Industry sources have revealed the ‘take or pay’ contract system used to pay for port and rail expansion was ‘killing’ some coal companies.
Coal companies are reluctant to admit this on the record but two respected industry magazines covered the issue and slammed the system.
The UK-based McCloskey Coal Report said take or pay contracts prevented unprofitable Australian mines from cutting production that was not viable, stopping ‘a correction in the supply/demand balance’.
As a consequence this ‘illogical market’ was serving to keep coal prices down, the Newcastle Herald reported.
“This is the view of several disgruntled coal producers, some of whom admit they are continuing to produce coal even though they are losing more than $10 a tonne, because it’s more expensive not to produce,” McCloskey’s said.
Under the take or pay system, coal companies are obligated to take rail or port capacity 10 years in advance, and must pay for any capacity they do not use or cannot trade.
According to the Australian Coal Report, Rio Tinto’s take or pay cost could be $300 million a year if the Mount Pleasant mine near Muswellbrook did not go on.
Chinese company Yancoal, which has mines in the Hunter region, told the stock market it will pay an estimated $50 million to $55 million this year for rail and port capacity it does not intend to utilise.
Companies had to agree to pay the charges of $4.50 to $6 a tonne even if they sold less.
Some defend the take or pay system saying the contracts were necessary to acquire the multibillion-dollar financing to build and develop the Hunter’s port and rail infrastructure.