MELBOURNE/SINGAPORE - 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, told Reuters last month.
But a 40 percent 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.
GRAPHIC: Australian Newcastle coal prices https://tmsnrt.rs/2D8rXQI
Adani has said it is aiming to start producing 10 million tonnes a year of coal from March 2020, but analysts say the target date is optimistic.
"I think a lot of people are doubting as to whether it will see the light of day," said Wood Mackenzie analyst Victor Tanevski in Sydney.
Adani estimated in January that total costs of bringing the coal to port via rail would be A$54 a tonne ($39). Based on current market prices, the selling price for the mine's lower-grade thermal coal would be just over $47, suggesting a profit margin of $8-$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.
Tanevski suggests benchmark Newcastle 6,000 grade coal would need to be close to $100 a tonne for the mine to break even. The 6,000 benchmark was quoted at $86.20 on Thursday.
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 $8-$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.
GRAPHIC: China & Japan imports of Australian thermal coal https://tmsnrt.rs/2VIPlvn
GRAPHIC: Australia thermal coal exports by top destinations https://tmsnrt.rs/2IphzIA
Apart from the economics of the mine, Adani faces other headwinds, including an Australian coal boom that has probably peaked, analysts said.
As users move away from so-called dirty fuel sources, coal prices are set to drift lower, consultants AME Group say.
That scenario will impact producers of lower-grade coal first as they feel the pinch of competition from lower-cost miners like Indonesia and renewable or cleaner fuels.
"The boom period for Australian thermal coal exports has plateaued" said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit (EIU) in Singapore.
"A sharp reduction in coal use from export markets such as China, Japan, and India represents a considerable threat," he 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 climate 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.
"The Carmichael Project's low-cost profile, the quality of the resource and forecast demand from our target markets of India and South-East Asia mean that the project's economics are strong," said an Adani spokeswoman in a statement, even when adjusting for the coal's quality.
"The IEA and other respected analysts are reporting an increase in demand for seaborne thermal coal, particularly from Indian and South-East Asia, which Carmichael is well-placed to meet."
Prices for Newcastle coal hit three year lows last month https://tmsnrt.rs/2WBEjIC
ARE COAL'S DAYS NUMBERED?
Australia is one of the world's biggest coal suppliers and its miners face an increasingly competitive future as buyers shift towards cleaner or renewable fuel sources, underlining the view that the country's coal boom is topping out.
The Australian Department of Industry, Innovation and Science expects thermal coal imports from Japan, Australia's biggest buyer, to shrink to 131 million tonnes a year by 2024 from over 140 million tonnes last year.
Ports in China, another big buyer, have been restricting imports from Australia this year, claiming environmental concerns.
Many analysts say the restrictions are down to political tensions between Beijing and Canberra over issues of cyber security and China's influence in Pacific island nations.
Australian producers are struggling to make inroads in coal's remaining boom markets of South Asia in the face of lower-cost competition from Indonesia.
Shipping data showed Indonesia supplied 149 cargoes, carrying 8.9 million tonnes of thermal coal to India and Pakistan in April alone, while Australia has only shipped sporadic cargoes to these large and growing markets.
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.($1 = 1.4174 Australian dollars)
GRAPHIC: Global coal demand to decline - IEA https://tmsnrt.rs/2VHO2g5