CHARACTERISTICS OF THE AUSTRALIAN COAL INDUSTRY
Coal mining is an established and expanding industry that is deeply embedded in the Australian economy.
Coal is the world’s fuel of choice for electricity generation – accounting for 41 per cent of global generation – because it is affordable and reliable.1 Further, coal is expected to remain the primary source of electricity for the foreseeable future.2 Coal is also an essential ingredient in the manufacture of steel and cement.
Coal benefits the Australian community through its contribution to exports, wages, jobs, investment, and tax and royalties. It is Australia’s comparative advantage in coal – together with iron ore – that has enabled Australians to sustain the longest period of continuous economic growth in the nation’s history.
Apart from boosting national income, coal provides reliable and affordable electricity for Australian households and businesses. Low cost, reliable energy has been a critical element of the international competitiveness of Australian industry and the living standards of households for several decades.
Coal mining in Australia is an increasingly sophisticated and hi-tech activity. Continuous improvements in mining technology, occupational health and safety and environmental performance have ensured that Australia is an efficient and reliable producer of high quality thermal and metallurgical coals for the international market.
The coal industry is supported by a strong equipment and services sector. Australia has world-class expertise in design, construction and operation of mines, transport systems and loading facilities. Australia also has expertise in training, technical support and project management.
While the coal industry is currently experiencing a cyclical downturn in prices, the underlying trend of rising world coal demand – driven by Asian industrialisation and electrification – will persist for decades.
History of Coal in Australia
Modern Australia has been built on the stored energy of coal.
Coal generates three-quarters of the electricity that powers Australian industry and heats, cools and lights Australian homes.
Australia’s relationship with coal can be traced back to the first voyage of Captain James Cook, who arrived on the east coast in HMS Endeavour in 1770. Cook served his nautical apprenticeship on vessels that conducted the North Sea coal trade between northern England and London. The Endeavour began life as a collier (coal ship) before being refitted by the Royal Navy for exploration.
The establishment and growth of British colonies in Australia coincided with the coal-driven Industrial Revolution in Britain. British colonists sought to recreate British conditions in Australia, and this in turn required the use of coal.
Coal was first discovered by Bass and Flinders in the area now known as Wollongong. Soon after, a seam was spotted north of Sydney on what was named Coal River. The resource here proved significant enough to establish a convict settlement in 1804, known as Newcastle on the Hunter River. Today, it is the biggest coal export facility in the world.
Not only is coal Australia’s second biggest export trade, it is also the oldest. Sydney began to develop as a port, supplying coal to visiting ships, and in particular whaling ships, which needed coal to fuel the boiling down of whale oil during hunting season. Coal had begun fuelling the energy transition.
By the 1830s, the coal industry had become established. In the fledgling colonies, demand was insufficient to sustain mining until the arrival of steam ships bringing the first free settlers, stimulating population growth. Coal-fired steam-driven mining machinery was also introduced, sparking rapid growth.
And so Australia’s first industrial town was born – Newcastle. The coal expansion led to the establishment of salt and lime production, iron, copper, brass, foundries, soap and candle works, cloth and flour mills.
Australia’s coal industry today
Australia’s natural endowment of coal resources offers a clear comparative advantage in coal production. Australia has the fourth-largest share of proven coal reserves in the world.3 In terms of resource life, current estimates of Australia’s economic demonstrated coal resources are 110 years for black coal and 510 years for brown coal (lignite).4
Australia is a major supplier of high-quality coal to both mature and emerging markets, accounting for 54 per cent of world trade in metallurgical coal and 24 per cent of world trade in thermal coal (Chart 1).
In the International Energy Agency’s core scenario, Australia’s coal production grows by almost 50 per cent between 2011 and 2035 (compound average annual growth rate of 1.7 per cent), driven by rising exports. The IEA expects Australia and Indonesia to be the biggest beneficiaries of increasing international trade in coal. Australia overtakes Indonesia as the world’s biggest coal exporter by volume by 2030, although Indonesia remains the largest thermal coal exporter.6
According to Professor Sinclair Davidson, output from the “coal economy” – that is, coal mining and related industries and services – represented 3.1 per cent of gross domestic product (GDP) or around $43 billion in 2011-12, rising by 18.25 per cent since 2006-07 (Chart 2).7
Source: Professor Sinclair Davidson
The “broader coal economy” – that is, coal economy output plus spending of wages earned in the coal economy – represented 4.2 per cent of GDP or almost $60 billion in 2011-12. This is about the same size as iron ore and agriculture (at the farm gate).8
The Bureau of Resources and Energy Economics (BREE) reports that the coal investment pipeline (including both mines and related infrastructure) currently consists of 93 projects worth approximately $118 billion. BREE provides employment estimates for 64 of these projects, which collectively could generate up to 75,000 jobs (42,000 in construction, 33,000 ongoing).9
BREE identifies 50 new coal mining projects under feasibility examination with a combined value of $54 billion. There are more coal projects at the feasibility stage than any other commodity.10
However, Australia’s comparative advantage in coal production is not simply given; it depends on continual improvements in productivity and appropriate tax and regulatory settings.
The mining boom is not over, just different
The mining boom has entered a new phase of increasing production and exports, which offers long-term economic benefits to the Australian community. The previous two phases of the mining boom were characterised by record commodity prices and levels of investment, which generated large and comparatively easy gains to national income.
In contrast, the current phase of the mining boom is more constrained and demanding, being marked by lower commodity prices, cost escalation, capital discipline and declining investment – but also higher levels of output. As BIS Shrapnel explain:
Falling coal prices and the relatively high operating cost environment has led to challenges for the coal industry, with a number of existing mines shut down, new coal projects cancelled, and job cuts within the coal sector. While the news seems bad, coal production has actually increased and is expected to continue to do so over the forecast period [i.e., 2014 to 2018].11
BIS Shrapnel further point out that coal production has increased by 15 Mt on average since 1989-90, with only one negative year (2010-11) owing to the Queensland floods. Significant investments since 2005-06 have boosted production growth to above-average levels and over the two years to 2012-13, annual production increased by 38 Mt on average.12
BIS Shrapnel forecasts total coal mining production to increase at an average of 3.8 per cent a year (i.e., 24 Mt a year) to sum 717 Mt in 2017-18. Production of brown coal is expected to remain steady over this period.13
Whereas the benefits of the price and investment phases of the mining boom were compressed into one decade, the revenue streams from the production phase will be realised over multiple decades. As BREE explains:
While the capital inflows associated with investment phase of the mining boom have brought substantial economic benefits to Australia they are realised over a relatively short period of time. The economic benefits of the production phase may not be as large as the investment phase per year, but they are expected to last for considerably longer.14
Reserve Bank Governor Glenn Stevens has also emphasised this point:
Let's be clear that Australians will continue to benefit from the higher level of resources output for a very long time. There has been a large lift in the global demand for natural resources that our country happens to have in abundance. Most people agree that the rate of growth of that demand will be lower in future than it has been in recent years; some say much lower. But the lift in the level of demand we have already seen is permanent enough, and large enough, to have a quite persistent effect on our economy … Even allowing for the high degree of foreign ownership in the resources sector, flows of income accruing to Australians, through a few different channels, will be high over a long period.15
The lasting and positive impact of the mining boom is illustrated by Treasury’s projections of Australia’s terms of trade in the 2013-14 Mid-Year Economic and Fiscal Outlook. Taking into account the three phases of the boom, Treasury expects a long-run terms of trade that settles (by 2019-20) at the historically high level observed in 2005-06.16 Treasury also notes that “With the resources boom transitioning to the production phase, resources exports will begin to make up a greater share of real GDP growth.”17------
1 International Energy Agency, World Economic Outlook 2013, Paris, 13 November 2013, p. 175.
2 ibid., p. 174.
3 BP, Statistical Review of World Energy 2013: Statistical Review data workbook, 12 June 2013. According to BP, proven coal reserves are ‘Generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known deposits under existing economic and operating conditions.’
4 Geoscience Australia and the Bureau of Resources and Energy Economics, Australian Mineral Resources Assessment 2013, Canberra, 1 November 2013, p. 32.
5 International Energy Agency, World Energy Outlook 2013, p. 165.
6 ibid., pp. 148, 151.
7 Sinclair Davidson and Ashton de Silva, The Australian Coal Industry – Adding value to the Australian Economy, paper commissioned by the Australian Coal Association, April 2013, p. 1f.
8 ibid., p. 1f.
9 Bureau of Resources and Energy Economics, Resources and Energy Major Projects, October 2013 projects listing, 27 November, 2013.
10 Bureau of Resources and Energy Economics, Resources and Energy Major Projects, October 2013 report, 27 November, 2013, p. 11.
11 BIS Shrapnel, Mining in Australia 2013 – 2028, October 2013, p. 44.
12 ibid., p. 44.
13 ibid., p. 44.
14 Bureau of Resources and Energy Economics, Resources and Energy Major Projects – October 2013 report, Canberra, 27 November 2013, p. 28.
15 Glenn Stevens, Governor of the Reserve Bank of Australia, Economic Policy after the Booms, Address to the Anika Foundation Luncheon, Sydney, 30 July 2013, emphases in original, but italicised rather than bolded.
16 Glenn Stevens, Governor of the Reserve Bank of Australia, Economic Policy after the Booms, Address to the Anika Foundation Luncheon, Sydney, 30 July 2013, emphases in original, but italicised rather than bolded.
17 ibid., p. 11, emphasis removed.