fossil fools

Coal's Dirty Secret

Waning demand means plans to build one of the world's biggest mines will prove ephemeral.

The world's biggest coal exporter has a problem.

Demand for the dirtiest fuel is on the wane. The International Energy Agency -- which has tended to overestimate coal production, and underestimate renewables -- doesn't expect consumption to regain its 2014 levels until 2021. Investment in new mines is "drying up," according to its latest market forecast.

On the Plateau

Australia is the world's biggest coal exporter -- but volumes are going sideways, based on trailing 12-month figures

Source: Bank Indonesia, Australian Bureau of Statistics, Gadfly calculations

That's reflected in Australia's export figures. Since overtaking Indonesia as the biggest shipper in 2015, loadings at its coal ports have gone sideways. Even last year's price spike, which drove the cost of energy coal up 87 percent and caused the steelmaking variety to almost triple, wasn't enough to stop Rio Tinto Group selling off its last mines in the country.

Those seeking a revival in Australia's coal industry -- as well as those hoping for its end -- have pinned their expectations on a former cattle ranch in an isolated spot of the country's northeast. Indian billionaire Gautam Adani has proposed to build one of the world's biggest coal mines at the Carmichael site. Originally seen as a $16.5 billion project producing 60 million tons a year, a scaled-down first stage of the site is now planned, costing $4 billion and producing 25 million tons a year, Adani Australia CEO Jeyakumar Janakaraj​ said in an October 2016 interview with the Australian Financial Review. 1

Digging Deep

Even a scaled-down version of Adani's Carmichael mine would be one of the world's biggest coal pits

Source: Company websites and reports

Note: mtpa = million metric tons per annum. The list isn't intended to be comprehensive.

One of the strangest things about this project is something that partisans on either side of the debate are often unwilling to admit: Despite Adani's promise to start mining by 2020, Carmichael stands very little chance of ever being built.

A comparison with one of Australia's biggest coal operations shows why. BHP Billiton Ltd.'s Mt Arthur and its associated pits typically deliver a Carmichael-sized 20 million metric tons a year from the Hunter Valley north of Sydney to Newcastle, the world's biggest coal export harbor. Its coal is a better product, with a heating value of 6,450 kilocalories per kilogram and 17 percent ash content compared to the 4,950 kcal/kg and 26 percent ash 2 that the Institute for Energy Economics & Financial Analysis, a think-tank that's opposed the project, calculates for Carmichael.

Money Pit

Underlying Ebit at BHP's Hunter Valley mines has shrunk as coal prices have fallen

Source: Company reports, Gadfly calculations

Despite that, Mt Arthur is struggling. In BHP's 2016 fiscal year ended last June, the unit lost $22 million in underlying Ebit. Chief Executive Officer Andrew Mackenzie was quoted by Australian Mining magazine last March saying that it's "touch and go" whether operations might have to be suspended.

With Newcastle coal surging to its highest level in four-and-a-half years in November, Ebit did rebound to hit a three-year high of $110 million in the half year through December. But a $4 billion mine borrowing money at the 5.8 percent that Adani gets on its Australian dollar bonds would need that sort of result in every single half year just to pay its interest bill -- and that's before you factor in a $2.5 billion rail line. A $16.5 billion project would require about $950 million of Ebit a year.

That -- rather than the fear of blowback from environmentalists -- is the best explanation for why Australia's big four banks haven't exactly been queuing up to lend to Carmichael. After all, there are other projects out there for any credit committees interested in rolling the dice on coal's long-term prospects. At Newcastle, an extra berth would cost A$4.8 billion ($3.7 billion) and allow an extra 70 million tons a year to be exported, as opposed to the 25 million tons offered by Carmichael's first stage.

Rate of Change

The interest rate on Adani's main existing Australian-dollar bond suggests financing Carmichael would be costly

Source: Bloomberg

Why, then, the widespread pretense that this mine is on the brink of being built -- especially in the face of the oft-stated intent of India's energy minister, Piyush Goyal, to stop imports, and the far cheaper price of coal in that country's domestic market?

For Gautam Adani, formally canceling Carmichael would probably involve a brutal writedown of a major asset. The capitalized exploration value of Carmichael was A$969 million on the balance sheet of Adani Mining Pty. at the end of March 2016, equivalent to about a third of the equity at its ultimate parent Adani Enterprises Ltd. If the mine can't get finance, that number risks dropping to zero.

For anti-coal campaigners, the fight to stop one of the world's biggest coal mines with a port on the Great Barrier Reef represents a potent fundraising opportunity. And for federal and state governments in Canberra and Brisbane, it's about demonstrating the country is open for business and showing support for a cherished local industry. 

That history explains the government's enthusiasm to lend public money to the planned railway project if commercial finance isn't available -- it slender remaining hope of getting funding. Such a decision would be a mistake. As Gadfly wrote last week in relation to the hangover from the country's liquefied natural gas boom, Australia's desire to develop marginal resource assets at all costs has often been self-defeating.

The problem the coal industry faces in the medium term isn't a shortage of supply that could be solved by building Carmichael, but a lack of demand that will be exacerbated by the same action. 

Not So Cheap

Indian domestic coal prices are well below those in the Pacific market

Source: Bloomberg, Gadfly calculations

Note: Coal India price calculated as revenue divided by tonnage output. Products are of variable coal quality.

Using taxpayer money to develop uneconomic projects will "materially increase the risk to existing coal operations," Glencore Plc's coal chief Peter Freyberg warned in 2015, in a thinly veiled swipe. If Canberra tries to push more tonnage into coal's glut, it will ultimately damage the industry it aims to help.

Government funds would be better spent addressing some of the looming problems with Australia's domestic energy supply. We'll address that issue next Monday.

Second of three columns on Australia's energy policy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. An Adani spokesman, Ron Watson, said that no such scaled-down plans existed and that he didn't know the source of the figures attributed to Adani Australia's CEO in the article. He didn't address why Adani hadn't asked to correct those comments since the article was published. Matthew Stevens, the author of the AFR article, said by email that no correction had been requested. Watson said the company was confident the economics of the project would stack up. The end-user would be Adani's power stations rather than third-party consumers and so the project couldn't be compared to Mt Arthur, he said.

  2. The best-quality coal is high in energy and low in ash, which can't be burned and produces particulate pollution.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Paul Sillitoe at

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