Explaining Adani: why would a billionaire persist with a mine that will probably lose money?

That’s the title of my latest piece in The Conversation, republished on the ABC website. Possible answers

So what could be going on? Perhaps Gautam Adani is willing to lose a large share of his wealth simply to show he can’t be pushed around. Alternatively, as on numerous previous occasions, his promises of an imminent start to work may prove to be baseless.
The third, and most worrying, possibility is that the political pressure to deliver the promised Adani jobs will lead to a large infusion of public money, all of which will be lost.
The $900 million Adani sought from the Northern Australia Infrastructure Facility in 2017 would be enough to keep the project going for a couple of years, without the need for Mr Adani to risk his own money. It now appears that a similar sum might be sought from the Export Finance and Insurance Corporation.

32 thoughts on “Explaining Adani: why would a billionaire persist with a mine that will probably lose money?

  1. Gautam Adani has surely been spending more time on the ctriticak bailout of his 4GW coal generating plant at Mundra than on his quixotic mine in Oz. Late in the election campaign, with plenty of other headline material in Kashmir, he finally secured it, at the expense of Gujarati electricity consumers. I’ve not seen an analysis of the generosity of the terms. I assume that he has avoided disaster rather than made a pile, which would have been risky to the calculating Modi. It’s a real puzzle why Adani wants to make another risky bet on coal. Australia won’t make his losses good if Carmichael gets built and fails.

  2. From the article: “US$160 million a year for the initial output of 10 million tonnes a year. That’s a small return on A$2 billion, before considering overheads and depreciation.”

    US$160 million is around $230 million so that’s a return of 11% per year, let’s say 8% after overheads and depreciation. That’s actually quite good by the standards of comparable companies, for instance Glencore has a return on capital of 5.4%.

  3. I think you’re probably under-estimating the upside in coal prices. The price of coal is set by the intersection of demand and supply on the global seaborne coal cost curve. Demand is falling, but not by as much as you’d expect – especially in the Asian region. However, supply will fall faster given how hard it is to get a new coal mine approved. In addition, the cost curve is steepening so the marginal tonne of production is becoming more expensive to produce

    Although is transitioning away from coal, that process will take a long time. More than enough time for Adani to make a good return on its investment in a rising coal price environment.

    Here’s some more food for thought – For every tonne of coal burnt in Australia, there is about 100 tonnes burnt in China, and usually of a much inferior quality. Most Australian coal has a heating value of over 5,500kcal/kg, with a lot above 6,000kcal/kg. So actually – the most constructive thing that Australia can do to help reduce global emissions is to increase our output of high quality coal so that we drive the price down and displace the poor quality coal from China, Indonesia and South Africa which generate more CO2 emissions per tonne burnt than our coal. Activists who are demanding we shut down our coal industry are actually adding to the climate change problem, not assisting it.

  4. I don’t think you answered the question you posed in the title. It certainly isn’t to proceed in order to show that Adani cannot be pushed around – $2b is too much to be flippant about – if he was indeed gong to be using his own dough. I assume he believes he can make money out of it. Even on your own calculations he will make 11% return as Smith9 points out. The earlier $900 loan didn’t go through but now you suggest it might come from elsewhere – presumably as a concessionary loan – the cost of which, the concession, should be added to the project cost.

    Its a strange angle you are pushing. Like many you do not want a new coal field to come into operation and you are trying to outguess the intended operator to show it will not make money. Thus it will not be privately profitable even though you show it might be.

    Wouldn’t to be more straightforward to say that you are going to count the emissions generated in countries that use Adani coal as an Australian responsibility – because you assume there are no other sources of coal so that blocking it will stop emissions – and that levying a reasonable charge on these emissions means that the project is socially unprofitable. So don’t do it.

    I’ll go along with that apart perhaps from the implicit supply assumption.

  5. Harry Clarke

    there’s a link in another thread to a story that Adani has secured very favourable prices for their electricity generation in India and Bangldeash through power purchase agreements. From their point of view you’d think what they’d care about is profitability of the whole operation not just the mine.

  6. Andrew, a couple of points:

    1. While Australia’s existing black coal mines can maintain current output for some time thanks to decreasing domestic consumption, Australia can’t significantly expand coal exports without opening new basins which will be low quality compared to currently mined black coal. For example Galilee Basin coal is around 4,950 kcal and 25% ash.

    2. Coal is not fungible. Australian seabourne coal couldn’t reach inland Chinese coal power stations in large quantities due to rail and canal congestion and if it gets there the power stations aren’t designed for coal of that quality so it would have to be blended with local coal.

    3. Seaborne coal all tends to be high thermal value and with world seaborne coal consumption falling subsidizing coal production to outcompete other countries seaborne coal exports is not likely to help carbon emissions. Wouldn’t it be more likely to increase emissions by keeping coal power stations operating longer than they otherwise would? I think the South Koreans would be scratching their heads and wondering why those whacky Australians are paying to keep their coal power stations running.

  7. Hi Ronald,

    I’m not sure that is correct;

    1. The Carmichael mine is going to produce coal with a calorific value of about 5,500kcal/kg… yes there is some coal in the basin with a lower value, but that’s true of most coal basins.

    2. You are right to a degree – Australian coal could not displace inland coal consumption in China, only power stations on the coast. China currently consumes about 3.5btpa of thermal coal (about half the worlds coal), but only imports about 200Mt – mostly from Indonesia, Russia, Australia, Vietnam and South Africa. Interestingly – China is shifting a heap of its coal fired power inland. In the mid-2000s China discovered vast (>1 trillion tonnes) resources of thermal coal in the South Gobi desert in Xinchang – it has built huge coal mines, power stations and aluminium smelters to use what was else going to be a stranded resource. It’s one of the reasons aluminium pricing is so low – China has doubled the world’s output of aluminium in the past 15 years, with most smelters built in Xinchang.

    3. No, not all seaborne coal is high thermal value – in fact a lot is very low value – most is in the 4,500-5,000 kcal/kg range, particularly from Indonesia. Australian coal is very high value in comparison.

    The argument for stopping expansion of Australian coal mines seems to be that if we don’t produce coal, our customers will stop burning coal. But that’s just not true…. nothing Australia does is going influence India or South East Asia on whether to build coal fired power stations. There is a lot of coal available – isn’t it better that they burnt our higher quality coal while they start the process of transitioning away from fossil fuels?

  8. We should have started work on phasing out fossil fuels from 1990, at the latest. Here we are talking about it 30 years later and still we have done NOTHING. It’s too late now to prevent a series of unfortunate catastrophes. Let’s hope our crisis emergency responses are better than our preemptive responses. Somehow I doubt it. Neoliberalism seems to be systemically incapable of reacting to environmental challenges. What can’t adapt collapses and dies.

  9. Smith9 Your allowance of 3 per cent for overheads, depreciation and amortization implies a life of 30+ years even with zero overheads. The point of the article is that this is highly unlikely.

  10. If, as Tim Buckley says, Adani has secured long term deals to sell coal fired electricity at high prices, then 30 years is plausible and it doesn’t matter what the traded price of coal is.

  11. Smith9 @5:10pm

    I do not have independent information on the Adani multinational corporation or on the international coal and power generation sector. Multinational corporations are in my field of interest and experience.

    Your argument that ” Adani has secured very favourable prices for their electricity generation in India and Bangldeash through power purchase agreements. From their point of view you’d think what they’d care about is profitability of the whole operation not just the mine.” is consistent with empirical studies on the behaviour of multinational corporations. Furthermore, it is conceivable that Adani wants to have a good quality coal mine in Australia for strategic reasons. There are several possible strategic reasons. Preventing a potential international competitor to have such a mine in Australia is one. Another one is supply of electricity assurance by means of diversification (coal and renewables). This would be important regarding the supply agreements. Finally, how is the resale value of a going concern mine taken into account in the profitability calculations. Adani might consider China having a potential interest in acquiring an established good or high quality coal mine.

  12. Andrew,

    Carmichael coal is 5,200 kcal/kg GAR. It’s 4,950 NAR. NAR is after energy loss for water content is accounted for. If you are going to look at GAR — before energy loss from water content — you’d need to compare it to Australia’s export coal standard of 6,300 kcal/kg GAR, so Carmichael coal is considerably worse.

    Are you certain a lot of low thermal value coal is still being shipped? Indonesia’s coal exports are down by over a quarter from their peak so I thought there would be a lot less of it.

    Australia is, according to one ranking, the second lowest cost producer of coal in the world after South Africa. While ocean transport is cheap it is still about twice the distance from South Africa to China as from Queensland coal export terminals. So if Australia decided to stop exporting coal, as a major low cost producer, that would cause the cost of coal to rise.

    Given the low cost of renewables now one is going to open many new coal mines. Just look at Adani who appears to be waiting for mountains of taxpayers money to be spent on the project before it proceeds.

    Renewable energy is now not only cheaper than building new coal power stations, it is starting to compete with the marginal cost of coal. Distributed solar already does this in Australia and the cheapest large scale solar and wind farms are now being bid in at just over 5 Australian cents a kilowatt-hour we are closing in on it here before any of the coals health or environmental externalities are priced in. So there is no good economic reason for basically anyone to build a new coal power plant and run it off seaborne coal which is the most expensive thermal coal.

  13. Is there an element of accountancy optics ?

    Money already spent is capital invested in a future asset on the books if there is the potential of the mine going ahead.
    If it is abandoned it becomes a total investment loss.

  14. The title of the post is a garbled misquotation of that of the piece in The Conversation. Please fix.

  15. “the $2 billion should have been US. “

    All the articles on the interweb, say the 2 billion is in $A

  16. If the choice of hypotheses is 4D chess vs boneheaded stupidity, well, it’s not as though the rich are any less prone to the latter. Unfortunately, the depressing likelihood of your third possibility doesn’t hinge on Adani’s actual motivation.

  17. Some further possible (and not mutually exclusive) answers to the question.

    4. The politics around the Carmichael mine, like those around the aborted Bell Bay pulp mill in Tasmania, are about trying to maintain/restore a pre-sustainability paradigm in developmental decision-making in terms of how such decisions get made, what factors are considered in making those decisions, and which stakeholders are permitted to participate in or influence those decisions. From this standpoint the economics of the project are a secondary consideration. If this is the aim of the exercise, it must be admitted that Gautam Adani and his allies have had considerable success to date.

    5. Gautam Adani wants to secure his long-term stake as a player in Australia by demonstrating his capacity to inflict political pain and dispense political pleasure. From this standpoint, see last two sentences of 4.

    6. Gautam Adani is a proud Indian who derives a frisson of patriotic pleasure and historical revanche from having the mainly white elites of an Anglomorph nation flying on his trapeze.

  18. And if Gautam Adani gets an outcome where he and others like him are not able to be prevented from proceeding with a project by political campaigning in the forums of civil society and the democratic state, he does not need to proceed with the project (and lose money) in order to secure that victory.

  19. Paul Norton

    or maybe he’s just a very successful businessman who knows how to make a shekel and is willing to play the long game. All this talk about “it’s obviously a loss maker, so there must be another explanation” overlooks the possibility that their ‘pit to plug’ strategy might just work for Adani, regardless of what the rest of the world is doing with energy.

  20. The possible expenditure of $900 million of public funds also raises the question of opportunity cost. A comparative cost-benefit analysis of giving that amount of money to Adani versus spending it on other ways of creating employment in central/northern Queensland (even without factoring in environmental externalities) would be most interesting.

  21. Paul, put $900 million in the stock market. Get 8% return. That’s $72 million a year. That will pay 3,500 people $20 an hour for 20 hours a week to do whatever, forever. Or you could provide simple accommodation to 10,000 homeless people, forever. Or you could cut taxes by $900 million. That’s supposed to have miracle effects according to some people. Or you could pay off Australia’s federal debt, but since the interest on that is currently only 1.25% that would be stupid. Or you could add a total of around one million years of life to the world’s most vulnerable people. Or you could use it to offset the regressive effects of a carbon price and rapidly cause Australia’s coal generation to shut down improving the health of Australians, improving agricultural productivity (ground level ozone is hell on most plants), and slowing global warming. Etc. There’s a lot that could be done.

  22. “or maybe he’s just a very successful businessman who knows how to make a shekel and is willing to play the long game. All this talk about “it’s obviously a loss maker, so there must be another explanation” overlooks the possibility that their ‘pit to plug’ strategy might just work for Adani, regardless of what the rest of the world is doing with energy.”

    Indeed, I very much doubt his primary motivation is anything but business based. Saying that (and I reiterate from a previous thread) MacMines appears to have pulled out of China Stone primary for financial viability concerns. Yes, their target market was China, not India and no, they weren’t close mates with the president; however, the publicly available analysis highlighting issues with the business case for Adani appears to be pretty conclusive IMHO (only).

  23. Smith9 says: June 5, 2019 at 8:57 pm
    “If, as Tim Buckley says, Adani has secured long term deals to sell coal fired electricity at high prices, then 30 years is plausible and it doesn’t matter what the traded price of coal is.”

    Exactly. And Adani’s highly inflated transfer scam pricing in Australia, India, and Bangladesh will now be guaranteed for at least the next five years. How is it done?

    See by way of https ://theconversation.com/explaining-adani-why-would-a-billionaire-persist-with-a-mine-that-will-probably-lose-money-117682#comment_1938698
    for 49 exact search matches (Ctrl+F) for adani:

    Click to access Over-Invoicing-PIL.pdf

    IN THE HIGH COURT OF DELHI, AT NEW DELHI
    (EXTRAORDINARY CIVIL JURISDICTION)
    WRIT PETITION (CIVIL) NO. ……………….. OF 2017 (SEPTEMBER)

    IN THE MATTER OF PUBLIC INTEREST LITIGATION:
    CENTRE FOR PUBLIC INTEREST LITIGATION & ANR …PETITIONERS
    VERSUS
    UNION OF INDIA & ORS … RESPONDENTS

    A WRIT PETITION IN PUBLIC INTEREST UNDER ARTICLE 226 OF THE
    CONSTITUTION OF INDIA SEEKING A THOROUGH SIT INVESTIGATION INTO THE
    OVER-INVOICING OF POWER EQUIPMENT AND FUEL PURCHASED BY POWER
    GENERATING COMPANIES IN ORDER TO CHEAT THE PEOPLE AND TO SIPHON OFF
    FUNDS FROM PUBLIC COMPANIES

    To,
    THE HON’BLE CHIEF JUSTICE OF DELHI AND HIS COMPANION
    JUDGES OF THE HON’BLE HIGH COURT OF DELHI

    (see detailed instances listed in omitted pdf paragraphs 1 to 41…)

    GROUNDS

    A. That the above stated private companies have been hugely inflating
    the cost of power equipments and fuel they purchase from abroad
    by committing enormous over-invoicing, in order to a) cheat the
    consumers who pay for electricity, b) cheat the share-holders by
    siphoning of money from their public listed companies, c) cheat the
    public exchequer of revenue by showing reduced profits, and d)
    cheat the banks who have given huge loans and credit facilities to
    them.

    B. That in the last few years, several major instances of over-invoicing
    have been unearthed by Directorate of Revenue Intelligence (DRI)
    in which several prominent and influential companies are involved.
    The modus operandi is identical in all these cases. The coal or
    power equipment even though is shipped directly to India, but its
    invoicing is routed through a different company incorporated abroad
    which is directly owned and controlled by the promoters of the
    project in India.

    C. That the rampant and excessive over-invoicing committed by
    power companies has a direct impact on power tariff which is paid
    by millions of consumers. Besides this siphoning of money amounts
    to cheating the shareholders and the tax authorities, in addition to
    cheating the consumers. The same may also violate various laws
    like Customs Act, Foreign Exchange Management Act, Prevention
    of Money Laundering Act, etc.

    D. That the DRI had found that various power producers were
    indulging in huge over-invoking of coal imported from Indonesia
    which is used a fuel in their power plants. DRI in its alert dated
    30.03.2016 issued to various authorities had stated that this was
    being done for “(i) siphoning-off money abroad and (ii) to avail
    higher power tariff compensation based on artificially inflated cost
    of the imported coal.” DRI noted that “while Indonesian Coal was
    directly shipped from Indonesian ports to the importers in India, the
    import invoices were routed through one of more intermediaries
    based in Singapore, Dubai, Hong Kong, British Virgin Islands (U.K.)
    etc for the purpose of artificially inflating its value.”

    E. That the DRI had found that various power companies like Adani &
    Essar had set-up their own related companies to indulge in huge
    over-invoicing in the purchase of power-equipment in order to
    siphon out money from the companies to their own entities
    registered in tax havens and also to cheat their millions of
    consumers by getting high electricity tariff.

    F. That the rampant corruption and crime in high places in the country,
    and the manifest unwillingness of the executive to take requisite
    action in order to ensure that the culprits are punished, gravely
    impairs the right of the people to live in a corruption and crime free
    society. This violates Articles 14 and 21 of the Constitution. The right
    to life guaranteed to the people also includes in its fold the right to
    live in a society that is free from crime and corruption and upholds
    the rule of law…

  24. From JQ’s The Conversation article “Then there’s insurance. Faced with rejection by every major bank in the world, Adani announced it would fund the project from its own resources. But now insurers, including nearly all the big European firms and Australia’s own QBE, are saying the same sort of thing as the financiers…”

    Linked from there is:

    https://www.afr.com/news/insurers-shun-adanis-carmichael-coal-mine-says-activist-group-market-forces-20181219-h19ale

    “Ten of the world’s top insurance companies, including Australian groups Suncorp and QBE and global insurer AXA, say they won’t insure Indian energy group Adani’s controversial $2 billion Carmichael coal mine in Queensland, an activist group says.

    Market Forces, an anti-fossil fuel activist group backed by Friends of the Earth…”

    That may be, but six financial/insurance companies are currently shown at Market Forces as already working with Adani.

  25. Gore says that (i) in general renewable electricity is cheaper to make than coal-fired electricity, therefore (ii) it makes no financial sense for Adani to mine coal and turn it into electricity.

    But even if (i) is true, (ii) doesn’t follow. Adani probably could not give a fat rat’s clacker about the generalities. What matters to them is whether their specific mine combined with their specific power stations and, especially, their specific electricity contacts, make financial sense to them.

  26. A lengthy detailed article below holding little to nil hope for those doubting the Adani ability to self-finance the Carmichael mine through scams given the doubly contingent “perhaps” and “may” concluding bottom line..

    https://www.newsclick.in/exclusive-adani-power-rajasthan-gains-%E2%82%B92%2C500-Crore-consumers-expense
    02 Jun 2019
    How Adani Power Rajasthan Gains ₹2,500 Crore At Consumers’ Expense
    Regulatory authorities have interpreted rules in ways that have resulted in mounting losses for public sector electricity distribution companies while users are paying higher tariffs.

    …Alleged Over-Invoicing of Imported Coal
    The third issue of significance in the AIPEF applications relates to the allegations of over-invoicing of coal imported from Indonesia that have been raised against companies in the Adani group—among other companies—by the DRI, which these authors have covered extensively elsewhere. These allegations are the subject of a public interest litigation (PIL) petition currently pending in the Delhi High Court. … At present, the DRI’s investigation has run into a roadblock of sorts. (!!! Directorate of Revenue Intelligence) …

    Conclusion

    The April 2017 judgment by the Supreme Court––that had barred payment of compensatory tariffs to power companies on account of a rise in the prices of imported Indonesian coal and had emphasised the principle that the risk of changes in the costs of coal should have been taken on by companies when they chose to bid for the establishment of an electricity generation project and could not later be passed on to power consumers––had then been hailed by one of these authors as having “raised the bar for the Indian power sector.”

    In the two years that have followed, this judgment has in our view been thoroughly undermined by the country’s power generating companies with the complicity of government authorities and regulatory bodies. The Gujarat government set up a panel to examine how the costs of Indonesian coal could still be passed on to consumers despite the Supreme Court’s order. The panel duly did so. These authors had broken the news of its draft formula which was recently ratified by the Central Electricity Regulatory Commission (CERC). Among the beneficiaries is the ultra-mega power plant at Mundra in Gujarat. Now, other power plants that also use Indonesian coal, such as the ones at Kawai in Rajasthan and Tiroda in Maharashtra, have been granted compensatory tariffs using the same Supreme Court judgment as a justification. Incidentally, all these three power plants are owned by the Adani group.

    There is little doubt that if the compensatory tariff order of the RERC is upheld by APTEL, this case will also land up at the Supreme Court. Perhaps at that stage, the highest court of the land may get an opportunity to defend the spirit of its own April 2017 judgment.

    Adani will have to be stopped here then as India is in the bag for Adani. Mainstream politics and finance here or in India won’t do it, so it will be down to people power here.

  27. Afterthought: a business that can use its crony connections to secure subsidies at the consumption end, and a different set of crony contacts and agitprop to secure subsidies at the priduction end, can escape market logic entirely.

    Levitation by corruption opens limitless vistas to the skilled transnational grifter. Perhaps we can look forward to writing large cheques to Adani ventures into supersonic aircraft, nuclear reactors, nutrition supplements, and cold fusion.

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