MAC: Mines and Communities

Australia: Gambling taxpayer's money on coal

Published by MAC on 2014-11-17
Source: Business Spectator (2014-11-17)

As reported earlier on MAC, Australia's biggest proposed new coal mine, and some other mines in Queensland, are largely dependent on expansion of Abbot Point - the country's premier export port - in order to break even.

Not to mention huge gobbetts of additonal infrastructre, in the shape of rail, airports, and supplies of water and electricity. See: Australia's biggest-ever mine is close to fruition

Just who's going to foot the bill for all this?

Why - Private Public Partnerships of course!

The Queensland premier has just announced he'll fork "hundreds of millions of dollars" out of the state budget, then "exit those investments so the private sector can get on with it".

But, as Tristan Edis of Australia's Business Spectator sagely comments, this statement suggests that the state government would actually take an equity stake in the infrastructure projects, and "therefore ... bear full exposure to any losses if it turned out that these infrastructure investments were financially unviable".

So much, then, for a clean exit.

All at sea in Galilee?

With a current massive over-supply of sea-borne coal, and toppling market prices, it's quite possible that private investors will steer well clear of the scheme - unless the state government bears the brunt of initial capital costs.

Already one financial pundit has called the Galilee coal projects "totally, commercially unviable", and predicted that "[a]ny project undertaken is highly likely to end up as a stranded fossil fuel asset.”

No wonder then, that Australia's prime minister, Tony Abbott disgracefully defended coal mining expansion, when he hosted last week's G20 summit.

As Edis says, he "didn't want [it] to be putting a focus on phasing out fossil fuel subsidies".

Newman gambles taxpayers' money on coal

Tristan Edis

Business Spectator

17 November 2014

While precise details remain scarce, The Australian newspaper reports today that Queensland Premier Campbell Newman is prepared to chip in “hundreds of millions of dollars” for financing rail, port, airport, water and electricity infrastructure for the mega-coal mine the Indian company, Adani is trying to develop in the Galilee Basin.  

The Australian states that any investment by the Queensland Government in such infrastructure would be conditional on the infrastructure being open to access from other coal miners. This would include Clive Palmer’s company, as well as GVK who have a joint venture with Gina Rinehart’s Hancock Prospecting.

The government is yet to release anything official outlining the terms and precise amount of the funding, but Premier Campbell Newman stated:

"The State Government is prepared to take a short-term, financial stake in the rail, port or other infrastructure needed to open up this region.

"Then within a few years time, exit those investments so the private sector can then get on with it.

"We are now prepared to sign agreements with Galilee Basin proponents who can demonstrate they will meet the majority of the cost of providing this common-user infrastructure."

This statement seems to suggest the Queensland Government would take an equity stake in such projects, and therefore would bear full exposure to any losses if it turned out that these infrastructure investments were financially unviable.

At present, the seaborne thermal coal market is suffering from significant oversupply and prices have almost halved in the last few years. A range of Australian coal producers have also been announcing mine closures due to challenging market conditions.

This has led some analysts to seriously question whether the Galilee Basin projects have any prospect of being financially viable over the next few years.

Tim Buckley, former head of Australiasian Equity Research at Citi, now a director at the Institute for Energy Economics and Financial Analysis, commented in relation to this taxpayer support: “The Galilee coal projects are totally, commercially unviable. Any project undertaken is highly likely to end up as a stranded fossil fuel asset.”

He explained to Climate Spectator that the Adani project is so large, at 60 million tonnes, that it would represent an addition of supply equal to nearly 10% of the entire seaborne thermal coal market. Given an already significantly oversupplied market, this could be expected to crash prices below already depressed levels of about $65 per tonne out of Newcastle port.  At the same time, Buckley noted, because the project requires so much new and very expensive infrastructure, it has to built at such a large scale to obtain sales volumes that are capable of offsetting the large upfront investments in this new infrastructure.

However Daniel Morgan, global commodities analyst at investment bank UBS, observed on November 12 the project would need a price of about $100-$110 per tonne to provide an adequate return to financiers. Morgan told Reuters: "On a standalone basis, the economics just don't stack up – I'm talking about costs and return on capital. You'd need a price of about $100-$110 a tonne for it to stack up".

Given this, you can see perhaps why Prime Minister Tony 'stand-up for coal' Abbott didn't want the G20 to be putting a focus on phasing out fossil fuel subsidies.

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