System Regulation Political and Social Environment Industrial Relations Public (Social Licence to Operate) Peer Group and Datasets The competitiveness assessment requires a comparison of Australia s performance against a peer group of coal producers and exporters. This peer group was selected based on four criteria; market share, growth outlook, industry structure within the country and data availability. Countries were included if they had a greater than 0.5% share of world production or a significant year-on-year growth forecast of the coal industry (i.e. greater than 10%), represented a sizeable share of GDP, and if they were captured in more than 80% of the data sources. The assessment focused on world black coal production; as a result, lower ranked coals were excluded. This resulted in a peer group of 10 countries. The peer group of 10 countries has a combined share of 85.2% of world black coal production in 2015, making it a strong representation of the coal industry globally. Noticeably, India, which produces 9.5% of the world s coal, is absent from the peer group due to the lack of sufficient data. Had India been included in the peer group, the combined group would have accounted for 94.7% of world production. Data was collected primarily through secondary research from both public and proprietary data sources. The ICS uses 75 specific data points from a multitude of reputable sources across all 10 countries. All data is taken from 2015 data sources, although some metrics utilise longer periods. Key data sources used include; Wood Mackenzie, Metalytics, Fraser Institute, World Economic Forum, and Accenture s internal research. The study uses data in 2015 US Dollars (AUD:USD FX Rate 0.75) where applicable. Where data on a specific industry group or value chain phase was not available, suitable proxy data points were used. The complete list of data sources is included in the Appendix. 10 National Energy Resources Australia Coal Industry Competitiveness Assessment

11 Figure 7: ICS Structure Industry Value Chain Exploration and Development Extraction and Production Coal Transportation Closure and Rehabilitation Supply Chain and Services Industry Growth Enablers Reasearch and Innovation Work Force Government and Public Involvement Industry Competitiveness Score To calculate the ICS, data points from the VDT were logically split into eight pillars of competitiveness, which fall under two categories: Industry Value Chain activities performed by the industry to deliver a valuable product or service to the market. Industry Growth Enablers activities performed to enable and support the industry to deliver a valuable product or service to the market. Measures specific to a single phase of the value chain were included in their respective phase. Metrics that ran across the value chain were split into the four industry growth enablers Supply Chain, Research and Innovation, Workforce, and Government and Public Involvement. These growth enablers represent core capability, essential to the operation of a successful Coal industry. The structure is illustrated in Figure 7. The combination of the 75 separate data points into a single score of overall industry competitiveness is achieved in four steps: 1. All data points are scored relative to the peer group, between 0 and 10, (where 0 represents the weakest performance and 10 represents the maximum achievable score). 2. Where possible metrics are broken down into different production types (i.e. Underground versus Surface mining, and Thermal versus Metallurgical coal), generating up to four sub scores for each metric. Each country is then given a weighted average of each sub score based on the prevalence of that production type within the country. 3. A weighted average of data scores is taken for each pillar (i.e. Exploration and Development or Workforce), generating eight scores for each country. 4. The overall ICS is calculated as a weighted average of the eight pillars. The overall approach to calculate the ICS takes into consideration the broad definition of competitiveness used throughout this assessment. It also accounts for the interdependencies in the industry between the growth enablers and the different phases of the value chain. National Energy Resources Australia Coal Industry Competitiveness Assessment 11

12 Industry Competitiveness Results and Insights Industry Competitiveness Score From the analysis completed, Australia has an Industry Competitiveness Score of 5.8 out of 10, behind the world best, China, while marginally exceeding the world average of 5.4. The country performs strongly in the Coal Transportation phase of the value chain, with a score of 8.4, and also performs better than the world average in three of the four Industry Growth Enablers. However, weak results in both the Exploration and Development and the Extraction and Production phases ultimately undermine the country s overall competitiveness. China comes out on top of the ICS due to having one of the lowest costs across the value chain. China is the largest consumer and producer of coal in the world. The country performs the best in the Exploration and Development and Coal Transportation phases, and ranks third in the Extraction and Production phase. Figure 8: Industry Competitiveness Dashboard Industry Competitiveness Industry Growth Enablers MEDIAN AUSTRALIA BEST (CHINA 6.5) Supply Chain 6.4 MEDIAN AUSTRALIA BEST Workforce 5.2 MEDIAN AUSTRALIA BEST 5.8 Research & Innovation 7.1 Government & Public 5.4 MEDIAN AUSTRALIA BEST MEDIAN AUSTRALIA BEST Exploration & Development Extraction & Production Coal Transportation Closure & Rehabilitation 4.7 MEDIAN AUSTRALIA BEST 5.0 MEDIAN AUSTRALIA BEST 8.4 MEDIAN AUSTRALIA BEST US$3.4b * Estimated Australian mine closure liability to 2045 for currently operating mines *US$3.4 billion excludes establishing landform and revegetation costs Source: Accenture Research 2016, Wood Mackenzie Ltd. Coal Supply Service Q4, National Energy Resources Australia Coal Industry Competitiveness Assessment

13 Figure 9, presents the ICS Leader Board, where Australia ranks as the world s third most competitive coal producing nation. While the country ranks only slightly above average, the spread of scores across the peer group is low. Inspection of the results suggest this is because no country performs consistently well across all eight pillars of competitiveness. For example, Canada, ranked eighth, scores very highly in the Industry Growth Enabler pillars (i.e. Supply Chain, Research and Innovation, Workforce, and Government and Public Involvement), however, it is among the worst performers in the Extraction and Production and Coal Transportation pillars. These results suggest all 10 countries within the peer group have significant room for improvement and that, with industry commitment and policy support, Australia has the opportunity to significantly increase its competitiveness standing. Figure 9: Industry Competitiveness Leader Board Country Competitiveness Rank China 1 South Africa 2 Australia 3 United States 4 Russia 5 Indonesia 6 Colombia 7 Canada 8 Vietnam 9 Mozambique 10 Exploration and Development High capital costs coupled with unfavourable regulation and poor social license to operate result in an uncompetitive position for Australia s coal exploration and development. If major new greenfield or expansion projects are to reach potential significant improvements across both areas must be made. Australia performs poorly in the Exploration and Development phase of the industry value chain with a score of 4.7, only slightly above the world average of 4.5, and trailing behind the world s best, China, with a score of 6.3. Exploration spending has fallen significantly since its peak in ,10 ; the decrease is in line with exploration spending across the world, which is down 72% over the same period 9. Subdued coal prices and a slower demand growth are clear contributors to this fall in spending 11. Figure 10 shows the strong correlation between exploration spending and the price of thermal coal over the last seven years, both in Australia and across the world. This trend is unlikely to reverse in the short term given the uncertainty surrounding coal prices. Figure 10: Exploration Spending and Australian Coal Price As coal prices drop, exploration spend in Australia and around the world react accordingly Exploration Spend (Index Base 2009 = 100) Australia Expenditure World Expenditure Coal Price Coal Price (US$/t) Source: ABS 2016, SNL 2016 National Energy Resources Australia Coal Industry Competitiveness Assessment 13

14 For Australia s coal exploration sector to flourish when coal prices rebound, it is essential to create an environment where regulation and costs promote, rather than hinder, an active exploration sector. According to the 2015 Fraser Institute Survey of Mining Companies, 55% of respondents in QLD and NSW reported that regulation uncertainty had a negative impact on the states investment attractiveness, versus only 13% in Western Australia (WA) 12. The industry must look to other geographies and industries that are promoting exploration more effectively. Australia must make progress in creating an attractive exploration environment for new and existing firms. If the country cannot develop and operate projects competitively, the ability to find new reserves is inconsequential. Over the last decade, coal prices were pushed well above their long term average, fuelled primarily by demand from Asia. In spite of Australia s uncompetitive development capability and poor regulatory environment, there was significant expansionary capital expenditure which saw coal production grow by 124 Mt 1. However, as prices have weakened in the past 3 years, the industry s expansionary capital expenditure has followed 1,11. Figure 11 shows the downward trend in Australia s CAPEX to production ratio over this period. Figure 11: CAPEX to Production Ratio CAPEX to Production Ratio (US$/Mt) Following a boom in production growth, capital expenditure in Australia has fallen sharply Australia Coal Production (Mt) Development is a key weakness for the Australian coal industry. Capital costs for projects built over the last 5 years averaged US$7.2/t, the highest in the world, and almost 50% above average 1,13. While excessive demand during the boom saw significant cost inflation and project delays, this does not fully explain Australia s poor performance; instead, structural factors; such as the high cost of labour, are a major cause of this weakness. In the past two years, construction and labour costs have been falling; however, they are still among the highest in the world, and further labour cost reductions are unlikely to provide the step change in costs required. The country s current poor development capability is a severe barrier to investment. If the industry is to approve major new projects, investment must be made into new and innovate ways to compete. The combination of a complex regulatory environment (State and Federal government) and low social license to operate creates an unfavourable environment for Australian coal companies to venture into new coal projects. A recent study by the World Bank found 50% of respondents believe the coal industry does not benefit their local communities and, 65% believe it is having a negative impact on the local environment. The lack of a clear social license for the coal industry is a significant impediment to new operations. This fact has been made clear over the last seven years of the Adani Carmichael development, as explored in Case Study 1. To improve social license, the industry should start by building a clear and consistent message targeted to the Australian public, increasing energy literacy and articulating the need for high quality coal in the global energy transition. Due to Australia s poor development capability, based on current projections, only four new mines have a high probability of opening in the next decade 1. If additional greenfield projects are to become operational, the country must find ways to reduce upfront capital costs to be more in-line with the rest of the world, and work to improve its current social license position. Production Australia World Source: Wood Mackenzie Ltd. Q National Energy Resources Australia Coal Industry Competitiveness Assessment

15 Figure 12: Adani s Carmichael Project CASE STUDY 1 Challenges in developing the Adani Carmichael Coal Mine The proposed Adani Carmichael mine development in the Galilee basin has been stuck in the regulatory process and Australian courts for seven years. The project, if developed, would become Australia s largest coalmine, with expected throughput of 60 Mt per year and a Life of Mine (LOM) of at least 60 years. The mine would deliver thousands of jobs and at least A$22 billion in royalties over its lifetime. Every step of the process has been met with delays and issues. Legal activists from environmental and Indigenous groups have challenged virtually every aspect of the project through the Australian courts. Three lawsuits are still outstanding against the proposed development. Government support for the project has also swayed. The project has endured three changes of State Premier and five new Prime Ministers. It is now an issue being discussed at the highest levels of Australian politics. At the time of writing, the most optimistic outlook still would not see first coal at the Carmichael mine until the end of 2017, a full eight years after it was first proposed. This saga does not act as a sign of encouragement for investors and other coal miners looking to expand operations or further invest in new coal projects. 21 Source: IEEFA Remote Prospects Report National Energy Resources Australia Coal Industry Competitiveness Assessment 15

16 Extraction and Production Australia has very high mining and coal preparation costs compared to the peer group. This is a weak point for the industry, and if not addressed adequately and promptly, may lead to loss of overall world export market share. Australia performs poorly overall in the Extraction and Production phase of the industry value chain with a score of 5.0, below the world average of 5.3, and trailing behind the world s best, Russia, with a score of 6.7. Regardless of mine type (surface or underground) or coal product (metallurgical or thermal), Australia performs below average in both mining and coal preparation in the Extraction and Production phase. Australia s average mining and coal preparation costs are US$37.50 per tonne and US$6.00 per tonne respectively. This is substantially higher than the peer group average of US$29.60 per tonne and US$3.10 per tonne respectively, indicating there is significant room for improvement 1. Over the last few years, foreign exchange factors have played a significant part in pushing down operating costs for developing nations. For example, in Russia, the Rouble devaluation has reduced operating costs significantly, making it more competitive. While Australia s costs are significantly higher, 75.3% of coalmines were able to generate positive margins in This view on overall margin is illustrated in Figure 13. Metallurgical coalmines perform better and have a higher share of mines with positive margins compared to Thermal coalmines (87.6% compared to 65.9% respectively) 1,13. Although this paints a positive picture of Australia s coal industry, many mines are operating close to the breakeven point. Given the volatile nature of coal prices, the profitability of Australia s coal industry can move quickly. Scenario modelling suggests that, based on 2015 costs, a fall in the price of coal of only 15% would see 49% of mines operating with negative margins. On the other hand, should prices rise 15%, based on 2015 costs, only 15% of Australian mines would be operating on negative margins. Cost cutting initiatives, since prices began to fall, have kept Australia s coal mines competitive up until this point. However, progress is beginning to slow, particularly as automatic cost stabilisers such as the falling Australian dollar have taken effect, and quick savings such as workforce reductions have already been implemented. Now the industry is faced with the much tougher task of tackling the structural factors contributing to Australia s poor cost competitiveness. If not addressed as a priority, high-cost and low margin mines in Australia will be forced to close prematurely. A key structural factor contributing to the country s high mining and coal preparation costs is the workforce. Education and training levels scored very highly in Australia compared to the peer group, which contributes to the country having the highest salaries in the world (approximately 30% higher than the US) 14. While salaries have peaked and Australia has seen a marked decrease, this is in line with the rest of the world, and as such has not improved the country s competitive position. Although salaries are high in Australia, labour productivity, measured as marketable (product) tonnes per employee, is also high, ranking second overall as shown in Figure Australia scores highly due to the nation having more established and advanced operating environments compared to other countries in the peer group. Australia can further invest in increasing its current use of technology and automation in mining operations, for example, by learning from and considering remote operations and driverless trucks used in the metals mining sector. This will Figure 13: Margin Rate for Australian Coal Mines in 2015 Given coal price volatility, profitability of Australia s coal industry can move quickly % Positive Margins Margain (US$/t) % Negative Margins Source: Wood Mackenzie Ltd. Q National Energy Resources Australia Coal Industry Competitiveness Assessment

17 drive further productivity gains, offsetting the uncompetitive labour cost to improve overall competitiveness. The ability to produce high quality coal at scale is key to the competitiveness of Australia s export based coal industry. Metallurgical and thermal reserves in Queensland and New South Wales are among the largest and highest quality in the world. The ability to export this coal at scale sets Australia apart from many of its competitors. For example, Mozambique exports high quality coal, however the total production of the country is only 1% of Australia s output 1. Extraction and Production is the weakest phase in the value chain for Australia s coal industry. While the country has significant high quality metallurgical and thermal coal operations, it cannot currently mine and process this coal competitively. By tackling structural disadvantages, the industry has the opportunity to make a substantial impact on overall competitiveness. Figure 14: Labour Performance Comparison Labour Cost (Annual Salary in US$) $120,000 Australia s labour cost is the highest in the world, but this balanced by high labour productivity $90,000 Canada Australia United States $60,000 South Africa China Columbia Mozambique $30,000 Russia Indonesia Vietnam $0 Bubble Size: Marketable Production Labour Productivity (Marketable tonne per employee) Source: Wood Mackenzie Ltd. Q4 2015, Hays Group 2013 and 2016, Accenture Research Coal Transportation Transportation of coal, both by land and sea, is a key strength for the Australian coal industry. Quality infrastructure and comparatively short distances to key markets place Australia among the world s best in this phase of the value chain. Australia performs well in the Coal Transportation phase of the industry value chain with a score of 8.4, well above the world average of 6.7, and only just behind the world s best, China, with a score of 8.6. The transportation of coal is a significant cost factor for industry operators, representing 25% to 40% of the cost for seaborne coal 1,15. Given Australia exports 88% of its coal production, strong performance here is crucial in the overall competitiveness of the sector. Fortunately for the country, geography plays a major role in determining a coal producer s transportation competitiveness. Shorter distances to ports, and to final markets, significantly reduce the infrastructure required and the total cost of transportation. Coal production in Australia is concentrated within QLD and NSW, with over 97% of the country s black coal production occurring in the two states 1. The large clusters of mining operations and maturity of infrastructure mean that most mines operate within proximity to world-class port and rail infrastructure, as shown in Figure 15. As a result, Australia s average distance from mine to port of 206 km is the among the lowest in the world 15. The total inland coal transport task in Australia is estimated at 88.9 billion tonne kilometres, of which rail accounts for 95.9% 16. Over four years from 2008 to 2012, fuelled by export demand from Asian markets, Australia invested heavily in rail infrastructure, boosting capacity by 120 Mt (35%) 1. Figure 15: Australia Coal Mines and Transportation Infrastructure Australia s transport infrastructure is clustered around the coal operations in Queensland and New South Wales Abbot Point Hay Point Gladstone Abbot Point Hay Point Gladstone Brisbane Brisbane Newcastle Port Kembla Newcastle Port Kembla Source: BITRE National Energy Resources Australia Coal Industry Competitiveness Assessment 17

18 Figure 16: Australia Coal Exports and Transportation Costs Australia has reduced coal transport costs while increasing exports Transportation Costs (US$/t) Coal Exports (Mt) Exports Transport Costs Source: Wood Mackenzie Ltd. Q In the industry s rush to add capacity, transportation costs soared. Since then, a concerted effort has been made to reduce costs, in particular, a significant focus has been placed on improving productivity and utilisation of these assets through regulated collaboration and coordination. The Hunter Valley Coal Chain Coordinator (HVCCC), explored in Case Study 2, is a positive example of an industry led collaborative effort that has brought about mutual gains 17. Across the country, utilisation rates have reached 75%, and costs have fallen by 38% as seen in Figure While the location of Australia s current coal operations is favourable to land based transport costs, this may change. The next major untapped reserves of coal are in the Galilee and Surat basins, located over 500km inland, with no significant rail infrastructure. Adani estimates it would cost AUD$2.2 billion to build the significant rail infrastructure needed to export from the Galilee basin 18. This has been a major impediment to any development within the region. Successful transportation capability, for an exporting nation, requires quality port infrastructure. Exports from Australia s seven largest ports have grown an average of 5.6% p.a. over the last decade 1. To support this growth, the industry has added an additional 246 Mtpa of world class export handling capacity since Newcastle port is now the largest coal export terminal in the world, exporting Mt of coal in As a result of high quality infrastructure and having the world s leading port utilisation rate of 75%, Australia s port costs are among the lowest in the world, adding on average, only US$3.6 per tonne shipped 1,15. Shipping is a major cost to the seaborne coal market; however, distance is the major driver of costs, providing little opportunity for the industry to improve competitiveness. Fortunately for Australia, the world s four largest coal importers; China, Japan, India and Korea, are all within close proximity, leading to lower shipping costs, as illustrated in Figure 17. The combination of quality infrastructure, both port and rail, and short distances mean Australia s cost per tonne for land based transportation of US$7.1 per tonne is the third lowest among the peer group 1,15. The industry must continue to work collaboratively across shared transportation infrastructure, both rail and ports, if it is to remain competitive. Figure 17: Port and Shipping Costs Cost (US$/t) Australia s shipping and port costs compare favourably against its major seaborne exporting peers Australia Port Costs Canada Colombia Indonesia Shipping Cost Mozambique South Africa USA Vietnam Source: Wood Mackenzie Ltd. Q4 2015, Metalytics National Energy Resources Australia Coal Industry Competitiveness Assessment

19 Figure 18: HVCCC Operations Map CASE STUDY Collaboration in Action - Hunter Valley Coal Chain Coordinator Stretching over 450 km and transporting over 150 Mt of coal annually, the Hunter Valley coal chain is the world s largest coal exporting supply chain. The HVCCC is an industry-led, collaborative initiative to better utilise the Hunter Valley coal chain shared infrastructure. Historically, the mismatch of rail, terminal and rolling stock capacity has been a major bottleneck for the industry. Before 2003, planning and coordination was performed on an ad-hoc, uncoordinated basis, leading to inefficiencies and unnecessary costs. On the recommendation of an industry review team, a centralised planning function (the precursor to the HVCCC) was created with the goal of unlocking the enormous value in the shared coal chain infrastructure. The independent organisation, which now represents 11 operators, and 8 major service providers, has worked collaboratively to maximise latent capacity in the coal chain. The success stems from centralised daily planning and scheduling that focuses on managing the coal chain from a holistic point-of-view, while still enabling individual members to meet contractual requirements. Members have confidence that decision making is independent and impartial, and that commercially sensitive information remains confidential. The organisation has also become a leader in innovative supply chain research. Utilising advanced modelling and simulation techniques they have been able to detect and reduce the effect of key constraints, including break-downs, weather disruptions, late movements and maintenance outages. As of 2015, over $20 million has been invested in innovative planning technology and models 17,22. Source: HVCCC.com.au National Energy Resources Australia Coal Industry Competitiveness Assessment 19

20 Closure and Rehabilitation A significant mine closure and rehabilitation liability looms over the next 30 years. Australia must position itself to capitalise on this opportunity, creating value for the industry and community, while actively managing the substantial environmental implications. Closure and rehabilitation is a crucial phase of the industry value chain, as it leaves a significant legacy, affecting local communities and the environment. Due to the complex and different nature of the physical environment, political landscapes, and social culture across the peer group, an overall score was not developed. Instead, this study exclusively examines Australia s mine closure costs and social and community engagement indexes. As of 2015, there were 95 coalmines operating across Australia 1. Figure 19 shows the forecast drop in coal production should no new mines be opened. This clearly indicates the enormous closure and rehabilitation activity that is coming. Mine closure and rehabilitation is complex and expensive. Rehabilitation covers a range of activities including establishing final land form position, revegetation and ongoing environmental monitoring. As a result, rehabilitation is significantly more expensive and requires a longer duration to complete compared to mine closure activities. The estimated liability for mine closure activities (i.e. decommissioning) based on currently operating mines within Australia, over the next 30 years stands at USD$3.4 billion 1. This indicates the substantial overall cost to the coal industry for both closure and rehabilitation. Issues in the sector arise when sufficient funds have not been allocated to adequately complete mine closure. While many companies plan for the rehabilitation, it is vital that sufficient funds are set aside well in advance of the cost. Where necessary, the government must step in to ensure state money is not ultimately required. In tandem, the industry must find ways to reduce this future liability. One way to reduce this liability is for operators to progressively rehabilitate mining areas which are no longer used for mining purposes. Australia should collaborate with other countries to train its workforce to be able to operate competently during mine closure and ongoing monitoring, as well as leverage the opportunity to learn lessons and gain insights from countries who have experience in this phase of the value chain (e.g. United Kingdom). It is crucial that eventual mine closure and rehabilitation is carried out successfully as the impact to the regions and communities will be lasting and significant. Failure to perform these activities properly on just one coalmine could trigger significant backlash from the community, and affect the overall credibility and social license to operate for the entire coal industry. The amount of socio-economic contribution and involvement by the coal industry in Australia ranks as the highest amongst the peer group. Figure 20 shows that Australia s contribution is more than double compared to countries like Colombia, Indonesia, Mozambique and South Africa 12. Figure 19: Production Outlook from Operating Mines in Australia Figure 20: Coal Industry Contribution to Community against Public Perception and Support 500 Mine closure and rehabilitation activity is set to increase significantly over the next 30 years as current operating mines begin to close 100 Investing more money into the community does not necessarily increase local engagement and satisfaction Production per year (Mt) % Index Score (%) Australia Canada Colombia Indonesia Mozambique South Africa Source: Wood Mackenzie Ltd. Q Social-economic Contribution Index Public Perception Satisfaction Index Source: Fraser Institute Survey of Mining Companies 2015, World Bank Extractive Industries Perception Survey 20 National Energy Resources Australia Coal Industry Competitiveness Assessment

21 However, even with the highest investment into local content development, the general public perception toward the coal industry in Australia is very poor, with 46% of the public surveyed having a negative view 19. Figure 20 shows that investing more does not directly translate to having a greater share of buy-in from the public. In Australia s case, it shows that investments made have not been effective and there is a potential disconnect between what the coal industry has been doing to engage and address the concerns of the public. The industry must listen to the public and look to address concerns with projects that generate tangible benefits to the community and the environment. One practical example is by revisiting heritage mines and ensuring they are properly rehabilitated, and fit for use by future generations. An undertaking like this would require significant collaboration from the industry and its partners, which would start to rebuild the industry s social license. A focus on building stronger collaboration with government bodies, and changing the current engagement model from being an enforcer of rules and regulations to being a part of the process would also lead to overall benefit to the industry and Australian community. There is time for the coal industry in Australia to prepare and position itself to effectively manage the closure and rehabilitation phase of the industry value chain. By increasing collaboration with various stakeholder bodies, positioning and skilling workforce accordingly, and learning lessons from other countries, Australia has the opportunity to increase its competitiveness and maximise value for the industry and country in this phase of the value chain. National Energy Resources Australia Coal Industry Competitiveness Assessment 21

22 Priority Areas and Opportunities Implementing practical, innovative and collaborative solutions across key priority areas, will make the country one of the most competitive and sustainable coal producing nations in the world. Industry improvements and opportunities, identified in the previous section of the report and the NERA Sector Competitiveness Plan (SCP), have the potential to boost Australia s competitiveness and add significant value to the industry and economy. These ideas have been grouped in five priority areas; Supply Chain, Research and Innovation Work Force and Regulatory Reform, and Social License. The priority areas focus on improvements to the industry that are achievable within the short term across each phase of the value chain. An Other Opportunities category is also included to capture potential improvements outside of the five priority areas listed. Supply Chain Australia s Supply Chain score of 6.4 places the country above the peer group average, but shows there is significant room for improvement compared to the world s best, USA, which scores 9.0. The performance of the supply chain affects the industry over all phases of the value chain, so improvements have the ability to have major impact. Analysis suggests that supply chain improvements and innovations will increase Australia s overall competitiveness standing by 5.08%. For Australia to remain above the peer group average and be competitive in this area, it needs to consider a number of innovative solutions. Two possible solutions include: Creating additional regional Supply hubs and services, like the HVCCC, to support the industry. The HVCCC is an excellent example of industry operators collaborating to form a joint-partner entity that focuses solely on managing a component of the supply chain in a particular region. Additional joint-partner entities should look at managing warehousing, logistics and transportation needed to support mining operations, allowing operators to focus on core mining capability. This could reap several benefits including; the creation of new jobs, and the standardisation of supply chain operations. Coordinating key operational activities such as shutdowns or major maintenance across the industry. The coal industry can learn how to set this up from the Coal Seam Gas industry in Queensland. Coal operators can form better partnerships with service providers to facilitate a more effective and efficient flow of people and materials. This provides the opportunity to optimise resources, equipment, and ultimately increase overall utilisation. These potential solutions would require organisations to shift from the conventional way of working and adopt new operating models. Given the risks, the overall benefits would still outweigh them and allow Australia to increase its competitiveness in the Supply Chain space. 22 National Energy Resources Australia Coal Industry Competitiveness Assessment