Here’s The Dark Side Of The Boom

By Glenn Dyer | More Articles by Glenn Dyer

Whatever its parent, Rio Tinto, reported in its final production report for 2006, NSW coal group, Coal and Allied Industries has given investors a very good idea of the financial cost of our infrastructure inadequacies.

The company, which is 76 per cent owned by Rio, operates in the NSW Hunter Valley and ships coal through the port of Newcastle which is currently experiencing delays because of long needed upgrading and expansion of the big coal loading and rail facilities there are finally happening.

Coal and Allied said yesterday that due to “increased operating costs” it now expects 2006 second half earnings to fall $100 million or so to $60 million, from the same period of 2006 when it earned $163.7 million.

The company said the “increased operating costs are a result of significant shipping congestion at the Port of Newcastle”. The expected $60 million result is also sharply lower than earnings of $146.5 million in the first half of 2006.

Coal & Allied managing director, Doug Ritchie said.” The significant shipping queues, particularly in November and December, have not only impacted sales volumes and demurrage, but they have had flow-on effects through the production chain, leading to lower volumes and production inefficiencies.

“As noted in our 2006 half year results, the rising cost of business inputs being experienced by the industry is imposing increased costs on Coal & Allied.”

Coal & Allied plans to release its full year 2006 results on January 29.

The upgrade will boost export capacity considerably but it is taking time and there is a long queue of ships waiting to load coal at Newcastle.

That’s incurring demurrage costs of tens of thousands of dollars a day for either shipper or buyer (depending on how the coal is being shipped: by the buyer or by the miner). Some estimates put the total cost at more than $1 million a day for the industry with up to 50 ships queued, waiting to load.

As well the rail capacity is being upgraded in the Hunter and around Newcastle from 95 million tonnes a year to 110 million this month and 145 million by 2011.

A $500 million new loader won’t be finished until 2009 and has to run the gauntlet of obtaining environmental clearances. And it is facing opposition from a ‘green’ Newcastle council which wants to put a cap on coal export from the Hunter as a way of controlling greenhouse gas emissions (it will merely see the demand shift to Queensland, Indonesia or another supplier and won’t have any impact whatsoever).

The congestion not only means a slowdown in exports but has forced companies like Coal and Allied to cut production to enable stockpiles to be controlled and not grow too large (that’s expensive and leads to more congestion). This in turns means lower output from mines and higher costs because the throughput is running at less than optimal levels.

This showed up in Coal and Allied’s fourth quarter share of coal production which was 5.248 million tonnes, from 5.365 million tonnes for the same period last year. Its share of coal sales was 4.769 million tonnes, down 14 per cent from 5.573 million tonnes.

This is another public manifestation of how the fruits of the resources boom are being fritted away by higher costs, inadequate or poorly planned expansions in infrastructure and missed opportunities.

Governments at all levels and companies are to blame in most cases.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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