Coal news and updates

Coal demand falls globally; Adani,GVK to take a hit

Multi-billion dollar investment by Adani Power, and GVK Power in Australian mines could hit a dead end and may force companies to consider distress sales as global coal prices and demand have fallen, analysts said although companies say their projects can withstand turbulence.

Coal is being replaced by shale gas in the US and likely to lose out to renewable energy in China. In India, the Narendra Modi government is keen to accelerate mining to unlock indigenous coal reserves of 200 billion metric tonne.

 Another dampener for demand outlook is the possibility that Japan may consider restarting nuclear reactors that were shut down after the accident at its nuclear plant. All this has significantly changed the logic of developing mines abroad, industry experts said.

"These mine acquisitions were made when coal prices were high there has been a secular decline in international coal prices since then. The prices will remain under pressure due to ramp up in shale gas production in US, Japan restarting its nuclear plants and major importers like China and India focusing on improving domestic production," said Debasish Mishra, senior director, Deloitte Touche Tohmatsu India.

"At the prevailing coal prices, these projects will find it difficult to achieve financial closure, where nearly $5 to $8 billion of debt will be needed in each one. Some promoters may decide to exit these investments even booking losses," he added. These projects lack critical environmental approvals.

Last week Deutsche Bank said it will not fund Adani's coal project in Australia because there was no consensus between the Australian government and UNESCO over the environmental impact. The projects in question are the Adani group's coal and rail project in the untapped Galilee Basin in the Australian state of Queensland, which it acquired from Linc Energy in 2010 for close to $3 billion.

The GVK group which is in a joint venture with iron ore billionaire Gina Rinehart's Hancock Prospecting is also active in this area and wants to ship out millions of tonnes of thermal coal from a planned new complex of mines in the Galilee Basin. GVK had acquired Hancock Coal for $1.26 billion in 2011 in a deal which offered the Hyderabad-based energy major up to 20 million tonnes of coal every year.

A GVK spokesperson said: "The mining techniques available to us as a result of the large, shallow and very flat delineation of our coal assets deliver a free-on-board price that ensures our mine is comparatively immune to the volatility of cyclical coal prices." "But, even in the current market conditions, our Galilee Basin coal assets are differentiated from other mines due to their projected low production costs, sought-after coal quality, we are continuing to take our projects to a point where construction can commence and we wouldn't be doing that if we thought the projects weren't viable," the spokesperson added.

Tim Buckley Director of Energy Finance Studies, Australasia, Institute for Energy Economics and Financial Analysis disagrees."It will be hard for Adani and GVK to go to their shareholders to ask for a massive injection of additional equity capital to fund these high risk greenfield developments as these projects are uncommercial given the already oversupplied nature of the seaborne thermal coal market."

Source: The Economic Times