Fall­ing Coal Prices may Hit Adani, GVK’s Aus­tralian Projects

Coal de­mand also hit as US opts for shale gas and China moves to­wards re­new­able en­ergy

The Economic Times - - Companies - SHUCHI SRI­VAS­TAVA

Multi-bil­lion dol­lar in­vest­ment by Adani Power and GVK Power in Aus­tralian mines could hit a dead end and may force the com­pa­nies to con­sider dis­tress sales as global coal prices and de­mand have fallen, an­a­lysts said al­though the com­pa­nies say their projects can with­stand tur­bu­lence. Coal is be­ing re­placed by shale gas in the US and is likely to lose out to re­new­able en­ergy in China. In In­dia, the Naren­dra Modi govern­ment is keen to ac­cel­er­ate min­ing to un­lock indige­nous coal re­serves of 200 bil­lion met­ric tonnes. An­other damp­ener for de­mand out­look is the pos­si­bil­ity that Ja­pan may con­sider restart­ing nu­clear re­ac­tors that were shut down af­ter the ac­ci­dent at its nu­clear plant. All this has sig­nif­i­cantly changed the logic of de­vel­op­ing mines abroad, in­dus­try ex­perts said. “These mine ac­qui­si­tions were made when coal prices were high there has been a sec­u­lar de­cline in in­ter­na­tional coal prices since then. The prices will re­main un­der pres­sure due to ramp up in shale gas pro­duc­tion in US, Ja­pan re-start­ing its nu­clear plants and ma­jor im­porters like China and In­dia fo­cus­ing on im­prov­ing do­mes­tic pro­duc­tion,” said De­ba­sish Mishra, se­nior di­rec­tor, Deloitte Touche Tohmatsu In­dia. “At the pre­vail­ing coal prices, these projects will find it dif­fi­cult to achieve fi­nan­cial clo­sure, where nearly $5 to $8 bil­lion of debt will be needed in each one. Some pro­mot­ers may de­cide to exit these in­vest­ments even book­ing losses,” he added. These projects lack crit­i­cal en­vi­ron­men­tal ap­provals. Last week, Deutsche Bank said it will not fund Adani’s coal project in Aus­tralia be­cause there was no con­sen­sus be­tween the Aus­tralian govern­ment and UNESCO over the en­vi­ron­men­tal im­pact. The projects in ques­tion are the Adani group’s coal and rail project in the un­tapped Galilee Basin in the Aus­tralian state of Queens­land, which it ac­quired from Linc En­ergy in 2010 for close to $3 bil­lion. The GVK group which is in a joint ven­ture with iron ore bil­lion­aire Gina Rine­hart’s Han­cock Prospect­ing is also ac­tive in this area and wants to ship out mil­lions of tonnes of ther­mal coal from a planned new com­plex of mines in the Galilee Basin. GVK had ac­quired Han­cock Coal for $1.26 bil­lion in 2011 in a deal which of­fered the Hy­der­abad-based en­ergy ma­jor up to 20 mil­lion tonnes of coal ev­ery year. A GVK spokesper­son said: “The min­ing tech­niques avail­able to us as a re­sult of the large, shal­low and very flat de­lin­eation of our coal as­sets deliver a free-on-board price that en­sures our mine is com­par­a­tively im­mune to the vo­latil­ity of cycli­cal coal prices.”

“But, even in the cur­rent mar­ket con­di­tions, our Galilee Basin coal as­sets are dif­fer­en­ti­ated from other mines due to their pro­jected low pro­duc­tion costs, sought-af­ter coal qual­ity, we are con­tin­u­ing to take our projects to a point where con­struc­tion can com­mence and we wouldn’t be do­ing that if we thought the projects weren’t vi­able,” the spokesper­son added. Tim Buck­ley Di­rec­tor of En­ergy Fi­nance Stud­ies, Aus­trala­sia, In­sti­tute for En­ergy Eco­nom­ics and Fi­nan­cial Anal­y­sis dis­agrees. “It will be hard for Adani and GVK to go to their share­hold­ers to ask for a mas­sive in­jec­tion of additional eq­uity cap­i­tal to fund these high risk green­field de­vel­op­ments as these projects are un­com­mer­cial given the al­ready over­sup­plied na­ture of the seaborne ther­mal coal mar­ket.”

De­mand may take a fur­ther hit if Ja­pan restarts nu­clear re­ac­tors that were shut down af­ter the ac­ci­dent at its nu­clear plant

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