IEEFA Australia: The Zombie Australian Coal Project That Won’t Die

The announcement this week by Queensland Mining Minister Anthony Lynham that the proposed open-cut Carmichael coal plan is considered a “prescribed project” is yet another reminder that you still can’t say for sure that Adani’s dreams for north Australia are dead.

The strategic merit remains questionable, the quality of the coal the project would produce is inferior and the location is remote. It remains an unbankable proposal.

However, Adani is a gigantic company used to getting its way. It has already invested A$1.4 billion (US$1.06 billion) in the project and is reluctant to just walk away and write off that amount of money. Coal prices have rallied dramatically this year, and Adani wields political clout in both India, its home country, and in Australia. It can move governments. That means a downsized version of the project remains a possibility.

For financial close to happen, however, legal challenges would need to be resolved, and Adani Mining would need to update its project planning and pull together a new group of international partners to demonstrate exactly how the project would be financed.

Much has changed since the last serious Carmichael project study was done by Adani Mining, and the engineering team that was in place at the time of that work has been dissassembled. Given that this is October already, progress is unlikely in 2017. It would take the group a full year to get an updated engineering study complete and to pull together all the requisite multitude of required partners. Participants would have to include EPC (Engineering, Procurement and Construction) firms, international banks and/or ECAs (Export Credit Agencies).

Financially robust coal-offtake agreements would have to be put into place and associates would have to be recruited and assembled to build/fund the various ancillary infrastructure requirements. Those would include an airport, a railway, new water infrastructure and a government dam upgrade. Adani also would have to conscript a bank willing to provide financial assurances to cover rehabilitation liabilities.

But the structural decline of global seaborne thermal coal markets, in IEEFA’s view, continues.

While China cut its domestic coal supply faster this year than demand fell,  giving a short term fillip to the international traded price of coal, IEEFA expects the trend to move back into balance in 2017 and for both volume and price of traded coal to resume its downward direction, a trend that was very evidently established over 2015.

Still, so long as global ECA’s from China, Korea, the U.S., Japan and Australia continue to subsidize financing for new coal projects, Carmichael’s reappearance in headlines cannot be ignored.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.

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