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The further unravelling of Adani’s Carmichael coal project

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While the Adani Group has bounced back many times from adverse developments with respect to it’s Carmichael coal proposal, the run of negative news has continued at a rapid clip of late, putting the project in real doubt.

This week started badly for Adani, with the Downer Group announcing it had relinquished a proposed A$2bn non-binding Letter of Award received in December 2014.

This follows on from the Queensland government delivering its veto of the proposed A$1bn loan subsidy last week and a multitude of leading Chinese banks announcing a decision to avoid this controversial project the week before.

The Institute for Energy Economics and Financial Analysis (IEEFA) would suggest there is a common point of linkage: the building momentum of the Paris Climate Agreement combines with the unprecedented rate of renewable energy deflation evident globally in the last two years to make increasingly clear stranded asset risks for greenfield thermal coal export proposals.

As aptly highlighted by Geoff Summerhayes, Executive Director of the Australian Prudential Regulation Authority (APRA), the entry into force of the Paris Climate Agreement ‘brings the horizon forward’ for action on climate change.

Major financial institutions are addressing this rapidly evolving risk profile with policies to deliver on climate commitments and reduce stranded asset risk exposures by phasing out financing of new thermal coal.

This is clearly being addressed by both Australian financial market leaders such as National Australia Bank and a growing chorus of global institutions such as AXA and ING last week, following on from SCOR, Allianz and SwissRe in recent months. And Blackrock has said “Coal is dead” for any investors with a long term investment horizon.

IEEFA would view the series of announcements by the China Construction Bank, Industrial and Commercial Bank of China, Bank of China and most recently China Merchants Bank confirming they will have no involvement in the Carmichael coal proposal in this light – the cumulative climate, stranded asset and social licence risks make this project unbankable.

China is a world leader in low emissions technology sectors of the future, and clearly this project is inconsistent with China’s “Going Global” strategy in terms of its Paris Climate Agreement.

The Chinese decisions build on the move by the Palaszczuk government to veto the North Australia Infrastructure Facility’s (NAIF) proposed A$1bn subsidised loan to the Adani railway line from Carmichael to the Adani Abbot Point Coal Terminal.

In light of this, IEEFA also notes that the Queensland government’s election pledges would preclude the alternative, downscaled NAIF loan submission by Aurizon to build a railway line to the Galilee.

The government committed to veto “any NAIF loan that helps enable Adani’s mine, rail, power plant and / or port” and to “rule out any new direct or indirect subsidies to Adani.”

Put together, these statements mean Aurizon’s submission to the NAIF faces a similar veto to that enacted by Premier Annastacia Palaszczuk on Adani Mining.

Yesterday the Downer Group announced it had relinquished a proposed A$2bn non-binding Letter of Award with Adani Enterprises Ltd (AEL) for the construction and operation of the Carmichael mine received back in 2014.

AEL has said it will continue on with the Carmichael proposal as an owner-operator. IEEFA would suggest the financial risks of commissioning and operating a 25 million tonne per annum (Mtpa) export mine in a foreign jurisdiction are well outside the skills of the currently assembled team, not the least given the scale of the greenfield proposal.

While AEL has commissioned and operated a 6 Mtpa coal mine in India, its international mining experience is limited to a single Indonesian coal mine operation that has produced 5-7Mtpa since 2009, almost half it’s original target of 12-13Mtpa.

AEL remains highly leveraged, with net debt of US$3.8bn as of September 2017, 1.6 times AEL’s book value of shareholders funds at US$2.4bn.

This financial leverage is compounded by the A$1.5bn (US$1.2bn) carrying value of the Carmichael proposal (half of AEL’s book equity), which looks at clear risk post the loss of Chinese funding and Downer’s subsequent decision to withdraw.

Consistent with decision by the Downer Group to withdraw from the Carmichael proposal, the International Energy Agency (IEA) has today released its “Coal 2017: Analysis and forecasts to 2022”. This new assessment describes coal’s “decade of stagnation” since global demand peaked in 2014.

A key driver of this much more downbeat assessment is the faster-than-expected changes evident in India, the world’s second largest producer, consumer and importer of coal.

In a clear acknowledgement of the rapid success evident in Indian electricity sector transformation, the IEA has halved its forecast growth of Indian thermal coal demand by 2022, a cut of 14% or 115Mt to just under 700Mtpa.

With imports largely providing the balance of Indian power sector demand unable to be supplied from domestic coal mines, the implications for imports are even more material.

The IEA has cut its thermal coal import forecast for India by 39% or 65Mt to just 102Mtpa by 2022. Imported coal just can’t compete with renewable energy.

In light of the 50% decline in renewable energy tariffs to a record low of R2.44/kWh (US$38 per megawatt hour (MWh)) since the start of 2016, new renewable energy projects are lower cost than many existing domestic thermal power tariffs (which generally range from Rs2-6/kWh).

The November 2017 decision by the new Indian Energy Minister R.K.Singh to lift the country’s targets to 10 gigawatts (GW) of wind and 20 GW of solar installations annually means India’s previous 175GW of renewables by 2022 now looks decidedly conservative.

Renewable energy deflation is increasingly driving a global energy transformation, with solar tariffs down some 50% since the start of 2016 in Chile, Mexico, India and the UAE.

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It is also clear that the same factors driving rapid deflation in solar costs are also driving down the cost of both onshore and offshore wind. Greater policy certainty, lower capital costs, ongoing technology improvements, learning by doing and economies of scale are all assisting.

Last week saw the cost of onshore wind in Alberta Canada drop 55% to just $37/MWh relative to the prices set in 2016, and similar declines of some 50% in onshore wind tariffs have been witnessed in India and Mexico, as well as for offshore wind in Germany and the United Kingdom.

It is in the context of the ongoing, faster than expected, technology driven deflation that highlights a clear and present danger for the global seaborne thermal coal sector.

This structural decline was acknowledged by Roy Green, the incoming Chairman of the Port of Newcastle (the largest coal export port in the world), who today stated: “Essentially this spells a new era for Port of Newcastle. The world’s biggest coal port is now preparing for the end of coal.”

Stranded asset risks are highest for greenfield thermal coal proposals like Adani’s Carmichael mine, and their associated rail and port infrastructure.

It is in Australia’s best interest to stop adding coal capacity into what will become an over-supplied market. Furthermore, the incumbents and the associated workforces and communities need a managed transition over the coming decade.

This transition critically needs to start now to manage the inevitable disruption and dislocations that are already beginning to be experienced as the world moves away from fossil fuels and towards renewables.

Authors: Tim Buckley, IEEFA’s director of energy finance studies, Australasia & Simon Nicholas, Energy Finance Analyst at the Institute for Energy Economics and Financial Analysis, IEEFA.  

  • Mark Fowler

    With a little luck this will soon be a stranded asset which thankfully won’t have been environmentally raped in a desperate attempt to maintain credibility.

  • john

    I do not think Adani will find a bank to finance their proposal.
    Perhaps a rail line could be built, but what is the point if the mine can not get finance to build it?

    • Keith Altmann

      The risk is that Gina Rhinehart & Ors have interests in the Galilee Basin and will do their best to get a return on their assets in the area and the opaque NAIF will assist with pressure from Barnaby.

      • nakedChimp

        Well, they can try, but all they will manage is that the Australian taxpayer will cover their losses – at best.

      • Glynn Palmer

        Yes I have read that GVK Hancock http://www.gvkhancockcoal.com/ has an alternative rail line proposal to open up the Galilee Basin. The proposal includes a spur line to Adani’s Carmichael. Their marketing spin in the attached link includes the sweetener statement “GVK Hancock is developing the vast potential of its coal assets in the Galilee Basin in Central Queensland, bringing online a new world class high quality, low ash, low sulphur thermal coal deposit. Its projects will create over 20,000 direct and indirect local jobs and initiate one of the most significant pieces of regional and economic development Queensland has seen for decades”. I have also read that they have applied for a NAIF loan for this proposal. I have also read that the Qld Labor government may approve this NAIF loan.

        • juxx0r

          If it was high quality, low ash and low sulphur, it’d be metallurgical coal not thermal coal. Thermal coal is the rubbish.

    • Joe

      China had a look at financing but said…nah…and they were probably the last serious possibility. Looks like it is up to Two Tongues Turnbull to make an announcement….that in the interests of Nation Building, Agility & Innovation, Jobson Grothe…..Aussie Taxpayers will finance The Adani Mega Mine Abomination.

  • Joe

    Adani’s ‘Carmichael Ponzi Scheme’ is collapsing and not a moment too soon!. No Letter of Award, No NAIF loan, No China ( lender of last resort ? ) Financing = No Mega Coalmine Abomination. Just waiting for The COALition and Rupe & gang to brainstorm some sort of 11th hour rescue mission to piss away our / Aussie taxpayer moolah.

  • Ken Dyer

    The Wangan and Jiagalingou people won a stay of the acquisition of their native lands by Adani against the Queensland Government. Everybody can help the cause by signing the petition to stop Adani building their coal mine on traditional land.

    https://www.communityrun.org/petitions/don-t-let-adani-build-their-huge-coal-mine-on-our-traditional-land

    • MaxG

      Thanks, just signed it!

    • Joe

      Yes, but only temporary reprieve. Back in court in the New Year to fight on again. Isn’t it about time our legislators QLD State and Federal stopped trying to f*@kover our First Nations People with Native Title shenanigans. The Labor Party at State and Federal level has tarnished its record of long standing public support for our First Nations People…think Gough with Vincent Lingiari, Paul with The Redfern Speech and Kevin with The National Apology. All the goodwill has been pissed out the window. The recent Federal Senate Amendments to Native Title Law agreed by Labor was outrageous and we still have QLD Labor going at it against our First Nations People. These bastard acts by Fed & State Labor is to give Adani a continuing lifeline of sorts by squashing any Native Title objections from our First Nations People. Enough is Enough…..Can all who read Ken’s post above sign the communityrun petition. Adrian and his W&J peoples need all the public support that they can get. The real task is to stop Adani. Squashing Native Title Rights is ….UNAUSTRALIAN!

  • Radbug

    The slow motion implosion of the 20-50yo “spendalot” demographic across the Developed & Emerging economies means that consumer spending will not come to rescue of the global (and Australian) GDP growth numbers. This leaves investment as the only source of GDP growth. I mean income generating investment, not ghost projects eg., Clean Coal. The “old” MUST be done away with. “Coal is dead”, so what is left is low/zero emissions investments, a whole range of them, not just electricity generation. If the Chinese credit impulse (number of loans issued per hour) keeps falling, by February 2018 the situation will slip out of Beijing’s control and the Ponzi scheme that is the Chinese Wealth Management Products industry will collapse causing a financial panic. This is the avalanche that awaits Malcolm Turnbull if he procrastinates over low/zero emissions investment. ps. The Chinese avalanche will still happen, but a low/zero emissions “New Deal” will soften the blow.

  • MaxG

    Long overdue: good news — good riddance.

  • Glynn Palmer

    The BNEF outlook to 2040 forecasts global coal fired power generation peaks in 2026. Coal consumption in China peaks in 2026 but at a level 20% higher than 2017. India will add 40GW of coal plants over the next 5 years. Japan and South Korea will add 30GW of coal plants over the next decade.

    • Mark Fowler

      One of the issues for a new mine is that the break even requires 10+ years of production. If Adani went ahead at this point it would only start producing in 2022 or thereabouts and so would only receive reasonable prices for at best 10 years. As coal consumption reduces after 2026 the price for coal will plummet making it difficult for the project to recoup its capital cost..

    • Mike Shackleton

      Pretty much every forecast about the fall in price and rate of adoption of RE has been blown away by the actual figures. So I don’t hold much stock in the predicted coal consumption. A lot of those coal plants in India are only being constructed because there is a contract in place to do so. They are stranded assets before they are finished.

  • Glynn Palmer

    The global solar deflator $US/MWh bar chart looks interesting. If the US$20 2017 Mexico price is converted to AUD$ at 77cents conversion we could be seeing $26MWh in Australia in the foreseeable future. At this price all of its production would be taken up into the grid and crowd out any power stations that could economically and physically reduce output that needs fuel costs to operate.

  • Some people are listening and acting more GroupsStartup.net growth

  • Mike Shackleton

    Downer have probably looked at the financial position of Adani and decided that the risk of the company going under and Downer not getting paid for their work is too high for them to stay associated with the project. Adani is carrying a large debt for the Abbott Point coal terminal that they need to refinance next year. They can’t even service it with the coal exports they are currently putting through it. If they can’t cut a deal on a new loan they will be on the brink of bankruptcy in Australia. Big construction companies like Downer have risk teams that would be all over this issue.

  • Aluap

    Our current duplicious government is also a stranded asset and has no qualms about environmental rape in a desperate attempt to maintain credibility.