Japan Warns NSW Coal Reservation Scheme Could Undermine Relationship between Two Countries

Coal operations at the Port of Newcastle in New South Wales, Australia, on Nov. 18, 2015. William West/AFP via Getty Images

Japan has warned that its relationship with Australia could be jeopardised as a coal reservation scheme by the New South Wales (NSW) government risks cutting coal exports to the country.

According to The Australian, Japanese Consul-General Tokuda Shuichi had written a letter to the NSW government to express the concerns of Japanese companies about the coal reservation measure introduced in mid-January.

While the Japanese consulate did not elaborate on the letter’s content, it was understood that Japan worried about the impact of the NSW government’s decision on the coal supply to the country.

Any interruption to the supply will likely affect the Japanese economy, which has suffered from the global energy crisis following the war in Ukraine and undermine Australia’s reputation as a coal exporter.

It was also reported that NSW Energy Minister Matt Kean and Premier Dominic Perrottet had received similar written communications from at least one major Japanese power company.

What the Coal Reservation Scheme Is About

On Jan. 19, the NSW government announced that all thermal coal companies in the state would be required to reserve seven to ten percent of their output for the domestic market to reduce the impact of the coal price cap introduced by the federal government in December 2022.

The coal price cap is a federal government’s intervention in the domestic energy market to curb soaring electricity prices across Australia.

At the same time, the NSW government extended the coverage of the coal price cap to all coal mines in the state instead of the 12 mines under the original plan.

With the new measure, the NSW government expected a drop in thermal coal prices, which would reduce the pressure on energy companies that abide by the price cap of $125 (US$89) a tonne.

It also said the measure was temporary and could last until 2024.

A train transports coal through the valleys of Singleton in New South Wales, Australia, on Nov. 4, 2021. Saeed Khan/AFP via Getty Images

However, the policy faced strong objections from the energy sector, which said it was a political move and did not take into account the circumstances of coal producers.

NSW Minerals Council CEO Stephen Galilee said the measure was rushed and a radical change of approach as it was extended to coal producers not currently involved in domestic coal supply.

He also said the extension of the price cap would damage the reputation of NSW as an investment destination and a coal exporter, as well as threaten future investment in the state’s resource and energy sector.

Meanwhile, Idemitsu, a Japanese conglomerate that has been investing in the Australian resources industry for over 40 years, condemned the policy for its impact on the company’s operation.

“It is inconceivable that the NSW government would direct our business to supply lower-quality coal, which we do not produce, to the NSW power stations to comply with their requirements,” Idemitsu Australian CEO Steve Kovac said.

“This will result in a substantial financial loss as we would be forced to purchase lower-quality coal from other producers or traders to supply to the power stations. This makes no sense.”

The CEO also noted that the reservation scheme would make it harder for Idemitsu to operate in Australia and meet the demands of its long-term export customers.

Following the strong reaction from coal exporters, the NSW government has postponed the introduction of the coal reservation scheme.

Previous Warning from Japan

This is not the first time Japan has warned about Australia’s energy sector.

In July 2022, Japanese ambassador Yamagami Shingo criticised the massive coal royalty tax introduced by the Queensland government, saying it could push away Japanese investors and undermine the decades-long partnership between both countries.

A large truck drives trough an open-cut coal mine in Singleton, Australia, on Nov. 18, 2015. William West/AFP via Getty Images

The comments came after the Palaszcuk government announced it would enact three extra tiers of taxes to the state’s mining royalty scheme, which was already among the highest in the world.

Specifically, from July 1, 2022, the state government charged a 20 percent tax on each tonne of coal sold for more than $175, 30 percent for prices above $225 a tonne and 40 percent for prices above $300 per tonne.

The changes were a sharp increase compared to the previous flat rate of 15 percent.

“Make no mistake, this is a huge shock for Japanese companies,” Yamagami said.

“The future of the successful partnership between Japanese businesses and Queensland as a competitive investment destination could be at great risk.”

In response to the ambassador’s criticism, the Queensland government said that multinational companies were making super profits in the state and that it was fair to take back some of the money to invest in local schools and hospitals.

Nina Nguyen contributed to this article.