Coal price crash is bad news for the state budget and future capital investment

Last Friday, John McCarthy at In Queensland reported Budget impacts loom as coal prices plunge to four year lows. Yes, recent falls in the coking coal price to around $US100/t for coking coal must be causing anxiety in Queensland Treasury, which will be trying to wrap up the long overdue 2020-21 state budget that Treasurer Cameron Dick will hand down next Tuesday, 1 December. The fall in the Australian coking coal price since October appears partly related to alleged Chinese restrictions on Australian coal. Coal market analysts expect this can’t continue and indeed Australian coking coal futures prices show prices are expected to recover over the rest of the financial year (see chart below). Last Thursday, The Australian reported (Coal price slump finishes Carabella Resources):

In a client note on Thursday, RBC Capital Markets analyst noted that benchmark metallurgical coal prices had fallen below $US100/t this week for the first time in more than three years, but noted China’s bans on Australian coal were putting pressure on its own steel industry.

As reported by John McCarthy in In Queensland, “RBC Capital Markets has predicted the coal price would rebound to $US140 a tonne this year and $US150 long term.”  By this year, I think they mean this financial year, rather than by the end of 2020, which would be consistent with futures market pricing.

1st position refers to the 1-month ahead futures price, 3rd position to the 3-months ahead futures price, etc.

The (hopefully only temporary) fall in the coking coal price since October should see the Treasury adding a little bit extra to the already large write down ($1.1bn for 2020-21) in coal royalty revenue it revealed in its COVID-update in early September. We’ll see the additional damage the Treasury is expecting in the budget next Tuesday, and we’ll also see just how much debt the Treasury is projecting Queensland will end up with by 2023-24, something which should have been revealed in the COVID-19 Fiscal and Economic Review back in September. Of course, the state government was facing an election in late October and it didn’t want to reveal the obvious blow out in state debt. In a report commissioned by the Australian Institute for Progress, Joe Branigan and I projected general government debt of $72-77bn and total government debt of
$113-118bn by 2023-24. On Queensland’s budget outlook, see e.g. Gov’t claims police boost “fully funded”, but won’t release full budget forward estimates.  

Low coal prices (for coking and thermal coal) are raising doubts about future investment in coal mines. The Financial Review today, in an article on the latest Department of Industry forecasts of resources sector capital investment, referred to
$72 billion of projects unlikely to go ahead and noted:

The department did not name the projects it now deemed to be ”unlikely” to go ahead, but it did disclose that many of them were in the coal sector, which is currently struggling under very low prices and geopolitical uncertainty over China’s reluctance to accept Australian coal.

That said, the Carmichael coal mine is part of the resources sector investment rebound the department is forecasting for 2021, as is Arrow’s $10bn Surat basin gas project. While rebounding a bit, capital investment still won’t be anywhere near what it was in the first half of last decade, of course.

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