Last week the Federal parliament reached agreement on a package of measures which will help to reduce our budget deficit by $6.3 billion over the next four years – as spending on the baby bonus is removed, funding for the Australian Renewable Energy Agency is reduced by $460 million and Family Tax Benefit Part A for families on more than $80,000 a year is scaled back.
However, there’s more to do, and commodity prices will play a role.
For some context, coal is one of Australia’s biggest export earners. In 2015-16 Australia exported $34 billion worth of coal (energy and metallurgical) and this made up around 14% of Australia’s total export value of $243 billion. The chart below shows that coal’s share of Australian exports has been declining over time. However, it’s still big enough that what happens to global coal prices has an impact on the revenue of Australia’s coal miners, how profitable they are, the amount of tax they pay on those profits and the resulting size of the budget deficit.
Coal share of Australian exports
In an effort to support domestic coal miners and shore up coal prices, in March this year China’s National Development and Reform Commission (NDRC, think of a much more powerful version of Australia’s Productivity Commission) announced that coal mines across the country were only allowed to operate 276 days a year, down from 330. The policy was aimed at reducing the supply of coal and to encourage reform in the industry. The policy removed 10-15 million tonnes of supply from the Chinese coal market.
However, it was actually too successful (how often do we say that in Australia?) and resulted in global energy coal market supply shortage as China imported some of the lost domestic production, and prices shot up over 30% (from around $50 to over $70 a tonne) between March and September (although prices are still around 50% down on the 2011 peak of $140 a tonne).
The windfall for Australia’s miners and the government coffers was, however, short lived. Before our coal miners could start celebrating too much and the Treasurer could start counting on some extra tax income this year, last week the same NDRC became concerned that coal and energy prices in China might be getting too high, and relaxed the 276 working day policy for some of the country’s largest coal mines so that they could work 330 days. The policy reversal will increase the supply of domestic coal in China and likely result in a softening the global price.
Other countries are also contributing to this additional supply, including India, another large importer and user of coal, which has increased its own domestic supply in the last year by around 10%, while demand for coal in Europe and North America continues to decline due to the increasing use of gas and renewables in the energy mix. Interestingly though, lignite coal demand in Germany is increasing as nuclear reactors are being retired.
These recent events will likely reduce the global price going forward, profitability for Australia’s coal exporters, and reduce corporate tax receipts for the Federal Government.
So close to budget repair, yet still so far.
David Rumbens is a Deloitte Access Economics partner and co-author of Deloitte’s Weekly Economic Briefing. This article originally appeared in full on Deloitte’s D.blog.