Antinuclear

Australian news, and some related international items

Adani coal megamine is not viable: why do they persist with it?

The Numbers Don’t Stack Up: W&J’s Rights on the Chopping Block for Adani’s ‘Non Viable’ Project, New Matilda,  By John Quiggin on Adani Changes its Plans

In the context of shifting policy settings and coal markets, Adani has changed its plans. The original Adani proposal involved production of 60 million tonnes of coal from W&J Country in the Galilee Basin, and with an expected life of 90 years.

This was at first downgraded to 40 million tonnes of coal by 2022, with an expected life of 60 years, and then further reduced to 25 million tonnes of coal.

This revised so-called ‘Stage 1’ project would defer expansion of the Abbot Point terminal, alongside establishment of an initial, smaller mine.

Given the very unlikely possibility that coal will actually be in demand for electricity generation beyond 2050, the difference in duration is immaterial. However, these reductions in scale do have important implications for the viability of the rail line.

Capital investment for the life of the original mine project was expected to total US $21.5 billion. This total figure continues to be regularly cited, despite the significant downsizing that has since occurred.

Adani has, to date, invested approximately US $3.5 billion in this project, of which approximately US $2.1 billion financed the purchase of the Abbot Point T1 coal terminal. The remainder was associated with the acquisition of the Carmichael mine site.

A large portion of Adani’s total investment is what economists like to call ‘sunk’: that is, it is investment that would be written off if the Carmichael mine project failed to proceed. The only terms in which Adani could recoup these funds was if it could find a buyer for its assets. Adani’s unwillingness to write off such a large investment is likely one reason it has persisted with the project.

But the Numbers Don’t Stack Up

With its new scaled down project proposal, alongside global coal price fluctuations and the very real market access challenges in India, and elsewhere, just how do Adani’s numbers stack up?

Let’s start with estimates on the sale price for Carmichael coal.

As of October 2017, the price of Australian thermal coal was approximately $US97/tonne. Futures markets predict a decline in this price over coming years. Reflecting this trend, the futures price for delivery in February 2020, a possible start date for shipments from the project, is $US81/tonne.

However, Tim Buckley of IEEFA has estimated that the lower quality of the Carmichael mine’s coal output will result in a 30 per cent discount in revenue per tonne.

On this basis, the price of coal from the Carmichael mine – assuming exports begin in 2020 – will deliver just $A74 tonne.

But what will it cost to produce?

In its original analysis, Adani – based on advice from McCullough Robertson in January 2015 – estimated costs of US $38.70/tonne, although other analyses suggest the cost may be higher. Significantly, this figure does not include the costs of rail transport and ship loading. And of course, such figures fail to capture the environmental costs of Adani’s proposed mega mine nor do they measure the irreplaceable loss of Country for Traditional Owners if this mine were to proceed.

Putting these ‘externalities’ aside, this suggests a cost of A $50/tonne in 2015, or $A55, updating for inflation at an annual rate of 2 per cent.

Based on these figures, the price for Carmichael coal – net of all operational costs – would be approximately $10/tonne. If royalties were paid at the standard rate, the net return would be just $3/tonne. That’s a very small return for the destruction of Country and walk over of Traditional Owners rights………..

 

If It’s Not Viable, Why Would the Project Proceed?

The analysis above shows that, even under highly favourable assumptions, the Adani Carmichael project will be unable to generate sufficient returns to cover interest at commercial rates, or to repay capital to lenders and investors.

This analysis therefore raises the question; why does Adani Enterprises choose to proceed with such a project?

Three possible answers present themselves.

The first is that Adani does not in fact intend to proceed with the project in the near future. Rather, the project is being kept alive with relatively modest expenditure to avoid writing off the large amounts already invested, and to maintain an option in the hope that ‘something will turn up’, such as an unexpected and sustained increase in the price Adani can realize for coal.

A second hypothesis is that the complexity of the Adani corporate structure is such that Adani could construct the proposed rail line almost entirely with public funds provided on concessional terms, then hope that other coal mines in the Basin would render it profitable.

The apparent transfer of ownership of the rail project to an Adani-controlled company in the Cayman Islands supports this idea.

A third possibility, is that by making continuous new demands on governments for concessions of various kinds, Adani will eventually be able to blame government policy for the project’s failure, and on this basis extract compensation. If this is the strategy, it has so far been foiled by the abject compliance of governments at all levels.

The Adani mine-rail-port project is not commercially viable, even under the most optimistic assumptions. That Adani has failed to achieve final close reflects the dubious economics on which this project is based

While much remains obscure, it is clear that any public funds advanced to the project – a project that does not have the consent of the Traditional Owners – will be at high risk of loss.

There is no future for exploitative developmentalism. The economy of the future will depend on sustainable management of resources, a task in which Indigenous communities must play a central role.

This follows the general (though not universal) recognition of the principle, following the Mabo decision, that Indigenous people have the right to play a role in determining the appropriate use of their land.

But this is not simply a nice ideal that will come about through sensible public policy development. This is a brutal contest for land and resources that started with colonisation.

W&J claimants fighting the State Government, Adani and their backers, are at the leading edge of this contest and the latest in the long historical land grab in Australia. https://newmatilda.com/2017/12/24/the-numbers-dont-stack-up-wjs-rights-on-the-chopping-block-for-adanis-non-viable-project/

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December 29, 2017 - Posted by | climate change - global warming, Queensland

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