Ahmedabad-based Adani group might need to dig deep in India as banks are wary of funding the group’s coal project in Australia. The risk to fund a project that has witnessed huge opposition will add to the reputational impact of the banks, analysts argue.
Adani Group announced final approval for the huge Carmichael development on June 6. But so far no bank has expressed interest in funding the project, which involves a mine, a port and a railway in the Australian state of Queensland and is projected to cost around A$16.5bn ($12 billion).
Some banks are worried about the reputational risks of being involved in a large coal project, and others about the risks of funding what could turn out to be a giant stranded asset, reported the Financial Times.
Gautam Adani, the billionaire promoter of the Adani Group, who has already invested A$3.5 billion (US$2.7 billion) into the project, said: “We have been challenged by activists in the courts, in inner city streets, and even outside banks that have not even been approached to finance the project.”
Australia’s Great Barrier Reef Green activists claim 21 banks have so far ruled out financing it. Deutsche Bank and HSBC have said they would not fund Adani’s project, following a successful lobbying campaign that focused on the fact that coal from Carmichael would have to be shipped across the Great Barrier Reef, risking damage to the world heritage area.
National Australia Bank said in 2015 it would focus on funding renewable energy while Westpac has said it will only finance “existing coal producing basins”. Deutsche in January ruled out funding any new greenfield coal mines.
The price of coal
Worse, the State Bank of India, India’s largest government-owned bank, has also backed away. A senior investment banker in Mumbai felt that many other Indian banks will already be nearing their regulated lending limits to the Adani Group. But as much as banks are concerned about the possibility of facing protests should they agree to finance Carmichael, they are equally worried about the economics of the project.
The first problem facing Adani is the price of coal. Though the spot price for thermal coal from Newcastle Port in Australia has rallied in the past year to around $80 a tonne, it remains less than half of what it was in 2010, and below what analysts say is needed for Carmichael to be profitable.
Secondly, there are concerns about where the coal will go, especially with the Indian government trying to end the country’s dependence on coal imports. Adani’s plans to use 60 per cent of the Carmichael coal at its Mundra power station in Gujarat could be at risk if the company is forced to seek a government bailout for the financially distressed plant, as has been reported locally.
Last but not the least, financing Carmichael coal mine project at current coal price levels is a big concern for bankers. Adani’s ability to repay any loans, given its already high debt levels is of prime significance to the bankers. Net debt across Adani Group’s four listed companies amounted to around Rs1 lakh crore ($15.5 billion) by the end of March 2016, according to S&P Global Market Intelligence — eight times their combined earnings before interest, tax, depreciation and amortisation.
The only people who could fund this would be the Australian banks. Indian banks simply don’t have the balance sheet strength. The Adani Carmichael story, however, is not yet over.