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A White Elephant at Newcastle

July 15, 2015
Tim Buckley

A proposal to build a fourth coal-export terminal in Newcastle, Australia, is about as big a boondoggle in the making as one can imagine.

Even executives at Port Waratah Coal Services, the company that wants to erect the T4 facility are having trouble explaining the sense of the project.

“T4 will only be built if there is demand for it,” the company’s chief executive, Hennie du Ploy said at a Tuesday hearing before the Newcastle Planning Assessment Commission.

As it happens, there isn’t demand for it, and that’s the gist of an IEEFA report I presented at the same hearing (and published here).

T4 is an obvious stranded asset in the making—a US$3.8 billion white elephant by any other name—and it doesn’t warrant commission consent. Here’s a statistic that puts the proposal in perspective: Existing export facilities at Newcastle are operating at only 72.5 percent capacity this year, and the momentum is not toward growth (Newcastle export facilities operated at 75 percent capacity in 2014). T4 would increase Newcastle’s already underused export capacity by a third, and for what?

Some points we make in our full report include these:

  • Global seaborne thermal coal markets are in structural decline, with prices having peaked in 2013 and coal stocks across the board representing billions of dollars in investor losses over the past few years.
  • China, a main market for Australian coal, no longer has the same appetite it once did. Chinese coal imports peaked in 2013 and then tanked in 2014 with an 11 percent decline. That drop has since accelerated into a 38 percent year-on-year collapse in the first six month of this year, and our research at IEEFA sees this trend as structural and permanent. Beijing has made it clear that the government is undertaking a war on pollution and pursuing all means possible to diversify away from coal. China, believe it or not, was once upon a time (pre-2008) a net exporter of coal, and it will likely be an opportunistic net exporter again on any temporary price improvement in seaborne coal.
  • India is now the world’s largest importer of coal, but Piyush Goyal, the country’s powerful energy minister, announced eight months ago a plan to cease India’s thermal coal imports within two to three years. Just this past May, he set an even more ambitious agenda, saying India didn’t need three years to get there. That possibility is driven by an initiative to triple India’s domestic coal production by 2020 to 1,500 million tonnes per annum. With domestic Indian coal selling at US$24 per tonne, imported coal—even at record low export prices of US$58 per tonne in 2015—cannot compete.

There are other reasons to question the rationale behind T4: It would help crowd out development of alternative sources of energy, it relies too much on government subsidies, it is rooted in an industry that faces increasing regulatory risks associated with pollution and climate change.

Meantime, investors continue to see competing opportunity in renewable energy. We’ve commented recently on the significance of the blockbuster Softbank/Foxconn/Bharti Enterprises joint solar-energy venture in India, for instance. Now comes Aditya Birla Nuvo, a US$4 billion equity capitalized and a listed division of the massive Aditya Birla Group, announcing board approval to enter the Indian solar sector by bidding on new solar project tenders.

One more side note on India’s new coal-import policies. With new production records being set for 15 straight months now by Coal India, the country’s domestic coal industry is responding to Goyal’s agenda. This will likely cause a re-evaluation of the assumption that he was joking when he said India plans to cease thermal coal imports. Goyal isn’t joking.

India, like every other country, is driven by its own national self-interest, of course. Which brings us back to the T4 proposal at Newcastle. Investing heavily in yet another export facility to support a fading industry is not in Australia’s best interest. Were T4 to be built, it would only enable Australian coal producers to dump massive new quantities of coal into an already oversupplied market, driving prices lower and making it more difficult for the country’s existing coal industry to cope.

Should there be any doubt as to where coal is headed, one can look to the equity market for guidance.

Globally listed coal-mining companies have lost an average of over 70 percent of their stock value over the last five years. In 2010, Peabody Energy—the big boy on the block—had a market capitalization of US$18 billion. It is the largest Western coal producer, it’s share price is down 95 percent against broader U.S. stock gains of 80 percent and Peabody’s paltry market cap today stands at less than $500 million.

Coal is not a growth industry. It doesn’t need T4.

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

Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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