Tag Archives: BHP

#Carmichael – Of subsidies, coal mines and nation-building #auspol #climate

carmichaelmapWho’d try to build a new coal mine?  The divestment campaigns are slowly convincing banks to steer clear (), the coal price is in the floor. The Indians seem to be (finally) increasing domestic production and their solar price is tumbling.  The environmentalists and their pesky skinks are slowing things down, the social licence to operate looking being undermined .  And now the Federal government, previously a reliable source of support, might be blinking. While Malcolm Turnbull’s Resources Minister, Josh Frydenburg continues to argue that there is a ‘strong moral case’ for selling coal to the developing world.  (This argument that predates Peabody Energy’s notorious ‘Advanced Energy for Life’ by 20 years ).

Perhaps tellingly he did not put taypayers’ capital – and his own political capital – where his mouth is. He

“hinted that Adani was unlikely to get access to any cash under the $5 billion northern Australia infrastructure concessional loan kitty. “This wouldn’t be a priority project for us,” he said. Asked if Adani will be seeking taxpayer subsidies, Mr Frydenberg said it was a “commercial operation and needs to stand on its own two feet”.

The dilemma for Adani and its supporters is that to get its coal from the newly re-approved Carmichael mine, 400km inland, to the Abbot Point terminal on the Great Barrier reef would require a very expensive and controversial 400km long railway.

Meanwhile, in the US a producer in the Powder River Basin has welcomed delays in the construction of a West Coast coal export terminal, saying they “believe these agencies and environmental groups are doing the coal producers a favour by not approving or supporting the approval of these terminals”

Perhaps on the basis that the price for coal is already quite low enough, thank you.

Straws in the wind

There are straws in the wind that the incumbents are worried that overproduction is hurting their interests.  In May the chair of global commodities trader Glencore, Tony Hayward (he of the ‘I’d like my life back’ gaffe when head of BP during the Deepwater Horizon disaster) called for an end to subsidies for fossil fuels, but as a prelude to the introduction of a global carbon price, although cynics might say that this is simply a way of slowing down a price’s arrival.

More tellingly, last week the Sydney Morning Herald reported that the head of Glencore’s Australian coal operations was opposed to governments funding new entrants, saying  “Bringing on additional tonnes with the aid of taxpayers’ money would materially increase the risk to existing coal operations,”

Nothing new under the sun – nation building

Australian federal support for energy giants is nothing new.  In 1981 historian Richard White observed in his magisterial “Inventing Australia” that

“There was wide agreement that it was the government’s responsibility to provide much of the infrastructure for development, although private industry might reap the profit. An example was the establishment of B.H.P’s steel-works at Newcastle in 1912, the biggest single step towards industrialisation. State and Commonwealth Labor governments disregarded the federal party platform and helped establish B.H.P.’s steel monopoly by contributing land, power, harbour facilities, government contracts and financial support from the new Commonwealth bank.”

(page 115) [See also this excellent article about BHP’s history]

It should be remembered, for instance, that it was Labor’s Federal Infrastructure Minister Anthony Albanese who, in May 2013, extended the “Major Project Facilitation” status of the Galilee Coal Project.


When is a subsidy not a subsidy and who would  benefit  if they were cut?

Late last year the London-based Overseas Development Institute released a report,  the “The Fossil Fuel Bailout”  which estimated that “exploration by coal and energy companies is subsidised by Australian taxpayers by as much as $US3.5 billion ($4 billion) every year in the form of direct spending and tax breaks”.   It’s an argument also made repeatedly by the Canberra-based Australia Institute.  The Minerals Council of Australia’s response to these attacks is that “government funding and tax breaks for exploration are not subsidies but legitimate tax deductions for business” and that “official estimates of subsidy to the mining industry are actually quite small when compared to estimates provided by various lobby.”groups.

As Richard Denniss, Chief Economist of the Australia Institute who is campaigning for a moratorium on the construction of new coal mines made clear at a seminar in Manchester last week, by restricting supply in an era of rising demand, a moratorium would in part benefit the owners of existing mines.  This may explain some of Glencore’s recent statements.

Reframing ahead of a U-turn?

Predicting the twists and turns of government policy is a mug’s game.  Perhaps the fact that the Federal Minster Fryenberg has demured  means nothing. Or perhaps it means that the Turnbull government thinks that it’s one thing to give planning approval to Carmichael six weeks before the Paris climate conference, but quite another to throw more tax payers’ money at the scheme during an alleged budget crisis.  It could be that they are laying the groundwork (hoho) for a graceful exit from giving capitalists capital.  Time will tell.

What, however, is certain is that, with all the different controversies around mining – the dust, the stresses for and social consequences of fly-in fly-out workers, the noise, the potential dangers to the reef, and above them all climate change – there are many more battles to be fought between the miners and their opponents. The regulatory and financial powers of both the state and Federal governments will be a key battleground.

Of the Australian iron ore price plummet and mining’s “social licence to operate”

Iron Ore royalties leave, just when we needed them most…

All is not well in the great Southern quarry that tourists know for its koalas and Ramsay St. For the last ten years  selling iron and coal (and building infrastructure to sell ever larger tonnage) kept Australian mining companies busy, and rich.    But since early 2011 the price that mining companies (and the royalties governments get) has been plummeting(1).   If you want the gory details of the iron ore boom and bust, Mike Sainsbury and Mike Seccombe have both written excellent articles recently.

The gist is this;  the price for a tonne of iron ore is now under $50 (and still heading south), less than is a third of the $150 it was only a couple of years ago. The main customer for all this iron ore (which, along with coking coal, is used for making steel) is China  And it turns out that the Chinese
a) have not retired/mothballed as much of their own iron mining capacity as was predicted, and have cut taxes on their own producers ( Sanderson, 2015)
b) are recycling more of their old steel. (Who knew, that you could do that, eh? It turns out that “steel is 100 per cent recyclable. Steel created 100 years ago can be recycled today and used in new products and applications.” I’m quoting from an article (Howes, 2009) in which the national secretary of the Australian Workers’ Union tried to claim that steel workers were in ‘green jobs.)
c) are building fewer houses than was predicted even recently. Perhaps they can’t find enough ghosts to live in the ghost cities they built?

So, with assumptions of profits turned to dust, a bunch of “smaller” mining companies (e.g. Atlas) are doing mothballing of their own,  because they are losing money on every tonne they dig up. Meanwhile the big boys (especially Rio Tinto, BHP and Vale) can scrape by (or indeed ‘thrive‘) because they have got deeper pockets and run more efficiently (i.e. economies-of-scale and more automation). Still, even there the market is sending signals –   “BHP, Rio and Vale were among the eight iron ore miners put on negative credit watch by Standard & Poor’s this week.” (AFR, 17th April).

Meanwhile, the Western Australian government has a whacking great hole where a goodly chunk of their budget used to be. (They were expecting to be creaming off royalties per tonne. Fewer tonnes equals more migraines for the treasurer).
Last September, back when the Iron ore was selling at $85 per tonne  the economics editor of the The Western Australian put the edges of the hole at $1.7 billion.

It’s a wider, deeper and blacker now… The next state election is almost two years away, but nobody is predicting a magical price rebound anytime soon

Immediate implications
The Australian Financial Review(AFR;  think” Financial Times”, only not quite as pink) has some predictions and observations about this–

[Western Australian] Premier Colin Barnett has repeatedly expressed palpable anger at the threat to state revenues and the Pilbara’s mining landscape that is posed by the big boys’ approach to growth. (April 15th)

As the AFR (April 16th) points out.
There is a clause in each and every one of WA’s iron ore mining agreements that says an operator must “ship from the company’s wharf all iron ore mined from the minerals lease and sold and use its best endeavours to obtain therefore the best price possible having regard to market conditions from time to time prevailing… there is very well-informed speculation that this is the point that Barnett intends to labour in meetings that he will schedule with the local bosses of Rio and BHP over the coming weeks, and that he will again remind them that they require further state approval of retention licences and of future development plans.

Longer term implications (or “where can I buy one of these ‘ social licences to operate?’”)
The AFR (April 15th) wrings its hands that the “social licence to operate [of BHP and Rio Tinto could face the most severe test in this country since native title”, warning that “the winners of iron ore’s Darwinian struggle have a Himalayan public affairs challenge ahead.”
[For non-Australian readers- “native title” refers to the legal headaches that come up once you’ve admitted that the land the white Australians ‘found’ in 1788 wasn’t empty after all.]

Social licence to operate? That’s corporate/academic speak for how ‘legitimate’ business is perceived to be. Suchman (1996) is the key text, if you’re that interested. Especially since the 2002 Mining, Minerals and Sustainable Development report the global mining industry has been paying more (than?) lip service to whether they have the tolerance of the communities they operate in.  Let’s go to some academic classifications

According to … Lindblom (1994) also identified four strategies an organisation seeking legitimation may adopt. The organisations can use external disclosures to seek to:
(1) educate and inform its “relevant publics” about (actual) changes in the organisation’s performance and activities;
(2) change the perception of the “relevant publics” – but not change its actual behavior;
(3) manipulate perception by deflecting attention from the issue of concern to other related issues through an appeal to, for example, emotive symbols; or
(4) change external expectations of its performance.
(Yongvanich and Guthrie 2004:8)

Note that nothing in the above says “demonstrably pay your taxes.” And here the Australian narrative goes to levels that a satirist just would not dare push it. It is an exquisitely bad time to be perceived to be tax-dodging, but that’s what BHP has achieved, (with Rio Tinto in the same fleet, if not the same boat.)

As Leonore Taylor reported on 10th April

BHP Billiton executives have infuriated a Senate committee by refusing to say how much the Australian Taxation Office believes it is owed because of the way the mining giant channels profits through a marketing hub in Singapore.
They also declined to say how much tax it paid in that country.
The Senate economics references committee has now demanded BHP Billiton answer its questions. Continued refusal could ultimately result in the company being held to be in contempt of the Senate.

[This ‘transfer pricing’ was identified by Bernard Keane (2011) as a more important issue than ‘foreign ownership’.] Meanwhile, the corporate behemoth Glencore, which swallowed Xstrata in 2011 and is licking its lips at the prospect of swallowing Rio Tinto (2), is doing what it can to look good. It is going to relocate its coals sales from Singapore to Australia. This follows “a clear signal this week from Joe Hockey, Australia’s treasurer, that he would block any formal takeover proposal [of Rio Tinto] due to concerns about protecting the country’s tax base.” (Smyth, 2015)

Meanwhile, the New South Wales government has changed the law to give Rio Tinto permission to mine “Saddle Ridge”
– (which in 2003 had said it would never do). Why does this matter? Because it would make the town of Bulga uninhabitable.  The locals aren’t going to take this lying down.

So, to recap –  the mining companies are laying off workers, causing budget chaos, selling coal to anyone who’ll burn it (Japanese emissions are up)  and are apparently unbothered about being seen as tax dodgers. And now they want to pick fights with farmers, wine-makers, the tourism industry and people who are fighting for their homes. That is quite a display of … confidence.

(1) This “commodity cycle” is one of the oldest stories in commodities, but always seems to come as a surprise to our “groundhog day” brains.)

(2) The story of all the attempted takeovers of Rio Tinto – by BHP, Chinalco etc –  is fascinating, but not one for now.

Australian Financial Review (2015) Let them eat iron ore dust 15th April

Australian Financial Review (2015) Magnificent Seven to Atlas’ rescue 16th April

Australian Financial Review (2015) Miners go from rock stars to ore wars 17th April

Howes, P. and Leahy, M. (2009) Steel is green as the wind The Australian 25th March

Keane, B. ( 2011) ‘Selling off the farm’ isn’t the problem for the mining industry Crikey 30th June

Mitchell, T. (2015) Dumping On Bulga: How The NSW Government Abandoned An Entire Town To Big Coal New Matilda 8th March

Sainsbury, M. (2015) How Big Iron’s mistake cost you billions Crikey 9th April

Sanderson, H. (2015) Iron ore sinks further after Chinese tax cut Financial Times 11th April, page 19

Smyth, J. (2015) Glencore to shut Singapore coal hub amid tax concerns Financial Times 11th April, page 15

Seccombe, M. (2015) Resources bust worse thanks to Howard-Costello The Saturday Paper 18th April

Suchman, M.C. (1995), “Managing legitimacy: strategic and institutional approaches”, The Academy of Management Review, Vol. 20, No. 3, pp. 571-610.

Taylor, L. (2015) BHP Billiton refuses to reveal tax bill estimate to Senate committee Guardian 10th April

Yongvanich, KI. And Guthrie, J. (2004) The Australian Mining Industry’s Sustainability Reporting: An Examination of Legitimation Strategies Macquarie Graduate School of Management Working Papers