Whitehaven Coal boss says sudden discovery of domestic coal supply shortfall ‘beggars belief’

Whitehaven Coal boss Paul Flynn says the combination of price caps and domestic reservation could be gamed by power companies to stockpile discounted coal.

Whitehaven Coal chief executive Paul Flynn has slammed a NSW plan for a coal reservation scheme, saying he is concerned it could be gamed by power stations to buy cheap coal while price caps were in place.

The producer is one of a number of coal majors in the state likely to be caught up by NSW Treasurer Matt Kean’s plan to make all miners offer 7-10 per cent of their thermal coal volumes into the domestic market.

The plan, first revealed by The Australian on Thursday, is an expansion of orders issued by Mr Kean last month requiring a number of NSW miners – including Peabody, Centennial, New Hope and Glencore – to reserve about 18.7 million tonnes of their output for local power stations.

Whitehaven Coal chief executive Paul Flynn. Picture: John Feder

The expansion of the orders to other coal producers would take that total to above 22 million tonnes, but Mr Flynn told The Australian on Friday that the sudden discovery of a 4 million-tonne shortfall “beggars belief”.

“How is it that, all of a sudden, we’ve had such a large shortfall emerge? This market was in balance before,” Mr Flynn said.

Under rules floated by the federal Labor government, and implemented by Mr Kean in NSW, domestic coal prices have been capped at $125 a tonne for the type of coal most commonly used in the state’s power stations, or about $136.40 a tonne for high-quality, export-grade coal.

“We think there’s a great need for some transparency here to minimise the opportunity for individual corporate agendas to be playing out,” Mr Flynn said.

“It would be obvious that there would be commercial incentives for the generators to take the opportunity to buy lots of coal at these capped prices.

“And so that’s why we’ve asked the government for transparency about how the shortfall has been derived because we wrestle with the numbers.”

Japanese ambassador Shingo Yamagami, a vocal critic of Queensland’s coal royalty tax last year, also outlined concern over the NSW reservation policy, which could crimp sales to major export markets including Japan.

“We are following this development closely with great interest,” a Japanese embassy spokesman told The Weekend Australian.

“The embassy and the consulate in Sydney is in close touch with relevant Japanese companies with regard to this development.”

NSW Treasurer Matt Kean. Picture: David Swift

Still, Delta Electricity – which operates the Vales Point coal plant on the NSW Central Coast – said it backed the logic of instigating a local reserve.

“We understand that governments have to respond to this issue and we do need an increase in supply or the problem doesn’t go away,” Delta chief executive Greg Everett said. “The revised allocations across the whole sector is a fairer resolution for the industry.”

Details of the proposed orders and how they would operate have not yet been released, but Mr Kean has previously said they were aimed at helping “even the field among coal producers” by making export-focused miners also provide domestic production.

Delta Energy chief executive Greg Everett.

But Mr Flynn said coal produced at Whitehaven’s four mines in the Gunnedah Basin in the north of NSW would not be suitable for the state’s power stations, and would need to be blended with lower-grade coal before it was used.

“The power stations have never bought this type of ­material before,” Mr Flynn said. “This is not the end of the market they should be playing in. If they want to play in it, they can buy it on the export market.”

Being forced to sell up to 10 per cent of its thermal coal into the domestic market could come at a significant cost to White­haven and its shareholders.

The company sold about 3 million tonnes of coal into thermal markets in the December quarter, at an average price of $US351 ($507).

It generated about $1bn in cash from its operations in the period, and on Friday flagged half-year earnings before interest, tax, depreciation and amortisation of about $2.6bn.

Mr Flynn said Whitehaven had only met once with officials to discuss the proposal, but said it was clear the NSW government was not across all of the “nuances” of the state’s own coal and power industry. “We acknowledge that they want to move quickly, but I think they’re actually bumping into a whole bunch of practical difficulties in spreading this initiative over a broader range of mines,” he said.

Yancoal chief executive David Moult. Picture: Britta Campion

Hunter Valley power stations such as AGL Energy’s Liddell and Bayswater power stations are close to rail lines capable of carrying coal wagons, and could be supplied by Whitehaven’s mines.

But Mr Flynn said it would be much more difficult to deliver coal to power stations outside of the Hunter Valley such as the Vales Point power station on the NSW Central Coast, or Energy Australia’s Mt Piper facility near Lithgow – which has been plagued with difficulties with its coal supply over the past few years.

“We have never played in the domestic space. And there’s been plenty of times when international prices weren’t as good as domestic prices,” he said.

“But because of the logistical nuances of our particular circumstances, we just haven’t been able to play in one market.”

Yancoal said it was reviewing the domestic reservation scheme, with the miner among major producers to be drawn into the new edict as the state seeks to share the energy load across the industry. “Yancoal has had meetings with the NSW government officials this week, and was briefed on its intentions to introduce a thermal coal reservation policy that would include Yancoal,” chief executive David Moult said.

“Prior to that there were ­directions in place, but those ­directions only impacted companies that were already suppliers into the domestic market.

“Yancoal is currently evaluating the potential implications of the scheme and intends to continue to engage with the NSW government to understand fully the implications.”

Originally published as Whitehaven Coal boss says sudden discovery of domestic coal supply shortfall ‘beggars belief’