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Coal’s Dirty Secret
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.
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.
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 that the Institute for Energy Economics & Financial Analysis, a think-tank that’s opposed the project, calculates for Carmichael.
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.
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.
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.
- 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.
- The best-quality coal is high in energy and low in ash, which can’t be burned and produces particulate pollution.
9 Comments on "Coal’s Dirty Secret"
rockman on Mon, 3rd Apr 2017 9:59 pm
King Coal is DEAD! Blah, blah, blah. LOL. Same old pitch trying to ignored the reality. Such as the world is currently consuming more coal then at any time prior to 2014. That until 2004 coal consumption increased at a modest clip after which the rate of increase more then doubled. And not because coal consumption has “crashed” to a level that’s still higher then it been for 99% of the last century the end of the Coal Age is just around the corner.
Yes: some companies, regions and entire countries has seen a slide in coal. But the industry is still stronger then it was throughout the entire 20th century.
Pretending that coal which won’t continue to be a major of GLOBAL energy for many gears is simply delusional.
banjo on Tue, 4th Apr 2017 4:06 am
rockman yes you are 100% spot on. check out this link http://www.tsp-data-portal.org/Breakdown-of-Electricity-Generation-by-Energy-Source#tspQvChart
Coal that is supposedly dead, surprisingly! generates 39% of global electricity. Solar, tide, geothermal make up about 0.5% Thats right a full half percent.
So spare me the coal is dead story.
rockman on Tue, 4th Apr 2017 9:21 am
banjo – Not only is coal not dead but the trend from switching to NG from coal might reverse itself some decades down the road. NG and LNG have had a big price advantage in recent years. But eventually those prices will increase. When and how much for how long? Time will tell. But global industries thrive on electricity. And economies will move to what source is the most affordable. The Rockman probably won’t be around to see if but if alt energy doesn’t start ramping up significantly very soon we may see a reversal with coal providing a growing percentage of electricity production.
Cloggie on Wed, 5th Apr 2017 5:56 am
Coal has a big future… in China and America.
From banjo’s link, share coal in % (2014):
China 72%
USA 50%
Europe 25%
Russia 14%
Europe is the only entity with the explicit goal of getting rid of coal and the rest of the dregs.
The Rockman probably won’t be around to see if but if alt energy doesn’t start ramping up significantly very soon we may see a reversal with coal providing a growing percentage of electricity production.
Alt-energy won’t play any role in the US as long as Trump will pursue his MAGA vision. Not that the Dems would be that much different, they would continue to be focused on their NWO project.
This will cause America a delay of up to 8 years, provided Trump survives that long. Nevertheless, I am still pro-Trump for geopolitical reasons (America NOT seeking war with Russia as well as advancing the interests of the Euro’s in North-America, gradually eating away the power of the Soros-NWO bunch). That Europe will get a leading edge in all things alt-energy is an additional nice-to-have (for Europe).
Davy on Wed, 5th Apr 2017 6:45 am
Emotional attachment and personal agenda:
“Alt-energy won’t play any role in the US as long as Trump will pursue his MAGA vision. Not that the Dems would be that much different, they would continue to be focused on their NWO project.”
Cloggie, The POTUS has never had a significant impact on energy policy.
Cloggie on Wed, 5th Apr 2017 6:56 am
Emotional attachment and personal agenda
???
Cloggie, The POTUS has never had a significant impact on energy policy.
That is de facto true, but should not have been this way. At least Jimmy Carter gave it a try. White House during his presidency:
http://solartribune.com/wp-content/uploads/2017/02/obama-solar-panels-on-white-house.jpg
(Populist Reagan removed them again).
http://alternativeenergy.procon.org/view.source.php?sourceID=008537
Davy on Wed, 5th Apr 2017 6:56 am
Europe is sucking hopium on alternatives. What Europe is going to succeed at is putting itself into a situation of economic decline by systematically pushing the envelope of their energy systems and the economic demands of their region. They will be doing this within a time of economic decline. There is a point where alternatives because of all the drawbacks will actually cause Europe to shrink economically more than would otherwise be the case. They are paradoxically exposing themselves to more risk not less. This decline along with the current global economic decline of which Europe is a part of will just make matters worse. Fake greens want cake and eat it. Affluence is not green and the pursuit of it represents failure. Europe is a fake green land.
It is not that Europe’s alternative energy policy is all bad. If they maintained a modest and realist approach to what can be done and a realistic timeline these polices would be very smart. They would be managing the fall with alternatives easing the landing to a lower economic paradigm post globalism. It is the unrealistic parts of this that will cause them to make investments that come back to bite them later. As they lower their productive potential other regions will maintain theirs better. They are trying to save what can’t be saved. Not that I like what we moderns have it is just there is no green decoupling only embracing a decline process with lifeboats and hospices. It is great what Europe will do but it will not result in what they think it will. Many investments will be stranded and wasted when better policy could be achieved.
Alternative energy is an extender of modernism. Modernism will not survive the end of fossil fuels. Fake greens want to believe the status quo can be continued and even enhance through alternatives. They even talk expansively about sustainable development and technological advancements at the same time a huge and expensive energy transition is attempted. They even say we can continue mass air travel with it. Musk is pointing to Mars as the future as another example. This is all absurd and the usual dismissal of reality. It points to poor wisdom and policy that will end in failure. These poor policies that are part of a failed social narrative of a techno manifest destiny fails to account for all the other predicaments and problems that are scaling up too quickly to ever get ahead of. Economically we are entering stagflation along with resource depletion. Broad based planetary decline is now everywhere. Climate is destabilizing. Water is becoming an issue….on and on.
Europe is a failure in the making as a Union and with a currency that is nearing its effective lifecycle due to this faltering union. Europe is overpopulated and living a lifestyle far beyond sustainability especially without the support of globalism. Globalism is clearly in decline and once minimum operating levels are breached failure will cascade through its brittle unsustainable economic and social arrangements. Europe is one of the few regions that is almost completely 1st world and it will fall the hardest. Once is begins to implode it will turn on itself as it has done since its beginning with wars and genocide. Europe saw a brief period of success that was only allowed through the post war period of fossil fuel growth. Europe will sink back into its swamp of war and savagery like the rest of the world once decline is in full swing.
Cloggie on Wed, 5th Apr 2017 7:05 am
Europe is sucking hopium on alternatives. What Europe is going to succeed at is putting itself into a situation of economic decline by systematically pushing the envelope of their energy systems and the economic demands of their region.
So what’s your problem with alternatives? You have a pretty nihilistic destructive agenda my friend. It is obvious that alt-energy would be good (as in “not bad”) for the environment, but you nevertheless attack them as futile “hopium”.
What you and other preppers are really hoping for is that everything comes crashing down on a global scale and that the planet gets rid of 6 billion useless eaters. I remember well your statement that we should “plan for a global population of 1 billion”.
Renewables are only in the way of that “plan”, so they need to be attacked, right?
What is this forum anyway, a forum where problems related to energy are discussed and solutions (if any) sought or a nihilistic death cult?
Davy on Wed, 5th Apr 2017 7:41 am
Clog, I love alternatives, I am employing them here on the farm. I applaud them and believe in them in relations to lifeboats and hospices. Europe is going to dig its hole deeper with them because is wants cake and eat it. If you do not acknowledge decline you will malinvest and that is where Europe is heading.
“You have a pretty nihilistic destructive agenda my friend”
It is called molding myself to what nature and our systematically destructive situation of our civilization is telling me. This is embracing honesty and humility not grandiose fantasy and personal enhancement. I submit to nature not man. Man has proven a failure and no amount of your personal history revisions changes that. Your Europe is primarily responsible for this destruction because of its centuries of cultural colonialism. America and the hypocritical Anglosphere is your evil offspring. This is not me talking for my own enhancement. I am just telling what I see and nature and life is telling me this. Call me a crackpot and ignore me I could give a shit. Many people here are absorbed in their personal agenda do this anyway. They are delusional and delusions are blind. Personally I would love for your world to succeed Clog but I also respect reality and the truth because they are essential to proper wisdom to save as many as possible and not only white Europeans who are all you care about.
“What you and other preppers are really hoping for is that everything comes crashing down on a global scale and that the planet gets rid of 6 billion useless eaters.”
More emotional deflection to attack my position and enhance yours. I am saying it “IS” coming down and now is the time to save as many as we can. I say this unlike you who are a racist and want the 6BIL “colored low IQ” to die so there is more “lebensraum” for white Europeans.
I like you cloggie but this board is overwhelmed by your footprint and I am here to make sure you stay within the envelope of possibility and reality. I am here to squash personal agendas of which you are firmly after. If I am extreme it is to fight extremist of which this board is replete. I am wrong sometimes because I am human. Yet, you will see I am mostly about criticism and attacks on those who do the same for their own agenda. I have a wonderful life I do not want to change but change it will and I have no choice in the matter. I am end up with nothing but I will still have my dignity and sanity until maybe nature takes even that.