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Coal: crucial for Queensland

Mark Gresswell, Director, Commodity Insights

If Queensland were a country, it would be the third largest coal exporter in the world, behind only Indonesia and Russia, and ahead of large exporters such as the United States, South Africa and Colombia.

As economies globally struggle to recover from the impacts of the worst economic downturn in over 80 years, the coal industry is providing a strong bulwark for Queensland and is poised to remain a vital economic pillar for decades yet.

The importance of coal production and exports to the Queensland economy cannot be overstated. In a year when the tourism, hospitality and international education sectors have been severely damaged by government-imposed shutdowns and border closures (and sadly, may take many years to recover), the coal sector has provided ongoing exports, jobs across the state and significant revenues for government coffers.

The coal sector is an especially important contributor to the Queensland economy, with the Queensland Resources Council estimating the following total contribution – direct and indirect, in FY18-19:

• Total Gross Regional Product of $52.5B, or 15% of total state product.

• Over 260,000 full time jobs, or 11% of total state employment.

• $4.4B in royalties, accounting for over 80% of Queensland’s commodity royalties.

In terms of export revenue, coal accounted for over 43% of Queensland’s export revenue in 2018-19, more than the next three largest exports (LNG, metals and beef) combined. Despite tougher market conditions and lower prices in 2020 due to COVID-19, the sector will remain by far the largest contributor to Queensland’s export revenues.

Queensland Coal Production

In 2019, Queensland’s 50 operating mines produced 250Mt of coal. Of this, 160Mt was metallurgical coal, which is a key input into the steel production process, while the remaining 90Mt was thermal coal, which is used for power generation.

Queensland’s coal production is predominantly exported, with 214Mt or 86% of total production sent overseas in 2019. The remaining 36Mt is thermal coal, utilised domestically in coal-fired power generation. To put the export volumes into perspective, if Queensland were a country, it would be the third largest coal exporter in the world, behind only Indonesia and Russia, and ahead of large exporters such as the United States, South Africa and Colombia (see Figure 1).

Queensland is particularly dominant in metallurgical coal exports, where it accounts for almost half the traded volumes globally. This is important as metallurgical coal is a higher value product than thermal coal (ie. sells for higher prices) and it also faces less competitive pressure than thermal coal – which competes with gas, nuclear, renewables, etc. – while most steel can only be produced using metallurgical coal (see Figure 2).

Queensland metallurgical coal is widely recognised as the highest quality in the traded seaborne market, and key price benchmarks are based on Queensland coal brands. Coal exports are a massive income generator for Queensland, with export revenues in 2019 of almost $41B, more than the Gross State Products (total economic output) of Tasmania ($32B) and the Northern Territory ($26B)!

Queensland’s coal exports are largely sent into Asian markets – Japan, Korea, Taiwan, China, India and Southeast Asia – with 86% of volumes sent to Asia in 2019. This is important, as Asia is generally viewed as being a key growth engine of the global economy to 2050.

The Outlook for Queensland Coal

The outlook for Queensland coal exports is bright, particularly given the proximity and strong market position in the key growth region of Asia. The figures below provide some context around the potential Asian market growth over the next few decades. Let’s look firstly at thermal coal, which is primarily driven by electricity demand. The International Energy Agency forecasts the following under its current policies scenario:

• Asian power sector demand will grow by 75% from 2017-40

• Asian power sector coal demand will grow by 50% from 2017-40

• Coal-fired generation capacity is expected to grow by over 700GW, which is equivalent to around 2 billion tonnes of incremental thermal coal demand.

Even under its most bearish scenario, the IEA says coal-fired capacity in Asia will increase by over 400GW over the period, which equates to more than a billion tonnes of additional demand.

Assuming that some of this incremental demand will be met by domestic production (which it will be, particularly in India and China), much of the growth will be in areas that have no domestic coal production and therefore will have to import supply from the seaborne market.

We turn now to metallurgical coal, in which Queensland has an extremely prominent position globally. Metallurgical coal demand is driven primarily by steel production – which comes later in the economic development cycle than electricity.

Developed economies (Europe, USA, etc.) tend to consume around 300kgs of steel per capita. During strong phases of economic development, particularly in a centrally planned economy, the ratio can be higher due to intense industrialisation and urbanisation. However, most developing countries have low levels of steel consumption and therefore production.

If we just take India and the rest of developing Asia – combined population 2 billion - and assume over time they will reach 300kgs per capita, that is additional crude steel production of almost 500Mt. When converted to a metallurgical coal equivalent, this is approximately another 250Mt of demand – which will all be imported coal!

This Asian demand growth for metallurgical and thermal coal represents an outstanding opportunity for the Queensland coal sector. In our view, the demand will grow regardless of who supplies it – Australia, Indonesia or Russia. If Queensland does not supply this growth, then other exporters such as Indonesia (thermal coal) or Russia (metallurgical coal) will fill the breach.

It is up to the Queensland (and Australian) coal sector and governments at all levels, to help position Queensland coal exports to best share in this growth. With the continuing development of the Bowen Basin (Byerwen, Olive Downs and other projects) and the opening of the Galilee Basin with Bravus Mining & Resources’ Carmichael mine, Queensland’s miners are forging ahead with projects that illustrate their positive outlook for the sector.

In conclusion, the contribution of coal to the Queensland (and Australian) economy is not widely appreciated but it is strategically and economically significant.

Our industry is helping immeasurably to improve the lives of millions of people across Asia through the provision of cheap, reliable electricity and high-quality steel, and we should be proud of this. Asian economic development will continue strongly for many years – decades in fact – and will need enormous volumes of electricity and steel. Let’s make sure that Queensland export coal helps meet this requirement!

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