Banks and credit ratings agencies’ outlook for coal terminals is outdated amid the ongoing climate transition and higher risks facing coal mining. Despite these trends, they continue to maintain positive credit outlooks and provide debt financing for Australia’s coal ports.
New coal projects are increasingly difficult to finance and approve, and new coal supply will not keep pace with declining volumes from existing mines.
In periods of depressed demand, marginal coal miners may cease production, leaving the remaining operators to cover higher port costs.
Climate change risks continue to add financial burdens to the coal export supply chain and are only set to worsen over time. The risks to ports are not independent to those faced by miners.
Coal ports were once regarded as stable fixed-income investments, but this is increasingly not the case.
Investments in infrastructure like ports and railways have historically been seen as dependable, low-risk assets. Recently, credit ratings agencies have been showing renewed confidence in Australia’s coal export terminals.
A new set of risks are arising and converging to magnify the counterparty risk throughout the entire coal supply chain, driven by high coal price volatility combined with climate change and the energy transition.
However, it’s no longer viable to treat coal mines and their export ports as distinct industries with independent cash flows and creditworthiness. A new set of risks are arising and converging to magnify the counterparty risk throughout the entire coal supply chain, driven by high coal price volatility combined with climate change and the energy transition.
The rising costs of terminal charges are adding to coal miners’ cost inflation woes. Mining labour shortages curtail expansion plans and increase unit production costs. Extreme climate events risk damaging infrastructure and disrupting supply, while trading-partner decarbonisation policy measures will reduce demand. With increased pressure to meet higher financing costs, circular dependencies are driving a concentration of risk across the sector, as shown below.
Australia’s coal export terminal throughput is running well below capacity and declining. While the volume risk of lower throughput is generally transferred to the coal miners – through take-or-pay arrangements or shareholder agreements – this underutilsation can lead to several adverse outcomes. Ports located in urbanised areas may have more success in diversification than those in remote regional locations due to their greater flexibility to adapt infrastructure to meet growing demand for containerised shipping. Following record profits in 2022/3, established miners have paid down debts and returned funds to shareholders. This is in contrast to new junior miners, who might be expected to have a higher probability of default (PD) in the event of a downturn.
Investors are increasingly requiring companies to account for their emissions amid growing public concern over climate change. Scope 3 emissions, from the burning of our exported coal, are more extensive than Scopes 1 and 2, which occur within our domestic shores. As a visible symbol of exported emissions, coal ports in particular face an elevated risk, as Australia’s environmental accountability may encompass these downstream Scope 3 emissions in future.
Banks are increasing their climate-related disclosures; setting targets for fossil-fuel exits; sharpening environmental, social and governance goals (ESG) policies; and greenwashing. ESG policies and scores need to be reworked to reflect climate risk and financial risks. Coal ports are highly leveraged and as such face greater refinancing risks if exclusions are extended further. Banks’ coal exclusion policies need to be robustly reworked to exclude coal capacity investments along the entire value chain – mining, power generation and transport infrastructure.
How governments leverage this opportunity as well as addressing the challenge of achieving net zero emissions by 2050 remains uncertain. It seems unlikely to be accomplished by supporting developments of long-lived port assets that facilitate fossil fuel exports. Responses to these challenges by financial market regulators, banks, insurance companies, super funds and governments need to accelerate.