Chris Baker, CEO, Straterra
The country’s coal industry contributes more to our energy than most people realise. Straterra’s Chris Baker provides a comprehensive picture of the industry as it stands.
THE COAL SECTOR IN New Zealand is in a phase of commodity price-driven readjustment, dominated by structural change related to Solid Energy.
Historically, the state-owned coal miner has produced around 80 percent of our coal. In mid-August shareholders agreed to place the company into voluntary administration. Investment banker Goldman Sachs has been appointed to oversee the sale of assets, in a programme expected to take until 2017 to complete. With coal mines and resources dispersed around the country – the Waikato, West Coast, Southland – the likely scenario is acquisition by multiple new owners. In October the Huntly underground coal mine was closed.
In other supply-side adjustments, ASX-listed Bathurst Resources is concentrating on the domestic thermal coal market with its Takitimu, Canterbury and Cascade assets, while the new Escarpment mine on the Denniston plateau is in development, pending a strengthening of coal prices.
Strategic Minerals is intensifying its assessment of the Tatu coal resource, in eastern Taranaki, with bulk sampling underway. NZ Coal and Carbon has started coking coal production at its recently-consented Raja coal mine, on the West Coast. Stevensons is continuing exploration work at Te Kuha, near Westport. Glencoal has placed its consented mine development at Mangatangi in the Waikato on hold.
On the demand side, coal exports are flat, reflecting ongoing depressed commodity prices for coking coal for steel-making, at less than US$80/tonne, related to iron ore and steel prices.
Domestic demand for coal has been strengthening in some quarters, notably, increased investment by Fonterra and others in milk drying and other dairy processing facilities, up 38 percent since 2008. Chinese-backed Synlait is expanding its milk-drying capacity in Canterbury.
NZ Steel, New Zealand’s other major coal user, has been chasing $50 million in savings, to combat the low iron ore price, and to retain parent support – and has been successful in this endeavour.
The three companies consume more than 1.3 million tonnes of coal a year, which is around half of total domestic demand for industry.
The announcement in August by Genesis Energy that it would close down the remaining Huntly units by 2018, and a potential reversal of that decision subsequently, has created uncertainty over domestic demand for coal. In the balance is 500MW of generation capacity. Any review of the decision would stem in part from any closure of Contact Energy’s gas-powered electricity generators.
Holcim has announced the closure of its cement operations on the West Coast, from next year, with a drop in annual consumption of 90,000 tonnes of coal. Golden Bay Cement continues to operate, on an equivalent level of coal consumption.
In addition, domestic coal is also used as a source of heat in food processing; wood, leather and wool processing; in horticulture; and to heat large buildings such as hospitals, universities and schools. As such, coal is priced at roughly one-third that of electricity. Biomass has potential as an alternative, however, a number of technical and supply problems would need to be overcome first for use at scale.
As to the future of coal production and use in New Zealand, this may be affected by policy outcomes of the 21st Conference of the Parties to the UN Framework Convention on Climate Change, held in Paris, France, in December 2015, and subsequent negotiations on the details of any agreement reached.
A review of the New Zealand Emissions Trading Scheme was announced in November with a discussion paper out for public consultation. Former Climate change Minister Hon Tim Groser has indicated that agriculture would be left out of this review, and that New Zealand’s emissions target to 2030 of 11 percent below 1990 emissions levels would be met largely through overseas carbon credits.
The evolution of carbon prices over time will be, therefore, of great interest to fossil fuel producers and users. A phasing out of the two-for-one emission unit surrender obligation would double the exposure to a carbon price for eligible businesses, and could occur from mid-2016. On the other hand, a continuation of free allocation of units for emissions-intensive, trade-exposed businesses would benefit this sector of the economy, raising the need to review the thresholds, from an industry perspective.
The IPCC has modelled that for carbon pricing to incentivise actions to stabilise the world’s climate at +2 degrees, global carbon prices of as much as $178/tonne would be needed during the 2020s. There is much uncertainty around this conjecture because the IPCC’s latest revision of its models suggests a much slower rate of global warming of temperatures.
Be that as it may, increased carbon prices would have serious implications for many energy-intensive and trade-exposed (EITE) businesses in New Zealand, unless technology advances occurred in co-generation, Co2 capture and storage (CCS), and any other clean coal technologies. Globally, research into these areas continues, although at a lower level than would seem reasonable, given the problem we face.
Countering the anti-coal campaign in the lead-up to COP 21, the Minerals Council of Australia launched a campaign entitled “Little Black Rock – Coal. It’s an amazing thing”. This has had mixed reviews.
The World Coal Association (WCA) launched its own communications offensive ahead of COP 21. The WCA’s key messages concern global energy poverty and the enabling role of coal in this connection; the position of coal in the global energy mix; and that technology and efficiency increases will be a key part of the solutions for reducing greenhouse gas emissions from coal. There is no prospect in the near future or medium term of the world weaning itself off coal.
Coal research led by CRL Energy has focused on optimising the New Zealand coal blend for domestic boilers, and on predicting and managing the environmental impacts of mining. This work, being done with the Universities of Canterbury and Otago, Landcare Research and O’Kane Consultants, and dollar-for-dollar government funding support, is expected to be completed in 2018 with the publication of a mining lifecycle guide.
The coal sector also provided funding support to a project led by the BusinessNZ Energy Council (BEC) on energy scenarios for New Zealand out to 2050. This project drew on the world energy scenarios work carried out by the World Energy Council (WEC). It developed two analogous scenarios to the WEC scenarios for this country called Waka and Kayak, the first, a voter or government-led scenario, and the second, market or consumer led. Regardless of the scenario chosen, coal will remain part of our domestic energy mix for decades to come.
Aside from dairy and steel-making, ongoing demand stems from the South Island’s reliance on coal as a source of industrial process heat.
It has been five years since the Pike River coal mining tragedy, with major reforms of the workplace health and safety legislative and regulatory regime. The Workplace Safety Act was passed in 2015, replacing the previous Act and is due to enter into force in April 2016. New mining regulations have been in force since December 2013, and these regulations will be amended and extended to quarries and alluvial operations in 2016 and 2017. Many new Codes of Practice for mining health and safety have been completed, and in November WorkSafe and MinEx launched the Surface Mining Guidance.
As Straterra has reported for the last two or more years, the coal sector is a; “dynamic and complex business in New Zealand, with ongoing challenges”.
The situation is considered likely to remain so for the short and medium term. The sector’s advocacy, through Straterra, remains focused on policy, and targeted communications to influencers and decision-makers.