What is Adani thinking?

A couple of days ago, Gautam Adani made the long awaited announcement that the Adani board had decided to proceed with the Carmichael mine-rail project in the Galilee Basin. As usual there was an asterisk. Construction work won’t start until Adani can get financial backing. This was previously supposed to in June 2017 (that is, within weeks) but has now been deferred until 2018. Still, Adani has opened a head office in Townsville, promises to hire up to 250 staff and is also saying it will begin pre-construction works like land clearing in the September quarter.

But on the same day, unnoticed by almost the entire Australian press, with the exception of Peter Hannam at the SMH, the board of Adani Power, the putative buyer of Carmichael Coal, made a much more consequential decision. They are spinning off the 4GW Ultra Mega Power Plant* at Mundra, along with a huge load of debt, into a subsidiary, provisionally called Adani Power (Mundra). The plan it seems is to sell majority ownership, hopefully to the government of Gujarat, and thereby leave the slimmed down Adani Power with a manageable debt load, while it shifts further away from coal and into renewables.

But without Mundra, Adani Power won’t have nearly enough coal-fired plant to take up the output of even the first stage of Carmichael. And this “mine to plug” model was crucial to the viability of the project. Even if the modest recovery in thermal coal prices over the past year were sustained, Carmichael couldn’t cover its costs by selling on the world market.

So what is Adani up to? I’ve thought about a bunch of hypotheses and now I have one that I think makes sense. Adani doesn’t want to write off the $2 billion or so it’s already put into acquiring the mine site, but it also doesn’t want to throw good money after bad. Suppose that, Adani gets $1 billion in loans from the Turnbull-Canavan Northern Australia slush fund to build the rail line, which is owned by a separate Adani company in the Cayman Islands. They could use that money to get started on the rail line, while discovering yet more reasons not to start spending their own money on the mine.

That would buy them perhaps a couple of years during which something might turn up. The price of coal might go up a lot. abd the Hancock-GVK Alpha project might somehow be revived. If so, the rail line could be viable even without Carmichael.

And, if nothing did turn up, Adani would have bought a couple of years breathing space before writing off the losses that have already been incurred, without spending a significant amount of its own money. Adani (Caymans) would slide gracefully into bankruptcy and the Australian public would be left with a half-built rail line to nowhere and a billion dollar hole in our collective pockets.

Of all the explanations I’ve tried out, this is the one that makes most sense to me right now. Comments appreciated.

* I love this grandiose name, redolent of the great days of Soviet-inspired central planning. The UMPP program was started with great fanfare a decade or so ago, but has now collapsed almost completely.

31 thoughts on “What is Adani thinking?

  1. My off-spinning sock puppet posted on Monday Message Board that David Barbagallo has been appointed Annastacia Palaszczuk’s chief of staff. The serious point is that Barbagallo is a very experienced operative in the Queensland ALP and the Australian Workers Union faction of the party with experienced dating back to the late 1970s, and was Principal Private Secretary to Wayne Goss when he was Premier. It has been reported in the Murdoch press that Barbagallo was involved in brokering the deal that (temporarily) overcame the Palaszczuk government’s apparent split over the Carmichael mine. One inference that could be drawn is that Palaszczuk has decided that she needs the experience and political smarts of an old fixer like Barbagallo to help her government find its way out of the woods on the politics of the Carmichael mine, even to the point of being prepared to wear the flack that this appointment will attract given some of Barbagallo’s past activities.

  2. What is Adani thinking?

    My own view for some time is that the Adani plan has become one to eventually try to break even by selling it all off to China inc.

    However, I spotted another intriguing explanation amongst the comments on an article “Adani gives itself the green light, but that doesn’t change the economics of coal” at ‘The Conversation.

    Colin Dunstan commented there thus:

    “The investment in the Adani mine makes economic sense from one very narrow view. The price of thermal coal exports is forecast to fall 25 percent over the next 5 years. By adding additional supply from the Adani mine, the price will fall further and perhaps faster.

    At present Adani Power in India isn’t viable at the price of coal it imports and the contracted price at which it supplies electricity.

    By helping to force down the price of coal, Adani Power can become profitable again in India and avoid ever paying income tax in Australia as the mine will never make a profit.

    There is an obvious loss to Federal Government tax revenue, but it does pick up income tax from the mine workforce, and Queensland gets royalties whether the mine makes a profit or not.

    The real down-side is the superannuation funds that have investments in any Australian thermal coal mine. The fall in the coal price hits all of them, The Government can downplay this on the basis that the losses are not felt immediately.”

    In a second comment Colin gave an example thus:

    “The South Korean power generator KEPCO used this approach in a partnership with Cockatoo Coal.

    Cockatoo Coal has since gone into receivership and is no longer listed on the ASX.

    KEPCO on the other hand achieved sustained increases in its share price on the New York stock exchange.

    •15/09/2010: Cockatoo Coal Ltd will undertake a fully underwritten $150.8 million equity raising to fund its joint purchase of five coal assets in New South Wales and Queensland. Cockatoo, in partnership with Korea Electric Power Corporation and POSCO, will acquire interests in five coal development and exploration assets in New South Wales and Queensland from Anglo American PLC for $580 million.

    •27/06/2014: Cockatoo Coal increases Queensland coal production

    •19/09/2014: Shares of Korea Electric Power Corp (NYSE:KEP) hit a new 52-week high during mid-day trading on Thursday at $22.21.

    •22/09/2014: Cockatoo Coal (ASX:COK) hits a 52-week low. Latest Price: A$0.023 52-week High: $A0.063 52-week Low: A$0.023 Market Cap: A$104.885M”

    It will take Adani a number of years in construction before Carmichael mine coal or any coal from other new Galilee Basin mines can be exported, yet look what South Korean power generator KEPCO did for themselves here in just four years. I’m not an authority on wheeling and dealing in international share market manipulations, but this angle for Adani does seem somewhat feasible to me.

    Thoughts?

    I’ll follow up with links to the Conversation article and Colin’s comments.

  3. God bless John Quiggin. He is so unerring in his judgements as to these things. The politicians love it because it solves their problems also, both Tory and Labor, Federal and state.

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