Carmichael: Are Australian taxpayers about to subsidise a Chinese state-owned enterprise?

Adani Group's controversial Carmichael coal mine and rail proposal in Queensland is targeting financial close by March 2018. After seven years of delays, the probability of this latest target being achieved has risen materially over 2017.

IEEFA remains of the view the Carmichael proposal carries reputational and stranded asset risk plus is both commercially unviable and unbankable absent major government subsidies. Private financing has proven problematic for the Carmichael proposal, acquired seven years ago by the Adani Group, and seven years behind schedule.

The world's largest private financial institutions are increasingly redirecting their investment focus into renewables and specifically ruling out financing greenfield thermal coal mines.

However, the Australian government seems single-minded on ensuring the project goes ahead. Australia's High Commissioner to India, the Prime Minister, the Queensland Premier and various Cabinet Ministers have all made recent trips to Gujarat to voice their support.

Australian governments have also granted a range of financial subsidies and capital support at all levels: local ($31m), state ($320m) and Federal ($1bn). Additionally, the Federal Government has been using Cabinet Ministers and officials from the Department of Foreign Affairs and Trade (DFAT) to procure foreign government support, both from India and more recently China.

IEEFA views this as a clear public bailout of a stranded asset. This is in direct contradiction to Australia's stated Paris Climate Agreement commitment. Any such Chinese involvement would also appear contradictory to China's energy market and global climaleadership evident in the run-up to Bonn. Such subsidies are also unpopular with Australian taxpayers, not the least in the nature of a likely $1bn 30 year high risk, low return "quasi-equity investment" to a foreign tax haven based billionaire family that is under Indian government investigation for fraud, tax evasion, bribery and corruption.

In October 2017 Adani said it aims to secure additional Export Credit Agency (ECA) support and was hoping to sell minority equity stakes in the mine and railway to achieve financial close on the A$5bn stage I proposal to export 25 million tonnes per annum (Mtpa) of low energy, high ash thermal coal.

IEEFA has evaluated the foreign sources of additional subsidised public financing Adani is likely pursuing. According to various sources, the Chinese government state owned enterprise (SOE) China Machinery Engineering Corporation (CMEC) appears to be the leading contender, aiming to secure the engineering, procurement and construction (EPC) contracts for the mine and/or rail projects (similar to Downer EDI's $2bn nonbinding Letter of Award won in 2014) in return for providing access to the Export Import Bank of China and/or China Construction Bank, both SOE.

The Chinese government is increasingly playing a prominent global leadership role in driving the Paris Climate Agreement into Bonn as well as in investing in the global energy market transformation, as illustrated by the phenomenal outcome of installing up to 50GW of solar in 2017 alone. As such, any contradictory move by a leading Chinese EPC firm to develop the largest new coal basin globally brings significant reputational risks for China.

With South Korean's EXIM Bank and POSCO pulling out in 2015, Chinese SOE investment would secure Chinese jobs for equipment and service supply. However, China is unlikely to be interested in importing Carmichael's low quality thermal coal. Considering this and the financial distress of Adani's US$4-5bn import coal Mundra power plant, this proposition raises the question of where the coal from the Carmichael mine will go? Pakistan appears to be one option, but this raises a range of challenging political issues of its own.

Press release: Adani Struggling to Find Home for Carmichael Coal

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