The end of coal
Whatever else you might say about Gina Rinehart, about her extreme political views, her dysfunctional family, her execrable poetry, it’s hard to fault her business acumen.
There is probably no better example of this than her decision, back in September 2011, to sell off most of her assets in Queensland’s Galilee Basin coalfields to an over-leveraged, over-ambitious Indian company, GVK, for $US1.26 billion.
At the time, the price for thermal coal – the type they burn to make electricity, and the biggest single global source of carbon dioxide emissions – was north of $120 a tonne.
No sooner had the deal been done than the coal price started to fall. And it has kept falling ever since.
As of a month ago, according to the government’s own Bureau of Resources and Energy Economics, the price for Newcastle thermal coal, the benchmark price for Australian producers, stood at $74 a tonne. BREE predicts further “downward pressure” on prices for the rest of this year. It doesn’t see it rising much for at least five years. And it is one of the more optimistic forecasters.
These are dark days in Australia for anyone concerned about global climate change, what with mining magnate and part-time MP Clive Palmer only this week indicating his ruthless determination to spike any move that would seek to reduce greenhouse gas emissions. And to force the Abbott government to a double-dissolution election, if necessary, to achieve that end.
As journalist Lenore Taylor put it, at the end of an analysis piece in Tuesday’s Guardian, the options for climate change action by the Abbott/Palmer government now appear reduced to “half a Band-Aid, or no Band-Aid at all”.
There’s now really no point in looking to government if you’re concerned about climate change, or for that matter a future Australia whose standard of living is not dependent on the country’s status as a quarry. If you’re concerned, you have to look elsewhere for hope.
Maybe that hope could begin with Georgina Hope Rinehart’s very good deal of September 2011. For Rinehart was way ahead of the pack in realising it was time to hedge her bets on coal. As a result, she is likely to be the only investor to make a significant buck from the vast Galilee coal reserves for a very long time. Maybe the last one, ever.
Before we explore that possibility, though, let’s just talk about the sheer enormousness, if not the enormity, of the Galilee.
The basin covers an area of some 247,000 square kilometres, four times as big as Tasmania, and contains reserves estimated at 20 billion tonnes.
Originally, nine separate mining proposals were mooted, five of them bigger than any Australian mine now operating. If all nine went ahead, they would produce more than 300 million tonnes a year, about 1.5 times the total amount of thermal coal exported by all Australia’s existing mines. They would increase by almost one-third the total world seaborne coal trade.
By the calculation of the International Energy Agency, if you loaded all the Galilee’s coal onto a single train, it would be 2.5 million kilometres long, or six-and-a-half times the distance to the moon. By the calculation of Greenpeace, the Galilee’s mines would produce some 700 million tonnes of carbon dioxide every year.
In order for the coal to be exported and burned, though, it would have to be shifted 500 kilometres from the Galilee to port, which would mean a new rail line and a $6.2 billion expansion of the coal port at Abbot Point to provide four new coal terminals with an additional handling capacity of 120 million tonnes. And that in turn would necessitate the dredging of some five million tonnes of sediment, which would then be dumped adjacent to the Great Barrier Reef.
The coal-fevered people in government and industry spruik an enormous pay-off. Queensland Premier Campbell Newman reckons the Galilee development could generate $60 billion in revenue and create 15,000 jobs. GVK Hancock reckons its three mines alone would spin off $40 billion in taxes and royalties and 20,000 “direct and indirect” jobs. Whichever way you look at it, there’s a huge amount at stake in the Galilee.
Premier Newman attested to this in his first conversation with new prime minister Tony Abbott after last September’s federal election, when he demanded that the Commonwealth “get out of the way” of the Queensland government’s determination to speed up the various proposals past pesky federal regulation and the objections of environmentalists and landholders.
The Abbott government, as you may have noticed, has been only too keen to comply.
And yet the would-be miners of the Galilee face a couple of huge obstacles; obstacles that cannot be legislated away like environmental safeguards, nor defunded like a green group, nor met with overwhelming legal force in the courts like a stroppy landowner.
We’re talking about the basic law of economics: supply and demand. And the prime law of business: money coming in must exceed money going out.
As things now stand, and as they are likely to remain into the foreseeable future, the coalmines of the Galilee fail on both fronts.
The analysts’ numbers point to tough times for the rest of Australia’s coal industry, too. But they threaten to leave the whole Galilee as what they call a “stranded asset”.
Daniel Morgan, global commodity analyst at UBS, sums up the problem with just two numbers. “The Newcastle benchmark is currently $74 a tonne. That price is well below what developers would need to make a return on capital. We think you need a long-term price of $110 to be viable.”
He does not foresee a long-term price anywhere close to that. Moreover, he says, Galilee Basin coal tends to be of somewhat lesser quality than the Newcastle benchmark, meaning “it would probably command a discount in the order of 10 per cent”.
The problem is essentially one of oversupply. “There’s a very well-supplied market for thermal coal,” says Morgan. “And the time frames the proponents are talking about [the next five years or so] – we don’t need that amount of coal … or anything close to it.
“We’re not calling for a price recovery in the next five years that would mean that it would be anywhere close to the price required to incentivise Galilee basin coal. The economics don’t stand up.”
Adrian Cox, of Deutsche Bank, offers this from their April commodities report: “thermal coal export growth continues to exceed demand, suggesting that prices will remain depressed.”
Worse, the report sees growth in supply outstripping growth in demand for another five years, until 2019, and excess supply persisting beyond that. As for prices? Maybe $91 a tonne by 2018.
Wherever you go among the market analysts, the story is essentially the same: coal prices hovering somewhere below $90 – one credible analysis firm reckons $65 – while the Galilee mines need a return of $100 or more to be viable.
To see just how much trouble the Galilee miners are in, consider a few of the developments of the past couple of years, since Rinehart’s canny sale.
In April 2012, Rio Tinto announced it was pulling out of the Abbot Point coal port expansion project, citing uncertain global markets as the major reason.
In November BHP Billiton, the preferred developer for Terminal 2 at Abbot Point, announced it had formally withdrawn, and was also pulling the plug on a planned $5 billion rail connection to the port.
In February this year Lend Lease, one of the Queensland government’s two shortlisted developers for another of the four new terminals – designated terminal X – announced it, too, had decided not to proceed. The following month another potential developer of Terminal X, Anglo American coal, followed suit. The developers who haven’t pulled out are both Indian-based companies – the diversified conglomerates GVK and Adani.
And while potential investors at the port end of the business have been voting with their feet, at the other end, up in the Galilee, the miners, including Clive Palmer’s Waratah, have been mostly sitting on their hands.
One of the original nine potential mine developers, the huge Brazilian company Vale, put its lease up for sale in the middle of last year. Most of the rest are essentially moribund.
The two most determined miners are the same two still committed to the Abbot Point port expansion: GVK and Adani.
Tim Buckley, of the Institute for Energy Economics and Financial Analysis, has spent the past couple of years investigating the viability of the Galilee developments in general, and has produced detailed reports on both GVK and Adani.
Some disclosure here: Buckley’s analysis was commissioned by Greenpeace. But it should also be noted that he has a 25-year history as an equities analyst for big banks. And other analysts contacted for this story, who still work for big banks, did not argue with any of his research.
Suffice to say his reports were highly sceptical about the projects’ prospects, particularly that of GVK.
“GVK has a market capitalisation of about $300 million,” he says, “and debts of $2.5 billion and a pipeline of about $20 billion of greenfields projects. It’s a company with ridiculously grand plans.”
And it still owes Rinehart $US560 million, payable in September this year.
“I just can’t see how they’re going to pay Gina, let alone build the mine,” says Buckley.
Adani, on the other hand, “is a big, serious company. It runs the biggest port in all of India. It has a history of doing things. It’s still got about double its market cap in debt, but not 10 times”.
The difference between the two companies, says Buckley, is that “one is a minnow that is geared to buggery, the other is a big company that’s got a lot of debt”.
Still, both have the same simple, essential problem: “There is no way any bank, Australian or foreign is going to sign off on a multi-billion loan on a non-commercial project.”
And he reiterates that “all the major commodity houses have downgraded their forecasts for thermal coal”.
We’re not going to linger over the detail of his reports. But the management at the Queensland rail company Aurizon, which has a tentative joint development agreement with GVK to build its rail and port infrastructure, probably should.
Let’s focus instead on the point at which Buckley’s analysis of coal’s future prospects diverge from those of many other market analysts, like BREE and UBS’s Morgan. They see it as a cyclical downturn, albeit a long one. Buckley suggests something else: that coal will never boom again and that the industry is in long-term decline. He points to claims from other serious analysts like himself.
Like this, from a Citibank report last November: “We believe that thermal coal demand is in structural decline as a result of both increasing environmental pressure and declining cost competitiveness compared to alternatives for power generation.”
Not only was gas generally cheaper in most of the world, Citibank said, wind power was rapidly achieving parity, and solar would become competitive within a decade.
An analysis by the respected, if greenish New York company Sanford C. Bernstein and Co found this month that solar was already cheaper across much of Asia than gas, meaning photovoltaic power no longer needed subsidies to compete with fossil fuel. While solar was yet a small part of the energy mix, Bernstein said, its rise could see it begin to depress fossil fuel prices within a decade.
Another Bernstein report predicted that Chinese demand for coal will peak next year, and from 2016 “will begin to fall in absolute terms, and that trend will never reverse”.
That prediction, says Buckley, puts them only a little ahead of the consensus on Chinese coal demand. “Deutsche, Citi, HSBC, Morgan Stanley, UBS, are all forecasting it will peak between 2016 and 2020.”
This is a big deal, he says, when you consider China accounts for about half the world’s coal consumption. “And between 2007 and 2012, China accounted for all the growth in coal consumption; absent China, it fell globally.”
None of this is to suggest China will end its heavy dependence on coal any time soon. What it does indicate, however, is that China, which is the biggest coal producer as well as the biggest coal user, will likely be entirely self-sufficient.
“They don’t need to import,” says Morgan. “The country is extremely well endowed with reserves [and] has a mammoth production capacity and distribution network which has been improved over the past few years.”
Indeed, Buckley believes, it may become an “opportunistic” exporter, depending on price.
Which leaves the seaborne coal trade where? There may be some small opportunities in Japan, post-Fukushima, although it also is going heavily into renewables. Maybe some parts of Europe will turn to more coal, particularly if there are problems with Russian gas supplies.
Against that, though, one has to set the increase on the supply side. Indonesia now exports huge amounts of coal. US coal producers are looking for new markets, too, since new clean-air regulations, along with the boom in shale gas, have made coal-fired power domestically uncompetitive.
Which leaves India as the big hope of the export industry. But there, too, are big questions. “Every time I look at India’s coal sector,” says Buckley, “I’m drawn to their economic and finance situation, and it is dire. Non-performing loans hit 10 per cent this year, according to RBI [the Indian Reserve Bank], up from eight. Fitch [ratings agency] predicts 15 per cent next year.”
And India, too, has huge domestic coal reserves. The problem is more one of distribution than supply.
He argues the country’s financial situation is such that it can’t afford much of either coal or alternative energy infrastructure at the moment.
“But if and when it can, it will likely find alternatives are the cheaper way to go. India is not going to be the big driver of coal that a lot of people think it is.”
Now it may be that the likes of Buckley and the other progressive analysts are a bit ahead of themselves in their predictions of the rise of renewables. Despite the rapid decline in the costs of generation – and in the case of solar in particular that has been dramatic – problems still remain, such as storage. Like what you do to meet baseload demand when the wind doesn’t blow and the sun doesn’t shine.
However, even the more traditional analysts now see alternatives such as gas and even nuclear energy as likely substitutes for a lot of coal.
All of which points to one likely eventuality: there’s going to be a lot of coal left in the ground at the Galilee Basin.
This article was first published in the print edition of The Saturday Paper on Apr 26, 2014 as "The end of coal". Subscribe here.