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Do we have to rely on bankers to protect the planet?

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Just before Christmas, leading Citigroup analyst Elaine Prior took Australia’s coal freight giant Aurizon to task over the lack of board engagement on the science of climate change.

The board, which is considering taking the lead role in a $6 billion investment in an upgrade of the Abott Point coal port and a new rail line to the massive coal mines in the Galilee Basin, did not have climate change on the radar.

In fact, Prior observed, there was no strategic assessment of climate at senior management and board level, and it barely rated a mention in the sustainability report. Little wonder, then, that there had been no apparent investigation as to whether the massive investment may end up as a stranded asset.

Prior’s assessment gained no headlines, had no visible impact on the Aurizon share price, and may not have even been noticed by the Aurizon board.

But in the light of the Great Barrier Reef Marine Park Authority’s approval to dump 3 million tonnes of sediment from the Abott Point expansion project into the marine park, and the determination of the Abbott federal government and the Newman state government to develop the Galilee Basin deposits – partly owned by the likes of Gina Rinhart, Clive Palmer and others, the only thing that could stop the projects is the lack of finance and support in the investment community.

bankers sand

Financial markets have not always taken the environment into account. Photo: The Banker by Jason de Caires Taylor

If, as green groups have assessed, the Galilee Basin resources are one of a number of global “carbon bombs” that , then it seems the only people likely to save the planet are bankers. Given their track-record in sub-prime and other disaster, it may not be a comforting thought.

But, at least, banks and financial analysts are starting to take on board issues that many corporates, and Australian state and federal governments, refuse to countenance, or may even consider to be “UnAustralian”. The science of climate change is chief among them.

Little wonder that green NGOs are now taking their arguments direct to banks and the investment community, reasoning that unlike politicians, banks and investors should at least have a longer term perspective, and more skin in the game in the form of potential lost capital.

Prior, a former top rating analyst of oil and gas and still one of the country’ best regarded analysts, is not alone in raising concerns about coal. HSBC economists last month wrote that the issue of stranded asset valuations for coal has become “increasingly topical for equity investors and management” over the past 18 months.

“It is fair to say that the long-run future of coal is now “in play” in commodity and equity research markets.,” the HSBC economists wrote. Not that the miners accept this, because they have a massive “blind spot” over short term profits. But the fact that there is a debate in investment circles  is a change in itself over the past 18 months.

“We believe that mining companies need to be able to demonstrate to investors how their portfolio would prosper in a low-carbon scenario – and how this is being factored into long-term capex,” HSBC writes. That is particularly true of infrastructure investors such as Aurizon.

Deustche Bank and Goldman Sachs have raised questions about the future of thermal coal, and even the IEA has said the current low coal prices “raise concerns about the economic feasibility of projects in the Galilee Basin,” and several pieces of specific analysis have queried the financial standing of some of the key players in the Galilee Basin

Analysts says there are several reasons why Aurizon’s $3 billion investment (its 51 per cent share) into rail and port infrastructure might not be a good long term investment. The first is China’s moves to combat its shocking air pollution. There is increasing talk that China will implement the cap on coal consumption that has been freely discussed among its main policy bodies.

The second is that the world may take decisive action on climate change, and actually try to do what it  said it would – seek to limit global warming to 2C. That would require, according to International Energy Agency, the imposition of a strict “carbon budget” and the world leaving two thirds of its fossil fuels in the ground. There would simply be no long term market for Galilee Basin coal under that scenario.

The third is the most intriguing, because it is based around simple economics rather than government policy. It is generally assumed that India will continue to import huge amounts of coal no matter what to fire its electricity. But Prior notes that falling costs in renewables particularly solar, means that coal may not be able to compete over the medium to long term.

These may not be crucial for miners, who are keen to dig up as much of the wealth that currently lies in the ground. But for companies such as Aurizon, the infrastructure would require a 20-year payback period, and may not even be constructed for another 5 years.

Has Aurizon considered any of these options? Apparently not. Prior put some questions to Aurizon and the company told her that it sees strong 20-year fundamentals for coal, and it does not believe a 2°C global warming scenario represents a material risk.

Prior has a different view: “We see a risk that if the project starts 5-10 years into the future, and the world does take action on climate change or other dynamics drive a shift away from coal, driving weaker coal prices, a major long-term investment in the Galilee Basin might leave Aurizon’s shareholders with a “stranded asset”.

 

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  • JohnRD

    The other problem for the miners is that, even if the banks are convinced that the project is worth financing they may not be willing to put up with the bad publicity that comes from being labelled as “Great Barrier Reef destroyers.”
    The banks don’t need the miners.

  • Thylacine

    The world has gone totally mad if it seriously considers mining and exporting a product that will, according to credible science, create a situation that will contribute to making life on this planet extremely uncomfortable at best or unlivable at worst.
    Presumably the miners know this but dollar signs make them oblivious to it. The financiers must also see the risks but theirs will be theirs alone unless the whole shebang comes tumbling down.
    I don’t particularly care but surely the Queensland and Commonwealth governments have most to loose as aren’t they stumping up a lot of the cost of the infrastructure that Messrs. Newman and Abbott want to be remembered for. Under the circumstances, who will ever forget them? Perhaps our only hope will be that Clive Palmer’s loss of fortune may yet help save the day.

    • Chris Turnbull

      Newman and Abbott have nothing to worry about if they don’t believe the science. Same as I don’t worry about the toothfairy’s surplus of teeth and overdrawn loan defaulting. Belief is powerful. For the record, the toothfairy is Fiction. Climate Change is Reference/Non-Fiction :-)

  • Stan Hlegeris

    This situation reflects badly on our governments but may not result in a bad outcome for the reef.

    The potential lenders to this project will have to look far into the future to make a guess as to whether this vast port expansion will be able to pay for itself. If you look ahead twenty years you find plenty of reasons to doubt the proposition that coal sales will hold up at their present levels.

    Politicians only look as far ahead as the next electoral cycle and don’t care about science or reason. Banks have to use rational tools to make decisions about how a business will perform over decades. They might not get it right, but they’ll think about it more carefully than any arm of government.

    If the State of Queensland insists on pushing ahead no matter what then we’ll see a double disaster: we’ll be sure of doing all the environmental damage plus all the financial damage which will result from spending billions on a white elephant.

    • http://www.goodgoalgroup.com/ Ferdinand Swart

      You are too optimistic about banks now-a-days, they only care short term shareholder value and their bonuses. Otherwise they would never, ever contemplate investing in coal!

    • MrMauricio

      May not be a bad outcome for the reef???? Have you seen what happened to Gladstone Harbour? A tiny part of the size of the reef damage.Imagine a line of trucks from Melbourne to Brisbane dumping on the reef!. We have seen Richard Branson tell W.A that the shark cull is bad for tourism and one can only guess the catastrophic damage to the image of the reef this will do to tourism there-a permanent asset if looked after.

      • wideEyedPupil

        Problem is tourists only need a fraction of the reef to dive on, they don’t know and don’t care in general about the massive loses not in their camera lens’s field of view. The bad publicity could hurt tourism but not losing half the reef itself would hurt them much as an industry. Sure, individual operators would be wiped out or forced to relocate.

    • wideEyedPupil

      You mean the way Banks and Financial institutes and the US SEC looked forward twenty years (even five would have been good enough) to see repacked toxic debt as AAA investments and sundry other dodgy financial product offerings like credit default swaps as being high systemic risk?! Yeah Banksters play the long game these days don’t they.

  • http://www.goodgoalgroup.com/ Ferdinand Swart

    Let us announce an international divestment movement against any bank supporting this ill conceived plan with its global impact! I know we will be able to get millions active supporters for this cause, it’s the perfect issue for marketing.

    • Chris Turnbull

      350.org is already focusing on divestment globally and their leader Bill McKibben toured Oz in June 2013, acutely aware of the Galilee. Spread the word of their work, Ferdinand. Also, join March in March – a rally against various actions of our current Fed Gov’t. Quite a proportion of Marchers in each city/town will be there for climate change and reef issues.

      • wideEyedPupil

        In fact it’s thanks to Bill McKibbon and 350.org staff in Australia that a Citigroup analyst is asking “stranded asset” questions in public I would hazard a guess.

  • Miles Harding

    Unlike SPC Ardmona, I don’t see this coal expansion as having any political agenda, it is really the work of a desperate state government that is looking for any way to produce revenue. It may yet prove to be a financial disaster if all that extra port capacity isn’t needed. Sorry, Queenslanders you’ll be carrying the can for this one.

    This is on obvious evidence nationally with dumping the carbon price in favour of a truly awful mess of a policy. In Victoria, the same politics of desperation is in action with the Latrobe valley coal leases, even though that additional brown coal is probably unmarketable.

    As a friend commented: Politicians only care about one thing: getting re-elected, and they don’t care if they torch the people, nation or the future so long as they get back in.

    Really, it’s up to bankers now.

  • Dan Hue

    I don’t blame the people who choose to crudely see the world as it is and try to benefit from it as much as I do those who try to manipulate it towards an outcome more favorable to them. Investing in whatever to make a quick buck may not be noble, but it’s not immoral per se either. (I guess I’d call it amoral.) Bribing politicians, fudging science, and waging a denier PR war are much worse. I see the finance world as amoral, and as such, it can be an ally, if we only choose to play the game the way it’s written, as opposed to trying to change it. Some may not like the idea of putting a value on everything, but I believe that if we could realistically do that, it would go a long way towards solving a lot of our problems.