Australia is the world’s biggest coal exporter — but volumes are going sideways, based on trailing 12-month figures.
Those seeking a revival in Australia’s coal industry have pinned their expectations on a former cattle ranch in an isolated spot of the country’s northeast. Indian billionaire Gautam Adani has proposed to build one of the world’s biggest coal mines at the Carmichael site. Originally seen as a $16.5 billion project producing 60 million tons a year, a scaled-down first stage of the site is now planned, costing $4 billion and producing 25 million tons a year, Adani Australia CEO Jeyakumar Janakaraj said in an October 2016 interview with the Australian Financial Review.
One of the strangest things about this project is something that partisans on either side of the debate are often unwilling to admit: Despite Adani’s promise to start mining by 2020, Carmichael stands very little chance of ever being built.
A comparison with one of Australia’s biggest coal operations shows why. BHP Billiton Ltd.’s Mt Arthur and its associated pits typically deliver a Carmichael-sized 20 million metric tons a year from the Hunter Valley north of Sydney to Newcastle, the world’s biggest coal export harbor. Its coal is a better product, with a heating value of 6,450 kilocalories per kilogram and 17 percent ash content compared to the 4,950 kcal/kg and 26 percent ash that the Institute for Energy Economics & Financial Analysis calculates for Carmichael.
Underlying Ebit at BHP’s Hunter Valley mines has shrunk as coal prices have fallen.
Despite that, Mt Arthur is struggling. In BHP’s 2016 fiscal year ended last June, the unit lost $22 million in underlying Ebit. Chief Executive Officer Andrew Mackenzie was quoted by Australian Mining magazine last March saying that it’s “touch and go” whether operations might have to be suspended.
With Newcastle coal surging to its highest level in four-and-a-half years in November, Ebit did rebound to hit a three-year high of $110 million in the half year through December. But a $4 billion mine borrowing money at the 5.8 percent that Adani gets on its Australian dollar bonds would need that sort of result in every single half year just to pay its interest bill — and that’s before you factor in a $2.5 billion rail line. A $16.5 billion project would require about $950 million of Ebit a year.That — rather than the fear of blowback from environmentalists — is the best explanation for why Australia’s big four banks haven’t exactly been queuing up to lend to Carmichael. After all, there are other projects out there for any credit committees interested in rolling the dice on coal’s long-term prospects. At Newcastle, an extra berth would cost A$4.8 billion ($3.7 billion) and allow an extra 70 million tons a year to be exported, as opposed to the 25 million tons offered by Carmichael’s first stage.
Why, then, the widespread pretense that this mine is on the brink of being built — especially in the face of the oft-stated intent of India’s energy minister, Piyush Goyal, to stop imports, and the far cheaper price of coal in that country’s domestic market?For Gautam Adani, formally canceling Carmichael would probably involve a brutal writedown of a major asset. The capitalized exploration value of Carmichael was A$969 million on the balance sheet of Adani Mining Pty. at the end of March 2016, equivalent to about a third of the equity at its ultimate parent Adani Enterprises Ltd. If the mine can’t get finance, that number risks dropping to zero.
For Gautam Adani, formally canceling Carmichael would probably involve a brutal writedown of a major asset. The capitalized exploration value of Carmichael was A$969 million on the balance sheet of Adani Mining Pty. at the end of March 2016, equivalent to about a third of the equity at its ultimate parent Adani Enterprises Ltd. If the mine can’t get finance, that number risks dropping to zero.
For federal and state governments in Canberra and Brisbane, it’s about demonstrating the country is open for business and showing support for a cherished local industry. That history explains the government’s enthusiasm to lend public money to the planned railway project if commercial finance isn’t available — it slender remaining hope of getting funding. Such a decision would be a mistake. As Gadfly wrote last week in relation to the hangover from the country’s liquefied natural gas boom, Australia’s desire to develop marginal resource assets at all costs has often been self-defeating.The problem the coal industry faces in the medium term isn’t a shortage of supply that could be solved by building Carmichael, but a lack of demand that will be exacerbated by the same action.
Coal’s Dirty Secret