Demise of coal may breathe life into ex­ist­ing pits

The National - News - Business - - Analysis -

Here’s a ques­tion for the anti-coal lobby. If coal is dy­ing, how come there is an in­creas­ingly heated bid­ding war go­ing on for Rio Tinto’s coal mines in Australia?

Here’s another ques­tion, this time for the pro-coal lobby. If coal still has a vi­able long-term fu­ture as an en­ergy source, how come the world’s big­gest planned new mine is now hostage to whether the Aus­tralian gov­ern­ment de­cides to lend it money?

Rec­on­cil­ing these two ques­tions may seem like a chal­lenge, but both the bat­tle for Rio Tinto’s ex­ist­ing mines and the strug­gles of In­dia’s Adani to build its Carmichael pro­ject neatly show where coal cur­rently finds it­self.

Rio’s mines in the Hunter Val­ley north of Syd­ney are at­trac­tive to Glen­core and China’s Yan­coal be­cause they are likely to be prof­itable for the re­main­ing life of the pits – ex­pected to be about 20 years.

The Rio mines al­ready have all the in­fra­struc­ture, be­ing con­nected by rail to New­cas­tle, the world’s largest coal ex­port port.

They also have ex­ist­ing cus­tomers for the high-qual­ity ther­mal coal used to gen­er­ate elec­tric­ity, in­clud­ing util­i­ties in Ja­pan, which have pre­ferred long-term sup­ply agree­ments over the more volatile spot ship­ments that are more char­ac­ter­is­tic of deals to sell to ma­jor im­porters China and In­dia.

In some ways the Rio mines up for sale are in­su­lated from the down­turn in coal de­mand ex­pected over the next 30 years, be­cause they sup­ply fuel to cus­tomers who are likely to be the last to switch off coal-fired gen­er­a­tors, as­sum­ing re­new­ables kill de­mand for the pol­lut­ing fuel.

Ac­quir­ing an ex­ist­ing as­set is likely far more at­trac­tive to a com­pany such as Glen­core than de­vel­op­ing new mines, with the as­so­ci­ated cap­i­tal costs and in­evitable op­po­si­tion from green groups.

Glen­core raised its of­fer for Rio’s Hunter Val­ley mines to US$2.68 bil­lion in cash on June 23, making its bid about $225 mil­lion more than Yan­coal’s pro­posal.

Rio said it would study the re­vised Glen­core of­fer, hav­ing pre­vi­ously ac­cepted the lower Yan­coal bid on the grounds that it could be com­pleted more quickly as it had reg­u­la­tory ap­provals.

It may seem in­con­gru­ous to en­vi­ron­men­tal­ists that there is a bid­ding war for some­thing that has been de­clared a dy­ing in­dus­try but there is a medium-term fu­ture for coal, and Glen­core and Yan­coal are try­ing to profit from that.

The In­ter­na­tional En­ergy Agency said in its coal mar­ket re­port in De­cem­ber that it still ex­pects growth in coal de­mand up to 2021, al­beit at a slower rate.

The rise in coal de­mand is likely to be driven by In­dia and South-east Asia, ac­cord­ing to the IEA.

The IEA ex­pects global de­mand to be 5.64 bil­lion tonnes of coal equiv­a­lent in 2021, up from 5.4 bil­lion in 2015 – equat­ing to an av­er­age an­nual growth rate of 0.6 per cent, down from 2.5 per cent over the decade to 2015.

Like all fore­casts, the IEA’s es­ti­mates can be un­done by chang­ing cir­cum­stances and it does ap­pear to be the case that re­new­able en­ergy sources such as so­lar and wind are making faster than ex­pected in­roads, es­pe­cially in In­dia.

It is this un­cer­tainty that makes it hard for Adani to get its 25 mil­lion tonne-a-year Carmichael mine in Queens­land state to a stage where it can start con­struc­tion.

While the In­dian con­glom­er­ate has taken what it termed a fi­nal in­vest­ment de­ci­sion on the $4bn mine, it’s also likely that it won’t go ahead un­less sup­port from Australia’s fed­eral gov­ern­ment is forth­com­ing.

Specif­i­cally Adani wants close to $1bn in loans from the gov­ern­ment to build about 400 kilo­me­tres of rail track to link the mine to the planned ex­port port.

Adani has al­ready se­cured an undis­closed agree­ment with the Queens­land gov­ern­ment that is be­lieved to lower roy­alty pay­ments.

Even if the fed­eral gov­ern­ment does lend the money, the Adani mine looks to be on shaky ground, given that its in­tended ex­port mar­ket of In­dia has a gov­ern­ment with a stated pol­icy goal of cut­ting coal im­ports to zero.

While Aus­tralian gov­ern­ments have as­sisted with in­fra­struc­ture pro­jects, the Adani mine was sup­posed to be proof that the pri­vate sec­tor could pull off a big pro­ject with only sup­port­ive gov­ern­ment reg­u­la­tion and not cash.

There is still a good chance that the fed­eral gov­ern­ment will pony up the cash for Adani, given the rul­ing Lib­eral/Na­tional coali­tion has sev­eral pro-coal politi­cians and would like the credit from the jobs the mine would bring.

But Carmichael may also be the last of its kind, given how pro­longed and dif­fi­cult its birth has been, with a well-funded en­vi­ron­men­tal campaign against it and ques­tions about its vi­a­bil­ity.

It’s hard to see any com­mer­cial bank be­ing will­ing to fund a costly coal pro­ject in the fu­ture, given the un­cer­tainty over long-term de­mand and the likely neg­a­tive pub­lic­ity.

But oddly, the tra­vails of get­ting a new coal pro­ject off the ground prob­a­bly makes the jostling over ex­ist­ing mines more likely, as com­pa­nies seek to ex­tract the last dol­lars avail­able from coal’s twi­light.

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