January 17, 2018

Aurizon continues to bet on commodities

Written by  Mark Carter
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Andrew Harding, managing director and CEO of Aurizon, talks to Mark Carter.

ANDREW Harding took over as managing director and CEO of Australian rail freight operator Aurizon in December 2016 to lead the company into the next phase of its transformation programme. He succeeded Mr Lance Hockridge who had led the company since 2007 and who oversaw the transition, through a successful IPO in November 2010, from the government-owned QR National to the publicly-listed Aurizon.

Prior to joining Aurizon, Harding’s 24-year executive career was spent with mining giant Rio Tinto and in its subsidiary companies, acting as global chief executive iron-ore in his most recent role.

Andrew Harding 27 July 2017One of the challenges facing Harding is the volatility in global commodities markets, and the impact this is likely to have on Aurizon’s growth and profitability over the next few years. Coal accounts for around 65% of Aurizon’s revenues and in 2016-17 it hauled 198.2 million tonnes of coal, a decrease of 4% on the previous financial year, impacted to some degree by severe cyclone activity. The company’s market guidance for coal haulage in 2017-18 is between 215 million and 225 million tonnes.

Harding is naturally upbeat about the outlook, seeing strong and sustained demand for Australian resources which he says augurs well for Aurizon.

“The reasons for this are three-fold: Australia’s proximity to the world’s fastest growing economies; the high quality of our resources; and our position at the lower-end of the cost curve for most commodities,” he explains.

“Australia is the world’s largest coal exporter, accounting for around two-thirds of seaborne metallurgical and around a quarter of thermal coal supply, and coal remains Australia’s second largest export industry.

“More than two-thirds of Queensland coal exports use our ‘below rail’ network or Aurizon’s trains, so we see ourselves as a critical part of the export supply chain,” Harding says. “Aurizon will benefit, and so too will our customers, by driving improved performance across the supply chain.”

While cautious about a transition to renewable energy sources, Harding believes coal will remain a large part of the global energy mix for many years to come. “High-quality Australian coal will help fuel more than 350 new power plants currently under construction in Asia, the majority of which are high-efficiency, low-emission plants.

“Australian metallurgical coal will continue to be the feedstock for steel-making for the industrialisation that continues to our north. Many people are surprised to hear, for example, that it is India and not China that is Australia’s biggest customer for metallurgical coal.

“At the same time, we’re doing a lot of work to deliver better technology solutions for our heavy-haul operations, including, for example, wayside monitoring, in-cab driver assistance systems and the use of drones in infrastructure maintenance and recovery.

“We have increased payloads in our coal train fleet and continue to find ways to reduce our energy use. We see technology-enabled solutions underpinning a large part of our transformation in coming years.”

Questioned as to what needs to be done to strengthen the rail industry, especially regarding investment and infrastructure in Australia, Harding suggests that there is a strong case for reducing the regulatory burden.

“Australia needs to reduce this burden that is inhibiting investment, and adding substantial cost to the economy through project delay and uncertainty,” Harding says. “No one is advocating that we avoid important environmental and administrative approvals, but rather we streamline and provide greater certainty over the timelines and requirements of approval processes.

“Probably the biggest priority for reform is achieving a level playing field in terms of pricing and investment. Reforming heavy vehicle pricing should be focused on introducing direct user charges that are based on clear economic principles and properly reflect the use of road infrastructure by each heavy vehicle and the costs that they impose.

“The current indirect charges of fuel excise and registration for heavy vehicles result in significant economic distortions that impede the productivity of land freight transport.”

Rail freight operators support the decision of the federal and state governments to introduce a new pricing framework for heavy vehicles, and have advocated the introduction of trials of a new direct charging system for heavy vehicles on corridors where road and rail directly compete.

“It is important to emphasise that the rail sector is not seeking any hand-outs, but rather that government set the policy framework for all transport modes to compete on a level playing field,” Harding says.

Under-investing

Australia generally has a history of under-investing in rail infrastructure. Harding says that in the resource sector, the private sector has invested substantially in rail infrastructure that delivers broad economic benefits. “You can see this with the iron-ore railways in the Pilbara, where I previously worked with Rio Tinto, while here in Queensland, Aurizon has invested more than $A 2bn ($US 1.5bn) in its coal network and train operations since privatisation,” he says.

“Trucks still carry the majority of long-distance freight along the heavily-congested eastern seaboard from Melbourne to Brisbane. This is a 1800km corridor that should, with the right alignment and track infrastructure, see rail capture a much larger market share.

“This is one of the reasons that government and the private sector are supporting plans for the Inland Rail project from Brisbane to Melbourne. The key though is to incentivise more private sector investment in freight infrastructure. Our view is that we need to be targeted, strategic and play the long game in freight infrastructure investment to deliver productivity and economic benefit.”

Harding says this should also include ‘brownfield’ infrastructure where an existing asset can be leveraged to lift efficiency, remove bottlenecks or provide additional capacity.

“A good example of this is our proposal to construct rail infrastructure for proposed mines in the Galilee coal basin in Queensland,” Harding says. “The Galilee contains vast reserves of thermal coal, well positioned to supply future energy demand from Asia and the Indian sub-continent.

“The region is a significant distance from ports and not connected to existing rail infrastructure. Indian conglomerate Adani is proposing a 380km ‘greenfield’ railway to service their mine which is under development. We have an alternative proposal that would be integrated with the Central Queensland Coal Network, already linked to five coal export terminals,” he says. “This solution would be significantly cheaper than the Adani proposal because it would require only 190km of new track.”

Harding also has ideas on how to improve the Townsville - Mount Isa line, which is owned by the state of Queensland, so it can win back traffic lost to road freight transport. “Some of Australia’s best mineral reserves, including copper, lead, zinc and silver, sit in remote parts of northwest Queensland,” he says. “These mineral reserves and associated industries are serviced by a 1000km railway to the port of Townsville.

“On this corridor, where bulk rail should be very competitive, road is typically paying an estimated one-third or less of the access charges that trains are paying for infrastructure. We believe this has been a major contributor to more than 500,000 tonnes of freight on this corridor transferring to road since 2016.

“Carefully targeted investments to upgrade the existing Mount Isa line to enable improvements in the operational performance of rail freight operations, combined with policy actions that address the imbalance in access pricing, would offer substantial productivity benefits to the region.”

In August 2017, Aurizon announced that it would exit its inter-state intermodal business and at the same time sell its 1067mm-gauge Queensland intermodal operations to freight forwarder Linfox and rail operator Pacific National. While completion of the sale is expected in early 2018, Aurizon’s last inter-capital intermodal services ran in December.

Harding says that exiting the intermodal business was not a decision that was taken lightly, but over the past decade the company experienced continuing and significant financial losses in this segment of its business. “The reality is that in a market already serviced by a number of well-established transport providers, we have been unsuccessful in establishing the scale and customer base needed to make it profitable,” he explains.

“The intermodal market has not grown and increasingly favours short-haul trucking as the national economy transitions from local manufacturing to importing. In our review, we assessed the options very carefully, but could not find a pathway to profitability.

“These decisions are tough for affected employees and local leadership who have worked very hard to create a viable business. We will now focus on opportunities and market segments that best fit with our core strengths and capabilities.”