Adani's coal victory Down Under is pyrrhic


By Clara Ferreira-Marques

(The author is a Reuters Breakingviews columnist.)

SINGAPORE, June 14 (Reuters Breakingviews) - Gautam Adani's victory in Australia looks like a pyrrhic one. His Carmichael mine, which will cost $1.5 billion to build, has received its final approval after almost a decade of opposition. Yet prices for thermal coal are at three-year lows and the market is oversupplied. The Indian billionaire behind Adani Enterprises will feel vindicated by the win, but it's hard to see how he profits by it.

Adani bought the deposit in 2010 for around $345 million upfront. He added the coal terminal that serves it in 2011 for $2 billion. Outside financing faltered, so the group said it would fund the whole thing, and slashed its size.

Impressive persistence, perhaps, but the economics look tough. According to a January company presentation, the mine's cost of production is estimated at A$54, or $37 a tonne. Add in royalties, and that rises to somewhere close to $40. And yet the price for the quality of coal the mine is expected to dig up, based on the current S&P Global benchmark Newcastle price, is roughly $46.

That's an unimpressive $6 per tonne margin, or $60 million a year at a 10-million-tonne run rate. And it doesn't include the full cost of buying the port, building rail or servicing interest.

Despite anti-coal sentiment elsewhere, Asian demand is holding up for now. Thermal imports by China and India hit multi-year highs in May, Refinitiv data shows. But cheaper renewables and natural gas will challenge that, probably before Carmichael can hit a scale that would improve returns.

Supply is a bigger problem. Current depressed prices imply ample production, and places like Indonesia could dig up plenty more, even if it is lower quality. Adani can use Carmichael to feed his own plants, but could end up paying over the odds.

First production is at least two years away, and Wood Mackenzie estimates rail delays could hold it back. Yet Glencore , the world's largest thermal coal exporter, capped production in February. Before digging, Adani may want to consider why.

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- Indian group Adani Enterprises said on June 13 that it had received the last go-ahead required to begin building its Carmichael thermal coal mine in Queensland, Australia.

- The mine, in the huge Galilee basin, is slated to start at 10 million tonnes a year, according to company projections, though that could increase to 27.5 million. The mine was originally projected to produce as much as 60 million tonnes a year, but that estimate was scaled back last year.

- The opposition Labor party took major losses in Queensland during last month's general election, after its leaders campaigned on fighting climate change. The incumbent Liberal-National coalition was reelected.

This article appears in: Politics , World Markets , Stocks , Economy

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