Wednesday 18th Jul, 2018

Aurizon to ponder disintegration, customers not happy

Aurizon train on Queensland Rain Network. Photo: Aurizon
Photo: Aurizon

Aurizon boss Andrew Harding says the rail operator will review its vertically-integrated structure, as his company remains the subject of significant criticism from some of its largest bulk customers.

Speaking at Aurizon’s investor day on June 27, Harding said the rail giant would review its options throughout FY19.

Aurizon was floated on the ASX by the Queensland Government in 2010, as both a bulk and freight rail operator, and the monopoly owner of the Central Queensland Coal Network. Harding said last week while a lot of good work was done “a decade ago” to consider the value of that vertical integration, the time has come to take another look.

Aurizon’s vertical integration has been questioned often over the last decade, with many stakeholders arguing the competitive benefits of vertical integration aren’t worth the regulatory headaches Aurizon has had to contend with.

The latest, and perhaps largest of these headaches is the ongoing dispute between Aurizon, its customers, and the Queensland market regulator, QCA, over how much revenue the rail owner is allowed to earn from its operation of the Central Queensland Coal Network.

Aurizon is sticking to its guns, saying it needs to cut its maintenance spending on the CQCN if it is to match the framework outlined by the QCA in its draft decision at the end of 2017.

But miners are furious over an estimated 20 million tonnes in annual capacity cuts that will occur as a result of these maintenance practice shifts, and so far have placed the blame wholly on Aurizon, which has made this change before the QCA finalises its decision.

Harding has maintained the QCA is unlikely to change its mind significantly enough to not justify acting as soon as possible on maintenance methods, given the current access undertaking is backdated to the start of FY18.

Aurizon’s network boss, Michael Riches, focused heavily in his investor day presentation on the perceived flaws of the QCA’s thought process on the current access undertaking.

Riches estimated the maintenance changes have already cut 5-6 million tonnes of capacity from the network, since they were applied in February this year.

He also said miners had recently rejected an offer from Aurizon to briefly suspend the new maintenance practices in an effort to reach a mutual outcome, but that this was rejected.

“We can’t, for an unlimited or indefinite period of time, cease our practices with no certainty of what the outcome is going to be. That would not be a sensible thing to do,” Riches said.

The focus from Riches’ perspective is not only on getting the best deal for Aurizon during the current access undertaking debate, but to eventually “fix” the regulatory environment so this sort of drama doesn’t occur in the future.

Whether that is possible before the next access undertaking process gets underway – potentially 2-3 years from now – is another question entirely, but Riches is optimistic.

“There’s better models around, there’s ways this has been done before. We don’t need to reinvent the wheel here. Strong engagement with government, and the QCA in particular, around a recognition of change, and a desire to get a better outcome will lead to an opportunity to accelerate that.”

The Queensland Resources Council, whose members include many of the coal miners Aurizon has angered, took out a full-page advertisements in national papers on the day of the investor presentation, calling on Aurizon to revert its maintenance practices until the QCA hands down a final decision.

“Aurizon,” the advertisements read, “Stop playing games with Queensland’s coal exports. You are damaging the reputation of Queensland’s largest export industry. You are short-changing Queenslanders with the loss of royalties from lost exports. You are disregarding your customers. You are putting your shareholders’ investments at risk.”

Aurizon’s group executive for coal Ed McKeiver said his customers are frustrated with ongoing capacity restrictions, but said the frustration is yet to cost the company a major contract.

“There’s no doubt there’s frustration, and customer dissatisfaction in our Central Queensland business,” McKeiver said.

“Demand’s strong, capacity’s constrained, and stockpiles are filling. And customers are getting frustrated, and some of them are even curtailing production as those stockpiles stock out.

“There’s no evidence yet of a contract loss,” he continued. “Our first [contract up for renewal] is in FY20. In fact we’ve won a contract in this context, signing up Bounty in the Blackwater System in March.”

Nonetheless, McKeiver said he was aware the dispute posed a legitimate risk to future contract decisions.

“I’m alert to the risk, my team’s alert to the risk. We’ve got a professional team,” McKeiver said.

“There is absolutely tension in the tender process. Our customers are sophisticated counter-parties, though, and some of them can look through and continue to assess our suitability for their haulage solutions based on our service quality, scale, and the long-term value we can deliver for their business.

“We are doing whatever we can for our customers in [Central Queensland] by scrambling, and pushing, and demanding access, and trying to get as many trains scheduled to meet the demand as we can.”