Clive Palmer’s $8 billion gambit

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Clive Palmer, Queensland’s wealthiest man and key backer of the opposition party (the LNP), is filing a damages claim in the Queensland Supreme Court and is seeking injunctions against QR National following the recent announcement the QR National’s own rail project from the Galilee Basin will be granted Significant Project Status.

Palmer’s project, known as China First, was declared a Significant Project by the Queensland Government in November 2008, and was subsequently granted Major Project Facilitation Status by the Federal Government in November 2009. Two other projects in the Galilee Basin have also been granted this status (see below map):

It appears Palmer’s problem is that the QR National’s proposal was also been declared a Significant Project last week, after some months of cooperation with QR National over his own rail plans. He accuses QR National of breaching confidentiality clauses.

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However, there seems to be a clear distinction between Palmer’s project, which is a mine specific link direct to port at Abbott Point (at a Standard guage), and QR National’s proposal which will integrate a rail connection from the Galilee Basin into the existing rail network, and cover a short distance across a similar alignment to Palmer’s proposal (using compatible narrow gauge rail tracks).

The two maps below from the QR National Initial Advice Statement show the distinction between Palmer’s proposal (and other’s proposals) and QR National’s:

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Intuitively, one would imagine that having a rail link to the Basin that connects to the existing network is the best for all miners in the Galilee in the long run. This allows miners to ship from all ports on the network, which are each following their own expansion plans as shown in the table below. There has been strong political pressure for a couple of years now to have a single rail corridor from the Galilee Basin, and QR National’s proposal is the first to put this idea forward:

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An honest assessment seems to be that this lawsuit is simply a bargaining tool for Palmer. It frustrates QR National’s bid to construct the rail link to the Galilee, and gives the opposition party another angle to attack the government. The Bligh government has suggested that Palmer is hoping for different treatment should the LNP gain power at Queensland’s March election, although the alternate Premier denies such an outcome would eventuate:

Mr Newman said he knew nothing of Mr Palmer’s plans and had not spoken to him over the issue, or in the past four months.

“I don’t know anything about what his letter says, what he’s pushing,” the LNP leader said.

“This is his matter with the Queensland Government.”

He dismissed as “outrageous” claims by Deputy Premier Andrew Fraser that Mr Palmer would receive special treatment if the LNP won Government.

“I mean, Andrew Fraser? Please, spare me. Mr Palmer’s business affairs have got nothing to do with our election campaign,” Mr Newman said.

“Mr Fraser will say and do anything in this campaign because he cannot campaign on his record.”

Mr Newman insisted Mr Palmer would wield little influence under an LNP Government, despite his financial backing of the party.

Next up I suspect Newman will play the ‘jobs card’ should he intervene in the rail link deliberations that would see Palmer’s business construct the link. Almost every media outlet covering this story has regurgitated the 6,000 jobs figure, and $4.6billion of export revenue per annum generated by the project. Which is a tad misleading, since if QR Network build the rail link, or even if some other company mined the coal, the same figures would apply.

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From a business perspective, by pushing to construct the rail link himself, Palmer gains advantages from the speed of construction, but more importantly, he gains the possibility vertical integration of mine and rail, and efficiency gains from wider gauge rail and the potential for heavier trains. For his own business, this has efficiency advantages. But from the more broad perspective of State development, a single shared rail line connected to the existing would be more efficient than three duplicate lines.

Depending on the ultimate design, there is also a reasonable chance that Palmer’s rail link will be sought after by other miners, and if he can’t negotiate agreeable terms, it may be declared for open access under the Queensland Competition Authority Act 1997. Such a declaration typically involves what is known as rate-of-return regulation. This should in theory give Palmer’s rail asset a relatively low but stable return, and the same return that would be set by the regulation and apply to QR Network should they build the rail link instead. In this circumstance, Clive would be in a fairly similar financial situation if he simply bought a stake in QR Ltd.

Whether the lawsuit has any legs depends on the nature of the agreements made between QR National and China First during previous discussions. However, from the standpoint of assessing the cost and benefits to Queensland at the broadest level, the QR National proposal appears to be the preferred choice.

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