Queensland Treasury was right not to get too excited about the currently elevated coal prices and the surge in royalties when it updated its budget protections (chart below) last month.  As reported in today’s Australian, a report from the Chief Economist of the Federal Government’s Department of Industry, Innovation and Science hoses down expectations:

…the government’s projections in today’s release show that 2016’s 180 per cent price gains in coking coal and 80 per cent gains in iron ore and thermal coal have drawn nothing but a sober ­response from the industry so far.

“Investment decisions are taken with a long-term view of market conditions, and short-term price lifts are unlikely to have a significant effect on exploration activity and the progression of projects along the pipeline,” the report says…

…it predicts prices will slide this year as new global supply comes on and Chinese demand slows.

I made very similar comments to the Mackay Daily Mercury last week:

Adept Economics economist Gene Tunny believed it was likely the price surge would falter in 2017- on Tuesday coking coal come back to US$230.50/t- as mines reopened around the world to fill the supply shortfall.

However he noted the arrival of US president-elect Donald Trump could “give the global economy a kick along which would help coal prices”, through proposals to cut the corporate tax rate and focus on infrastructure.

He noted the longer term challenge would be if the US opted to increase trade barriers.

While he didn’t believe mining companies would be encouraged to make additional investments on the back of the higher coal price, he said state government would certainly benefit.

But he also noted signals from state government that it didn’t appear to be relying on the price climb maintaining.

A report from the state treasurer shows that in the 2016-2017 financial year it expected to reap $2.987b in coal royalties, up from $1.531b in 2015-2016.

However in 2017-2018 it expected this to fall to $2.022b and come in at $2.105b in 2018-2019.”

That said, Queensland is reaping some economic benefits from the elevated prices in addition to higher royalties, with the re-opening of the Collinsville mine in North Queensland at least, creating 200 jobs and additional business for local suppliers. Of course, the mining companies, and their largely foreign shareholders, will very much enjoy the temporary price surge, which has given Australia a positive trade balance for the first time in over two years (see the latest ABS data). Finally, the Commonwealth will extract some of the benefits through higher company taxes paid by the miners. So the higher prices are very good news, but we should not expect them to last.