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Key Findings

The price of thermal coal has declined by more than 50% over the last four years to its current US$65/ton (referencing the Newcastle 6,000kcal free-on-board benchmark). 

IEEFA views the thermal coal markets as having entered structural decline, with coal demand in China forecast to peak by 2016 and to decline gradually thereafter.

While India is regularly cited as the next growth market for imported coal, IEEFA forecasts Indian coal imports will grow at well below current market expectations. In addition to the inability of the Indian retail and agricultural consumer base to afford expensive imported coal-fired electricity, the government is talking increasingly of pursuing a rapid diversification of the Indian electricity sector away from its current fossil-fuel base.

Executive Summary

  • The two most advanced projects in the Galilee Coal Basin are GVK Hancock’s Alpha Coal project and Adani Enterprises’ Carmichael Coal project. Including the associated rail and port infrastructure requirements, these two greenfield developments alone have a capital construction cost of A$10bn and A$15bn respectively.
  • The huge scale, greenfield nature and foreign ownership of these two projects brings an almost unprecedented level of financial complexity and risk.
  • The global climate change implications of opening up one of the world’s largest undeveloped coal resource adds to the risk profile, not the least being the risk of creating stranded assets, a potentially devastating business setback once the world gets serious about explicitly pricing in carbon emissions.
  • Given the highly leveraged nature of each of these two Indian conglomerates, international financial institutions would have to play a major role in financing either of these two projects if they go forward.
  • Given the global scale and Australian focus of Galilee Basin projects, the Big Four banks in Australia (Commonwealth Bank, Westpac, ANZ Bank and National Australia Bank) will be critically important to the financing of this multi-billion work. Although each of these four banks are in the world’s top 22 banks by market capitalization, any one or two of them would alone would not be capable of taking on the financial risks associated with such globally significant greenfield coal projects. International loan syndication would also be crucial to success.
  • In addition, greenfield mining projects of this scale need one or more global investment banks to be involved in structuring the project and the related infrastructure finance, and to potentially bring in an equity partner. In Australia, the top nine global investment banks (in alphabetical order) are Bank of America, Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and UBS (with Commonwealth Bank rounding out the “top 10 leagues table” in recent years). Several of these banks have ruled out funding resource projects that put the Great Barrier Reef at risk, consistent with their Equator Principles commitments, a stance that suggests they would be reluctant to invest in Galilee Basin greenfield coal development.
  • With the Galilee projects largely stalled at this time, IEEFA sees financial close as at least a year away.

Please view full report PDF for references and sources.

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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