Senator Matt Canavan has returned to the Resources and Northern Australia Ministries just in time to see the Carmichael coal and rail projects enter a new phase. IEEFA has today published a Carmichael Briefing Note highlighting new information that is material to the project.
Having reportedly been struggling to secure finance for the project, the possibility of Chinese state-owned enterprises (SOE) becoming involved changes the picture.
According to various sources, the Chinese SOE China Machinery Engineering Corporation (CMEC) appears to be the leading contender for the engineering, procurement and construction (EPC) contracts for key parts of the Carmichael mine and/or rail projects.
Quite where this would leave Australian engineering firm Downer EDI, which has previously been linked to the project, is unclear.
CMEC sometimes takes minority equity stakes in the projects it is contracted to engineer. This could be a desperately needed boost for Adani which has recently stated it is seeking to sell a minority stake in the project.
Importantly, CMEC can bring with them access to the Export Import Bank of China and the China Construction Bank, amongst others, both also state-owned enterprises.
News broke last week that the former Australian Deputy Prime Minister, and the Trade Minister, wrote a letter to the Chinese government informing them that the projects have received all the necessary environmental approvals. This appears to fall squarely into the context of CMEC involvement.
Chinese SOEs won’t become involved if there is no benefit for them. As a result, this raises the question of where Carmichael coal will actually be exported to.
Adani has always stated that Carmichael is part of a vertically integrated “Pit to Plug” strategy with Adani Power the intended coal off-taker in India.
However, the chances of the majority of Carmichael coal going to India appear to be decreasing; Adani Power Ltd has stated that its import coal-fired power station at Mundra is no long viable. Tata Power’s Mundra power plant is in the same situation.
Furthermore, Adani has stated an interest in selling a majority stake in the plant to the state government of Gujarat for a single rupee. If this occurs the Gujarat government is likely to attempt to source alternative coal sources that are cheaper than Carmichael.
It also seems unlikely that Carmichael coal would go to China. Although thermal coal imports into China have risen recently (after a 40% fall in the preceding two years), this seems likely to be short term as the nation reorganizes its electricity system to be less reliant on coal in the face of its battles with air pollution issues and continued commitment to the Paris agreement.
A possible answer to the destination for Carmichael coal lies in China’s Belt and Road Initiative. The initiative is a US$1 trillion build-out of infrastructure projects, including coal-fired power plants, across ancient land and sea trade routes. At the recent Chinese Party Conference, the Belt and Road Initiative was enshrined in the Party constitution, increasing the focus and pressure to succeed.
CMEC itself has interests in coal-fired power projects within the Belt and Road Initiative with Pakistan as a key priority.
If this potential involvement of Chinese SOEs plays out, the project starts to look very different from the one that was stated for so long by Adani, including a promise to ‘light up 100 million Indian homes’. With landed cost of US$129/t in the case of Pakistan, imported coal is not in a position to solve energy poverty. As well as a potential reputational risk for Adani, there is also risk for the Chinese government.
The Chinese government is increasingly playing a prominent global leadership role in driving the Paris Climate Agreement going into the Bonn conference in November.
China is also investing in the global energy market transformation, as illustrated by the phenomenal outcome of installing up to 50GW of solar in 2017 alone. As such, any contradictory move by a leading Chinese EPC firm to develop the largest new coal basin globally brings significant reputational risks for China.
The Northern Australia Infrastructure Facility (NAIF) will soon a make a decision on the provision of a A$1 billion subsidy to a billionaire on the taxpayers’ behalf. The level of government support from the government has been questioned by many.
The NAIF loan would be in addition to a A$600m royalty holiday courtesy of the state government and now A$31m of funding from local governments for an airstrip.
If it turns out that Australian taxpayers and ratepayers are also effectively subsidizing Chinese state-owned enterprises with low-cost, high-risk loans, there are likely to be further eyebrows raised.
Simon Nicholas is an Energy Finance Analyst at the Institute for Energy Economics and Financial Analysis (IEEFA).