Why Adani is banking on the unbankable

This article from Peter Martin Political editor of The Age (June 1 2017) raises a few very important points. Adani’s Carmichael mine is on such a scale that it stands to undermine the Australian coal industry. Adani is banking on the resale value the asset through rezoning and positioning to make a profit, even if there is a new mine owner, through ownership of the government subsidized railway to take coal to the Great Barrier Reef.

You would think Adani would have gone away by now.

The giant Indian conglomerate can’t get a loan for its proposed $22 billion Queensland coal mine from an Australian bank, it can’t seem to get one from an Indian bank, the mine would be so big it would depress the world coal price, and the Indian government plans to phase out coal imports altogether.

Mine games

You would think Adani would have given up on Australia’s biggest coal mine by now.

In documents released to Fairfax Media under freedom of information laws, the Queensland Treasury as good as described the project as “unbankable”.

What is being proposed is breathtaking: a series of coal mines 60 kilometres long. If scrunched together they would be 40 kilometres long and 10 kilometres wide – an area bigger than Paris, much bigger than Sydney Harbour.

It would be the biggest coal mine in Australia and the biggest export coal mine in the world. It and the neighbours in the Galilee Basin that would open up when the railway went through, would double our export capacity. It’s more than important enough for the Australian government to take a serious interest in.

From a purely nationalistic point of view it causes problems. So much would the extra coal push down the world price that it would increase the use of coal and make it harder for the world to meet the emission reduction targets that Australia has signed up to.

“There is no avoiding the simple mathematics of it,” says Jonathan van Rooyen, who has a powerful interest to argue against the mine as the infrastructure manager of the half-owner of the Port of Newcastle in NSW. “If Turnbull succeeds in pushing between 25 and 60 million tonnes of subsidised new coal into a flat world market, the volume of coal mined and exported from the Hunter and Illawarra will decline.”

That means less coal mined using the infrastructure we already have, less use of the ports we already have, and an estimated hit to royalties received by NSW of nearly $50 million year.

So what are our leaders doing? Queensland has just offered Adani a discount starter-rate royalty, which it says isn’t a subsidy, just a deferral.

Malcolm Turnbull is considering spending almost $1 billion of his $5 billion Northern Australia Infrastructure Fund on one project: a loan to a company controlled by the Adani family to enable it to build a 400 kilometre railway to get the coal to a deep water port near the Great Barrier Reef.

By definition, such a loan wouldn’t be needed if the railway was commercially viable, which raises a disturbing question: if the railway isn’t viable, what about the mines it would rely on for business?

Adani Group founder Gautam Adani with Prime Minister Malcolm Turnbull in India earlier this year. Photo: AAP

The coal Adani hopes to mine is poorly located and of low quality. India has announced plans to phase out thermal coal imports. In the past year it has cut them 20 per cent. They are not only being replaced by domestic coal, but also by solar plants. The price of Indian solar has been sliding 25 to 30 per cent per year. It’s now cheaper than power from new coal-fired stations. In India the Adani group itself is building new solar and wind-powered stations.

So why is it bothering? Why is it stringing along Australian authorities regardless?

The Adani family might be more Australian than it thinks.

Part of it is accounting. It is carrying a lot of debt. Against that on its books is an asset: the right to build a mine, which has got to be worth something. Walking away would destroy the value of that asset and make its books look worse.

Which might be what the whole thing is about. The Adani family might be more Australian than it thinks.

The Australia Institute’s Richard Denniss puts this way: “One of the most profitable activities in Australia is the magical act of getting things rezoned, and that’s just as true for the mining industry.” (It’s a point amplified in the new book Game of Mates.)

Dairy farmers who want to put houses instead of cows on rolling hills and retire rich do it by getting the government to change the zoning. The minute that happens, well before any houses are built, they get richer. They get an asset they can sell. Eight out of 10 of the names on the Financial Review Rich 200 list got there through property, mining, banking, superannuation or finance – all heavily regulated industries relying on government decisions.

If Adani gets environmental approvals and a licence to mine, the value of its asset will have soared whether or not it actually mines. It could even onsell the asset without mining.

Even better, if it did onsell the project, it could maintain ownership of the railway, without which the next owners couldn’t get the coal to port.

Patriarch Gautam Adani has put ownership of the railway (the one that would be financed by the Commonwealth) into a separate private company owned by the family in the Cayman Islands. Should the publicly listed company that owns the mine go bust and have to sell, the mine’s new owners would still have to keep paying him.

I reckon it’s why he is still pushing.


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