At the same time, China’s first shipment of Australian coal in more than two years arrived at port in early February, after having lifted the unofficial 2020 ban on Australian coal in January of 2023.

However, any increase in Australian coal exports from this ban reversal may be tempered due to both countries having diversified their markets whilst the ban was in effect, as well as redirection of coal to local markets by the NSW coal reservation policy.

Fighting the Power Demand

The NSW State Government has mandated NSW coal companies to reserve at least 5% of their quarterly coal production for domestic use in order to satisfy the demand from the domestic thermal power plants. Companies are required to sell this volume to local power plants at a capped price of AUD$125/t (US$86/t), based on 5,500 kcal/kg coal. This policy will come into effect from 1^st April 2023, and last until 30^th June 2024.

This move was made as a response to the soaring thermal coal export prices resulting from a global energy crisis caused by the geopolitical conflict in Europe, with the focus of reducing operation costs of large coal-fired power plants. Otherwise, the costs would be passed on to consumer bills which were forecasted by the Federal Treasury to jump more than 50% by 2024 if left unchecked.

In 2021, Australian coal producers turned to the profitable export market to take full advantage of the historically high prices.

The NSW Government in December of 2022 capped domestic sales of thermal coal at AUD$125/t (US$86/t), following in the footsteps of the Canberra and Queensland (QLD) governments. In January 2023, the NSW Government added that NSW coal producers would need to put aside up to 10% of their coal production, which was brought down to a minimum of 5% in early February after receiving backlash from coal companies.

The total volume of coal reserved under this policy is expected to reach 19.7Mtpa. However, estimates suggest 22Mt will be required to keep NSW power plants running in 2023.

Roughly 200Mtpa of saleable coal is produced in NSW, with of this volume 175Mtpa being exported via the Port of Newcastle, making NSW the biggest thermal coal exporter in Australia.

Softening the Blow

The NSW Government has made some amendments since its initial announcements, following the backlash from coal firms with NSW operations. While the price cap will remain at AUD$125/t (US$86/t) for 5,500 kcal/kg coal, higher grade coal will be priced per tonne of coal at US$0.015/kcal/kg. Furthermore, the state may provide compensation in the case that production costs surpass the price cap.

Additionally, the NSW state government announced that coal royalty rates will not be increased until June 2024. Currently, NSW royalty rates are set at 8.2%, 7.2% and 6.2% of open-cut mined coal, underground coal, and deep underground coal, respectively.

In contrast, the QLD state government set upper tiers of royalty rates on 1st of July 2022, including 40% rate on coal valued over US$207/t. In the previous financial year, coal companies in NSW contributed more than US$2.4bn in royalties and were forecast to reach US$3.5bn by the end of this financial year.

NSW will also allow exporters to continue shipping overseas, provided the companies purchase coal to meet their requirements under the policy. This amendment may result in companies exporting higher grade thermal coal overseas and then purchasing lower grade thermal coal to fulfil their obligations.

The NSW government will also allow exemptions for companies with well-defined contracts of at least 12 months from the policy. As such, Japanese-owned Boggabri mine is not required to reserve any coal as part of this policy.

Reservation Obligations

The redirection of a non-negligible amount of Australian thermal coal away from the export market, alongside China’s lifting of its ban on Australian coal is expected to raise seaborne thermal coal prices. As such, revenue for coal producers in NSW will be reduced, as coal volumes intended for export are redirected to local markets.

NSW coal producers may be required to reserve up to 1.3Mt in a quarter under the reservation policy, which may cost the company about US$200m when comparing the capped price against peak thermal coal export prices in 2022. However, export prices have since mellowed from US$240/t during the 2022 European energy crisis borne from the Russian-Ukrainian conflict, down to US$133/t in January 2023.

Coal producers in both QLD and NSW are expecting a resurgence in performance during 2023, after having suffered from unfavourable weather conditions due to La Niña weather patterns, as well as labour constraints and COVID-19 disruptions.

Australia’s New Hope Corporation (NHC) is required to contribute 15% production or 0.28Mt coal from its Bengalla, whichever is lower. Ownership of Bengalla is shared between NHC and Taiwan Power Company, each holding interests of 80% and 20%, respectively. NHC, respective to its share in Bengalla, produced 1.54Mt and sold 1.46Mt at an average price of US$357.8/t in the December quarter of 2022.

Overall, 4Mt coal was produced from NHC’s share in Bengalla, with guidance of 7.7Mt given for 2023. Due to grandfathering of Bengalla’s existing domestic supply contracts, Bengalla will not be impacted by the price cap until quarter one 2024

Glencore, the operator of the coal mines across NSW and Queensland, is expected to put aside the lower of 10% or 1.23Mt from its quarterly coal production. Glencore’s total coal production was 110Mt in 2022, of which 65.2Mt was thermal coal. In 2022 the company exported 53.4Mt and sold 7.8Mt domestically.

Whitehaven Coal (WHC) will need to reserve 5% or 0.2Mt, whichever is lower, from its quarterly coal production from all its NSW mines as part of the reservation policy. In H1 FY2023, WHC produced 6.6Mt of saleable coal, and sold 6.4Mt at an average price of US$371/t.

Similarly, Yancoal, the largest source of Australian export thermal coal, is to reserve the smaller amount between 5% or 0.31Mt of its quarterly coal production for domestic plants. The export-focused coal firm sold 24.6Mt in CY2022 at an average of US$250/t.

BHP will reassess plans to extend the life of its Mount Arthur operations as the company is expected to sell the lower of 5% of 0.175Mt of its quarterly coal productions domestically as part of the coal reservation policy. The Development Consent of the 19Mtpa Mt. Arthur mine expires in 2026, with BHP currently working on renewing State and Commonwealth approvals.

After BHPs domestic thermal coal sales contract had expired in 2019, the company redirected around 0.5Mtpa of coal to export markets. In the December half of 2022, BHP’s NSW coal sales averaged US$354/t. The company expects thermal coal production in 2023 to total 15Mt.

Thai producer Banpu is expected to reserve 100%, 95%, 75%, and 25% from its Australian coal operations, Myuna, Springvale, Airly, and Mandalong, respectively, whereas Delta Coal is required to sell all of its Chain Valley and Mannering Colliery operations coal production locally under this policy. Peabody will be required to reserve the 31% from all of its NSW coal operations for domestic sales.