A crash in Australian thermal coal prices is raising fresh questions about the viability of a controversial $4 billion coal mine just a week ahead of a national election in which climate change is a key issue.
Final approval of the Carmichael coal mine in Queensland, owned by India’s Adani Enterprises, should come in “a matter of weeks, not months” following nearly a decade on the drawing board, the company’s mining chief executive, Lucas Dow, said last month.
But a 40 per cent slump in benchmark Australian thermal coal prices since mid-2018 to a two-year low last month, points to tight profit margins and questions as to whether the economics will support the launch of the mine as soon as next year.
Adani estimated in January that total costs of bringing the coal to port via rail would be A$54 a tonne (US$39). Based on current market prices, the selling price for the mine’s lower-grade thermal coal would be just over US$47, suggesting a profit margin of US$8-US$12 per tonne.
Adani said the A$54 estimate takes into account royalties, processing fees and the cost of financing part of a rail line to the export terminal, although analysts suggest the company’s figures are too bullish.
Analysts suggest the mine is unlikely to start commercial production until the middle of the next decade at the soonest, if at all. A profit margin of US$8-US$12 a tonne is half the averages of 2017 and 2018, highlighting how rapidly the market has turned since the Paris agreement on climate change.
Apart from the economics of the mine, Adani faces other headwinds, including an Australian coal boom that has probably peaked, analysts said.
Adding to uncertainty over the mine is an Australian general election next week which could return a Labor government, which has more aggressive targets towards cutting emissions. To be sure, a growing reluctance among lenders to finance thermal coal projects could crimp supply and rally prices.
As an integrated producer selling to its own plants in India, Adani may also be able to offset small margins with gains elsewhere, such as giving other parties access to its planned rail line if authorities allow new mines in the same coal basin. Coal remains the most-used source for electricity generation, but the International Energy Agency (IEA) expects renewables to overtake coal as the most important power generation source by the mid-2020s.