By Greg Peel

Australia's coal industry is making as big a song and dance as it can about the crushing impact of the government's planned carbon tax, as well it might. Lobbying is the name of the game ahead of any such fiscal policy proposal and "lost jobs" is a popular political war cry.

Citi analysts note that the coal industry is set to become the country's highest taxed mining sector it would appear, given corporate tax, state mining royalties of up to 10%, an upcoming Mineral Resource Rent Tax (which, incidentally, is to be charged net of royalties), and now a carbon tax.

This week Citi increased its forecast thermal coal prices by 13-45% across ten years and coking coal by 15%. For hard coking coal Citi now expects (prices all US$/t) a 2012 average price of 275 with a long-term forecast of 200, and for thermal coal 139 and 160 respectively. Citi's 2012 currency assumption is US$1.06 and its long-term US$0.80.

As a result of coal price forecast changes, Citi has made "material" changes to the forecast earnings and target prices of coal stocks in the broker's coverage universe, net of a corresponding assumption of rising costs. The result is, in most cases, reductions in earnings forecasts in earlier years and then increases as rising coal prices win out over rising costs.

The analysts have also calculated the cost of the proposed carbon tax on the coal industry, estimating in impost of up to A$2.50/t. So in thermal coal for example, Citi's average price has risen from a 2011 forecast of US$122/t by US$17 to US$139/t in 2012. Then take off A$2.50.

It's easy to see why the coal industry is up in arms.

The point of this article is not to advance any view on climate change, carbon tax or any implications arising therefrom. It is, however, to point out that movements in the coal price from year to year and even quarter to quarter driven by the demand/supply balance, and movements in the Aussie dollar if taken independently, and cost inflation in a crowded resources sector, are going to have a far more significant impact on Australian coal producer earnings than the proposed carbon tax ever could.

Citi's A$2.50/t estimate is based on a flat carbon tax of A$26/t of CO2 equivalent. The broker suggests such a tax would reduce coal producer valuations by 2-4%. By contrast, as one example, Citi has increased its target price on Coal & Allied ((CNA)) as a result of its forecast coal price and mining cost increases, by 4%.

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