Australia Lures $21 Billion Bet on Coal Rebound: Energy Markets

Coal’s worst slump in seven years has failed to deter GVK Group and Adani Enterprises Ltd. (ADE) from pressing ahead with a $21 billion bet on Australia’s Galilee Basin as other companies shelve projects amid rising costs.

GVK, controlled by India’s GV Krishna Reddy, plans to have financing as early as this year for its Alpha mine in Queensland’s Galilee region and is scheduled to begin exports by 2017. Coal at the Australian port of Newcastle, the Asian benchmark price, has slid 4.4 percent in 2013 to $86.65 a metric ton on May 17, extending a 19 percent slump last year, the most since 2005, according to IHS McCloskey data.

While Glencore Xstrata Plc is among miners canceling projects and cutting workers to cope with escalating production costs and slumping prices, GVK and Adani are preparing to meet Asian demand that’s forecast to increase 24 percent by 2018. About 15 percent of Australian coal is extracted at a loss below $90 a ton, according to CIMB Group Holdings Bhd. (CIMB)

“GVK and Adani have reached a point of no return,” said Debasish Mishra, a partner and head of the energy practice at Deloitte Touche Tohmatsu India Pvt in Mumbai. “It’s very difficult for them to exit.”

Adani, India’s biggest power-station coal importer, and GVK are the most advanced in a group of companies planning to spend more than A$33 billion ($32 billion) to export the fuel from the Galilee region.

Biggest Producer

Covering more than 247,000 square kilometers (154,000 miles) and containing an estimated 14 billion tons of the bulk commodity, Galilee may become the largest producing area in Queensland, according to Aurizon Holdings Ltd. (AZJ), Australia’s largest transporter of coal by rail. Five proposed mines may bring combined capacity of 200 million tons a year, it said on its website. Companies in Queensland produced 237 million tons of thermal and steelmaking coal in 2011, government data shows.

Adani is scheduled to start construction this year on the Carmichael mine as part of its A$6.8 billion project, with first output set for 2016, according to a Dec. 13 statement on the Gujarat, India-based company’s website. Harsh Mishra, chief executive officer of its Australian unit, declined to be interviewed for this story.

GVK’s $11 billion plan includes construction of a 495 kilometer rail line to transport the fuel to the Abbot Point harbor, where it intends to build an export facility to load as much as 60 million tons a year. GVK and Aurizon signed a non-binding agreement in March to develop the rail and port jointly.

Asian Demand

The Indian company’s Kevin’s Corner mine may start production about six months after Alpha, according to Mulder. Kevin’s Corner is valued at A$4.2 billion by Australia’s Bureau of Resources and Energy Economics in Canberra. The two projects will have combined output of about 62 million tons a year, according to a presentation on the GVK website.

Australian billionaire Gina Rinehart’s Hancock Prospecting Pty. owns a 21 percent stake in Alpha, the presentation on the GVK website shows. Waratah Coal, controlled by mining entrepreneur Clive Palmer, is also proposing an A$8.8 billion mine, while Bandanna Energy Ltd. (BND) is planning a Galilee project valued at A$4.2 billion by the bureau.

“To keep the lights on, coal is still going to need to be produced,” said Paul Mulder, the managing director of infrastructure and coal at GVK Hancock, the company’s Australian unit. “In China, India, Korea and Japan, thermal coal forms a massive foundation of energy,” he said in an interview from Brisbane, the capital of Queensland.

Emerging Economies

Asian coal imports are forecast to increase to 824 million tons by 2018, up from 665 million tons in 2012, the Australian bureau said in a March report. Shipments to China are projected to rise 22 percent, while exports to India are predicted to increase 83 percent to 185 million tons, it said.

The lower cost and reliability of coal-fired electricity generation makes the fuel appealing to emerging economies expecting rapid increases in energy demand, the bureau said. India, which generates 57 percent of its electricity from coal, plans to add 118 gigawatts of capacity in the five years ending March 2017, according to I.A. Khan, an energy adviser at India’s planning commission.

Coal from Adani’s 60 million ton-a-year Carmichael mine will be exported to India for use in the company’s power plants, it said in a December statement. The Indian group was awarded a long-term lease to operate Abbot Point in 2011.

Adani Commitment

“The Adani Group stands committed to setting up world-class infrastructure facilities such as a mine, railway and port in Australia,” Gautam Adani, chairman of the company, said in the Dec. 2 statement. India is the world’s third-biggest importer of the fuel used in power stations behind China and Japan.

Newcastle coal, the Asian benchmark, may average $100 in 2015 and $99.50 a ton in 2016, according to estimates compiled by Bloomberg from banks including Credit Suisse Group AG, Societe Generale SA and Standard Chartered Plc.

Coal has traded below $90 for 10 weeks, according to data from IHS McCloskey, a Petersfield, England-based provider. Prices averaged $94.29 last year after slipping to a three-year low of $78.05 on Oct. 19.

The slide is driving some producers in Australia to pull back. The industry is “struggling to remain globally competitive,” Darren Yeates, acting managing director of Coal & Allied, a unit of Rio Tinto Group, said in a statement on April 22.

Miners Cut

GVK rebounded from a 2.8 percent decline yesterday and rose 1.2 percent to 8.70 rupees at 1:32 p.m. in Mumbai today, paring this year’s loss to 35.8 percent. Adani Enterprises advanced 1 percent to 221.15 rupees after falling 5.9 percent yesterday. The stock has declined 18.5 percent this year, compared with a 1.5 percent gain in the benchmark S&P BSE Sensex.

Glencore Xstrata, the world’s biggest shipper of the fuel, halted work on the Balaclava Island export terminal this month in Queensland, citing poor market conditions, overcapacity and concerns about the medium-term outlook. The Baar, Switzerland-based company also shut its Brisbane office in March after flagging in September that it would cut about 600 jobs.

Peabody Energy Corp. (BTU), the largest U.S. coal company, has taken control of most of its Australian sites from contractors to limit losses, the St. Louis-based company said in a statement announcing its first-quarter earnings last month. Early-stage projects continue to be deferred, with timing dependent on market conditions, the company said.

Even Abbot Point, where GVK and Adani plan to export their coal, hasn’t escaped cutbacks. The Queensland government reduced the scope of a planned A$9 billion expansion in May last year, citing costs and an increase in capacity that would exceed demand. Rio Tinto ended talks to take part in the enlargement in April 2012, citing a weaker global economy.

‘Increasingly Remote’

Development of the Galilee Basin looks increasingly remote, Macquarie Group Ltd., Australia’s biggest investment bank, said in a May 1 research note. Prospects for project paybacks look extremely poor, the bank said. Further delays are likely unless “deep pocket” backers are able to ignore conventional economics, Sydney-based Macquarie said.

Retrenching coal developers are taking a short-term view of a mature industry with bright long-term prospects, said GVK Hancock’s Mulder, adding that the company will be able to deliver coal at a cost of about $55 a ton.

“If you look at what China’s done in the last two years, going from 2010 to 2012, they’ve become a net importer of coal of some 250 million tons per year,” he said. “Korea is lifting and Japan is starting to expand its baseload also. There’s going to be cyclical up and downs.”

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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