Last week saw the NSW Planning Department recommend the Planning Assessment Commission approve the proposal to spend A$4.8 billion to develop a further 70 million tonne per annum (Mtpa) coal export facility at Newcastle Port.[i]
Market conditions that suggest that Newcastle’s T4 coal terminal is extremely unlikely to be built. Demand for Australian coal is flatlining, and is likely to decline over the next few years. Demand is unlikely to ever recover, with long-term deteriorating global market conditions.
Analysts and investors who look at this project will quickly see that it is an extremely risky proposition. Current coal loading facilities are under-utilised by 30 per cent – even they are on shaky ground at the moment. The last thing that the Port of Newcastle needs right now is another massive coal loader sitting idle.
Newcastle’s three existing coal export facilities have a combined capacity of 211Mtpa, and in the 2012/13 peak of the last coal boom operated at 71% utilisation. With 60Mtpa or 29% spare capacity on the existing coal port, it is commercially illogical to be even contemplating the further 30% capacity expansion with ”T4”.
There is a significant global surplus capacity in the seaborne coal markets. With many mines currently operating at a loss even on a marginal cash basis, further mine closures are being debated, constrained against doing so by the legal liability of long term take-or-pay rail and port contracts.
The NSW Planning Commission report acknowledges “demand for coal has softened eliminating the prospect of a capacity shortfall in the short term”. However, the department then provides an incomplete reading of the International Energy Agency (IEA)’s work, stating: “estimates global electricity demand could double between 2009 and 2035” and that coal’s share of the global electricity market is currently 40% and “is projected to increase to 45% in 2030”. The report concludes that “exports are projected to continue to grow at 2.4% pa at least until 2030”.[ii]
We note that the IEA provides three possible demand scenarios based on differing regulatory and energy efficiency assumptions. It does not offer one, definitive estimate as implied by the Planning Department.
The IEA’s latest report, “World Energy Investment Outlook” of May 2014, estimates under its “New Policies” scenario that coal demand will grow at only 0.7% from 2012-2030, less than a third of the 2.4% pa the department claims. Under the IEA’s more aggressive “450 scenario”, global coal demand is estimated to decline 1.8% pa from 2012-2030 to be 30% below current production levels. With seaborne traded coal carrying significant transportation costs relative to mine-mouth supplies, seaborne exports in the main are marginal units of coal-fired power supply.
These second and third scenarios offer a counterbalance to the aggressively upbeat assumptions in the Commission’s report. As such, it should be questioned why the IEA’s central New Policies scenario outlook for coal is not even mentioned in the 80 page review. Should the 450 scenario play out, this would put the existing 211Mtpa coal capacity at Newcastle Port at serious risk of financial writedown, whilst any T4 project would be squarely within the stranded assets basket. This is a risk the Planning Commission does not even contemplate.
The Planning commission’s misstatement regarding IEA’s scenario analysis is further compounded by the fact that current markets are pointing in precisely the opposite direction of the Commission’s conclusion.
With the thermal coal price down 50% in 4 years to a new low of US$71/t in June 2014, and coking coal prices down more than 60% to US$110/t, the market no longer needs the expanded infrastructure of massive greenfield projects like Newcastle T4. An excess state of supply is being maintained due to long term take-or-pay contracts. Economic slowdowns in China and India means that this is compounded by weaker than expected demand.
The Planning Department’s review of T4 comes at a time when numerous multi-billion dollar Australian coal export terminal proposals have been relinquished over the last two years. This highlights the rapid deterioration in the global coal industry prospects, with key turning points last month by China’s President Xi Jinping’s call for an “energy revolution”[iii] and President Obama’s “Clean Power Plan”.[iv] These include:
- In 2012 BHP indicated it would not proceed with its new coal export terminal plans at Abbot Point “T2”;
- In May 2013 Glencore announced they had scrapped plans to build a 35Mtpa coal export facility at Balaclava Island, 40km North of Gladstone;
- Wiggins Island Coal Export Terminal (“WICET”) Stage 2 has been put on hold post Glencore’s cancellation of the Wandoan Project in September 2013;
- Lend Lease’s decision in Feb’2014 to withdraw from the AP-X project (a joint proposal with Aurizon);
- In March 2014 Anglo American notified its intention to withdraw from the AP-X coal terminal development project at Abbot Point; and
- In June 2014 Brookfield and Adani’s 180Mtpa Dudgeon Point proposals lapsed.
Despite these cancellations, the Australian coal export sector continues to suffer from excess capacity. The Adani Abbot Point “T1” coal facility of 50Mtpa capacity is operating at less than 50% utilisation.
The WICET stage I of 27Mtpa capacity has further delayed its commissioning till second quarter 2015, a year behind schedule due to weak demand. Industry reports forecast utilisation rates of only 40-60% as a number of the proposed coal mine projects are still yet to reach financial close, one year out from port commissioning.
Vale SA in May 2014 announced the closure its Integra operations at Glennies Creek and Camberwell in Singleton, NSW alone removes 4.5Mtpa of port capacity.[v] And this week BHP cut 163 jobs from its Mt Arthur coal mine in the Hunter Valley.[vi] Neither these moves, nor the risk of further mine closures, are referenced in the Commission report.
If the full capacity of the existing Newcastle coal facilities and the proposed T4 expansion was used, it would see 130Mtpa of additional export capacity. This would boost total global seaborne coal supply by 10% – a addition that would further undermine global coal prices, reduce mining profitability and further erode government royalties.
“Clearly the world’s seaborne coal markets have entered a prolonged period oversupply. The key debate now is if this is going to be a prolonged cyclical downturn or in fact is the commencement of a structural decline in the seaborne traded coal market along the lines of the IEA’s 450 scenario,” says Mr Buckley.
Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research. IEEFA’s latest thermal coal outlook report is available here.
[ii] Page 9 of the Major Project Assessment: Port Waratah Coal Services Terminal 4 Project”, June 2014.