Logistics experts agree that the many players in Australia’s largest coal supply chains must collaborate and move forward to solve capacity constraints. Australian Mining hosts a roundtable discussion to get closest to the action.
Daniel Hall: How has the relationship between government, the mining industry, and key logistics suppliers changed through the boom and bust cycle of the last 20 years?
Bede Boyle: We had a major downturn in 1999 and that stalled investment. And then, although there was a bit of a reprieve in 2001-02, by 2003 our steam coal price was the lowest that it had been for 20 years. Nobody was proposing major investment in infrastructure at that time. When the resources boom started in 2004, it took off from the lowest base for 20 years. It caught everybody by surprise. And that has been the big problem that the industry, the government, and the service providers have faced.
Hall: How has this affected coal supply chains in Australia’s coal producing regions?
Boyle: We have been in a situation where the producer’s demand for throughput, underpinned by strong buying, has meant that the demand for throughput exceeds the capacity of the infrastructure to supply it.
Neil Buckley: The other thing to happen during that period, with respect to rail, has been open access and competition issues. We now have a situation where below rail infrastructure is regulated, and above rail is subject to competition. That has changed the dynamics in terms of Queensland.
Boyle: Around 2003-04, rail freights were negotiated in Queensland. The investment on Dalrymple Bay went before the Australian Competition Tribunal. Those investments were made at the lowest point in the coal price cycle, and I think Queensland Rail confirm this. They have said that pricing structure did not give them enough room for future investment. The same thing was said by the Australian Rail Track Corporation chief executive at the time. With those negotiations, at that time, there was no margin in the contracts that would allow forward investment.
Buckley: There is a difference between boom and bust. In boom, the focus is on capacity, and prices become secondary. When you are in a bust cycle, the focus is on cost and asset efficiency. Suppliers were being hammered over costs. Coal companies were looking for every 20 cents they could find in a freight rate port handling charge. That put the focus on sweating the assets and working them harder. Things suddenly took off.
Peter Morris: It is easy in retrospect to see where China had come from. Nobody realised what was happening in China, and the industrial expansion that was going ahead. China under its 10th five-year plan had actually been aiming to increase its coal exports. It was exporting something like 5% to 6% of its production. That had happened over a three or four year period. Suddenly, at the beginning of 2004, the government decided to remove its incentive, and to prefer to have that coal used for domestic use. China was exporting perhaps 80 million tonnes or more, and suddenly it was moving to take that off the market. At the same time we saw bulk carrier prices shoot up because it wasn’t just coal that was booming. Iron ore had taken off a quarter before, and there was a need for more bulk carriers. The Chinese themselves needed bulk carriers to move coal around the coast, and iron ore. They are actually moving more coal now than we export. It is huge quantities. So those bulk carriers have been removed from the international market. Around 2004, the Koreans decided that they should be buying more on the spot market than on the contract market, because for so many years contract prices had actually been above spot prices. Unfortunately, that coincided with what was happening with China. At the same time we had some major weather events in Indonesia. That coalesced and suddenly ships were lining up off Newcastle, because this demand had taken off.
Hall: When coal customers start demanding more capacity, the blame game starts between port, rail and suppliers, according to past Hunter Valley Coal Chain Logistics Team (HVCCLT) general manager Anthony Pitt. What is the cause of this blame game?
McMillan: There are two drivers. One, the media love a scandal and they will promote anything that they can to make for interesting reading. CEOs these days are very much in the spotlight. It is a very politically sensitive issue when you have 30, 40, 50 ships sitting offshore. CEOs are very keen to protect their corporate reputation, and they need to be seen to be protecting the interest of their own companies. The second is a lack of understanding. The logistic chain is extraordinarily complex, and when you have each of those individual corporations looking at their own resources and assets, and see them in black and white, as being in excess of what is being moved, people far removed from the daily complexities of managing coal chains do not understand why the top number they see on their books, and the bottom number, do not agree. Therefore, they say ‘well I am okay, so it must be everybody else’. It is that lack of understanding of the interaction, which needs to be taken as a whole, which is not well understood by some people inside the organisations themselves, and particularly by people outside involved in reporting what is happening in the logistics chain.
Ian Murray: The press likes a stoush. The issue, at the end of the day, is who is prepared to take responsibility? I mean you get state government versus commonwealth government as to who is going to take the responsibility. It is a blame game right from the start when that happens. Of course you’ve got the private sector in there as well.
McMillan: Given the risk profiles that the corporations engage in, in terms of investment and not wanting stranded assets, there is a gap between the level of confidence at which corporations are prepared to say, ‘I am going to put my money on the line’, and from making that decision to actually physically being able to use the facilities to deliver coal. We are in the middle of that gap. But there certainly is commitments and investment now underway in both Queensland and Newcastle. With the best will in the world, we can’t physically deliver those any faster. The issue is not always one just of dollars. There is a significant shortage of resources capable of delivering this infrastructure. That goes across Queensland, Newcastle, but also Western Australia which is absorbing the resources that you need to complete some of these projects. We are in that gap between having made the commitments and actually delivering them.
Morris: There is always a balance between how much infrastructure you put in place, which leads to some latent capacity. You don’t want to over-invest and have too much over-investment because that is costly. On the other hand it is also costly if you under-invest, there is loss of sales of exports and revenues and there is demurrage issues. It is very difficult to spend a billion dollars on a new coal terminal in less than six years because of all the programming and planning requirements and so on. It is very difficult once you start building it to spend a billion dollars in a year.
McMillan: You are also trying to push that physical construction onto a working railway. You can’t shut the railway down while you are building it. On the one hand people said ‘don’t stop producing things, we want more capacity’. And you have to balance both of those things.
Murray: Is there a too stronger view on short term outcomes, both private and public sector that creates a lot of that thinking?
McMillan: It is a very realistic reflection of the economics of Western commerce; share prices move daily.
Murray: And governments get voted in every three years.
Andrew Barger: When you’re sitting here today looking back, it’s very easy to see the turning point in coal prices and surge in demand and say, ‘why wasn’t something done?’ As companies and logistic suppliers lived through the period, you come off a period of fairly flat demand and static prices, so it’s very easy to say ‘it’s a short term spike’.
McMillan: When you start to break that down into the relative Queensland versus Australia versus other countries, the various ports within Australia, and then within the various companies, the fragmentation of that makes it very difficult to get a combined industry position which will support necessary risk. That is where the HVCCLT is starting to make headway. I certainly would not hold the HVCCLT up as a panacea or a model that is going to fix everything. It is a step in the right direction.
Hall: The Hunter combined planning and logistics teams from various stakeholders in 2003 through the HVCCLT. What are the biggest lessons from the Hunter Valley case study?
McMillan: Clearly bringing the parties together around the table and getting a model, any model that gets the parties talking to each other to get a common understanding, is the first step. The biggest benefit that we have seen in the last 12 to 18 months has been from simply aligning some of the maintenance activities better. Now, that is very obvious when you say it in the cold light of day but the fact is it wasn’t happening.
Morris: Yes, it’s really trying to move towards the optimal model, which would be somebody owning the mines, owning the railway and owning the port.
McMillan: “I’m not convinced about having it under a single person, yes it would be easier, but would it be more efficient, who knows?”
Morris: In the Hunter Valley you have two above rail providers, at least two below rail providers, multi-owners at the port, public-private ownership of the port infrastructure and the port system. You’ve got tidal issues and the biggest export coal bulk infrastructure system in the world, linking billions of dollars of mines through a conveyor belt, and the railway line to a multi-billion dollar export infrastructure.
McMillan: I liken it to playing Chinese whispers. I mean everybody as a child played Chinese whispers. And they start off with a message at one end and by the time it’s gone all around the room it comes out totally different. There are so many different people that have a hand in the outcomes achieved by the time the coal gets to ship and away out of the bush. The communication and coordination of all of those aspects is critical and the better that you can be at that, the more effective and more efficient that coal chain is going to be. We’re certainly on the edge of some very interesting debates, because one of the most recent initiatives of the logistics chain is to do a long term system plan, which will incorporate all of the elements of the chain. Obviously, ARTC is a track owner and published the 2005-11 strategy for the track. Port had its plans, and the two operators have their plans. But until you put those things together, you are still left with this problem, and we actually don’t know what the combined assets are going to deliver, against what profile of demand.
Buckley: The complication is how do you transition to where we are now to where we want to go to?
Hall: Is there actually an element of distrust between the producers and the port when forecasting production and capacity?
McMillan: No I don’t believe there is. Every single day of the year, and I am sure Queensland do the same thing, we know what assets are going to be available from all the service providers on a daily basis. And we model it and say, based on the assumptions of the rolling stock, the asset availability every single day, how much can we put through?
Buckley: That is actually based on a set of assumptions. Even tailings, choke feeding ports, all these things are major assumptions which can impact on throughput capacity. I think everyone’s got good intent.
Boyle: The HVCCLT is a magnificent first step, but it has got to go up to another level. The day that it starts to be managed as if it was one entity is when the real big benefits are going to flow through it.
McMillan: The HVCCLT certainly has its challenges though. What we have done is the easy bit. The commercial alignment is a lot more challenging.
Murray: Do you ever see that mines will compete at the mining end and then compete at the marketing end? Do they see the bit in the middle as being a competitive advantage, or do they see that as being a means to an end?
Boyle: Some of the commercial arrangements actually destroy value at the interfaces in the coal chain. The thing that I like to say is get the end result clearly in your mind, then dare to put a dollar value on how the commercial arrangements destroy value.
Hall: What is the Federal and State Government’s role in managing coal supply chains?
McMillan: I believe the more that they can leave industry to sort it out themselves, the better. That is not necessarily anybody else’s view. That is my view. I think most people would probably agree with it. The last thing that we need is a government trying to create rules around what we are doing. I don’t think that would add value at all.
Morris: We definitely need light-handed regulation.
Boyle: The main thing that we would look to the New South Wales government for is to expedite development approval.
McMillan: I agree with you 100%. From an investment perspective, as a corporation, I am no where near being able to go to a board with their project costed and go to the regulatory people who are going to approve investment for ARTC and the regulatory environment I have to operate within, in order to spend the money. In terms of State Government, if there is any area where there could be a very clear and direct assistance, it would be in that environmental and approval area.
Morris: It is really difficult to get your ducks to line up.
McMillan: We certainly appreciate and understand the frustration that everybody has. There is an opportunity that is not fulfilled in terms of market demand. From my own perspective at ARTC, and speaking as a chair of logistics too, I can only confirm that we believe that we are doing as much as we can, as quickly as we can both physically and intellectually, to try and get the best outcomes for the industry. We are open to suggestions if people want to put suggestions to us, but we would ask that people put some thought into those suggestions.