Fixed Port Fees Hit Glencore's Coal Exports
Glencore and five other miners backing the world's most expensive coal port in Australia face extra annual charges of A$150 million after the restructuring of one of their partners this month, the latest to buckle under slumping commodity prices.
The additional charge will deal a blow to the remaining backers of the A$2.6 billion ($2 billion) Wiggins Island Coal Export Terminal (WICET) in east Australia at a time when they are grappling with floundering coal markets.
Mining and trading giant Glencore and seven partners began negotiations to build WICET in 2008 near the height of a coal boom, but prices have plunged 75 percent since then on global oversupply, China's slowing economy and competition from natural gas.
Expecting coal markets to remain strong, the partners had agreed to pay port fees for 27 million tonnes whether they shipped that volume or not - setting themselves a tonnage charge as much as five-times higher than other coal ports.
The project currently charges around A$20 a tonne, several people familiar with the terms said. Neighboring RG Tanna coal port at Gladstone charges about $5 a tonne. WICET Chief Executive Marcus McAuliffe declined to comment on the charge.
But adding to the partners' woes - and those of their 19 lenders, owed more than $3 billion - coal prices have now pushed two of WICET's original owners, Cockatoo Coal and Bandanna Energy, into administration.
Both were stung by port charges for capacity they were never able to produce after coal prices crashed to nine-year lows and funding for their projects dried up.
"The world didn't unfold, the coal mining sector didn't unfold, and the mine development didn't unfold the way everyone was hoping for. Then they were left paying four times what they could pay shipping through the terminal next door," said Stephen Longley at PPB Advisory, the administrator for Cockatoo, which emerged from a restructuring this month.
The grand hope when it was planned was that WICET would eventually ship 120 million tonnes a year, fed by what would have been Australia's biggest coal mine, Xstrata's Wandoan. But Glencore shelved Wandoan in 2013 after taking over Xstrata.
Under the terms of the port agreement, the rest of the WICET partners - Glencore, Wesfarmers, Baosteel's Aquila Resources, Yancoal Australia, Guangdong Rising Assets Management's Caledon Coal and New Hope Corp - now have to pay the amount that would have been due from Cockatoo and Bandanna - A$150 million a year.
"Every time one drops it makes it more challenging for the rest," said Thomas Jacquot, a senior director at Standard & Poor's.
Glencore played down the impact of the extra costs, indicating that charges would be capped if any further partners dropped out.
"The incremental costs to Glencore imposed by exiting users at WICET are contained by commercial protections and must be viewed in the context of our greater global coal production business," it said in an emailed statement.
The other remaining partners declined to comment.
Glencore must shoulder 40 percent of the costs, reflecting its share of the port's 27 million tonnes a year capacity, meaning it has taken on an extra A$60 million a year in costs on top of the A$218 million a year it was already paying.
And the pain is worsening for Baosteel's Aquila, which has yet to build the Eagle Downs mine that committed to using 1.6 million tonnes of capacity at the port.
That implies Baosteel is spending A$32 million a year for its unused capacity plus bearing an extra A$9 million from Cockatoo and Bandanna.
Distressed debt investors fed speculation last year that WICET's banks, nervous that the project would find it tough to service debt amid the coal price slide, were looking to sell the loan backing the port below par value.
WICET's McAuliffe dismissed talk of any urgency to refinance, with the nearest deadlines around three years out, but said they would look to cut costs, including interest costs.
"WICET as an organization is underpinned by some very strong balance sheets," he said, arguing against "knee jerk" decisions.