The Wall Street Journal
written by Rhiannon Hoyle and Saurabh Chaturvedi
Monday July 28, 2014
SYDNEY — India's Adani Group 512599.BY +1.34% has secured approval from Australia's government to build one of the world's largest coal mines, a move that comes amid investor concerns about a global supply glut of the commodity and a prolonged downturn in prices.
On Monday, Australian Environment Minister Greg Hunt approved the 16.5 billion Australian dollar (US$15.5 billion) Carmichael mine and rail project in the eastern state of Queensland, which could produce and transport enough coal to power homes for about 100 million people in India. Nearly 300 million people in India have limited or no access to electricity, according to the World Bank.
Earlier this month, Adani said the engineering unit of South Korean steel company Posco 005490.SE +0.15% would build railway tracks that would transport coal from the mine to East Coast ports, where it will be shipped to Asian buyers. Posco is the sole contractor and will help Adani raise funds for the project, though neither company has disclosed terms.
The mine was proposed in 2010, at the height of Australia's coal-mining boom, as investors from countries including India, Japan and China sought to lock up strategic supplies of the fuel that they could ship home to facilities such as power plants and steel kilns. Adani bought the deposit that year to secure supplies for export to Indian utilities, many of which it owns.
Adani plans to produce as much as 60 million metric tons of thermal coal a year from six open-cut pits and five underground mines. That amounts to nearly one-third of what India—the world's third-largest importer of coal, after China and Japan—currently ships in from major producers like Australia.
India relies primarily on coal to generate power, and the country's imports rose 16% to 168.5 million metric tons in the financial year ended in March. Imports could rise to 200 million tons in the current year, according to Indian government estimates.
Still, India has grappled with a domestic-coal shortfall in recent years as the state-run mining company Coal India Ltd. 533278.BY -3.14% failed to produce enough coal to keep pace with local demand. Strict environmental regulations and difficulty securing land for mining projects have dragged on India's coal production, Adani Chairman Gautam Adani said last year. Supply shortages have increased India's reliance on expensive coal imports from Indonesia and other countries.
Analysts expect Indian demand for thermal coal to help absorb supply and underpin prices. Still, mining executives see that trend as a long-term driver for prices, and don't expect oversupply to be mopped up until at least next year.
UBS estimates there is an extra 17 million tons of thermal coal in the seaborne market this year that demand can't absorb. Last year, supply and demand were balanced, it said.
The current drop in Australian thermal-coal prices to near five-year lows has made many new coal projects uneconomic and prompted mining companies including Rio Tinto RIO.LN +1.01% and Anglo American AAL.LN +0.67% PLC to cut jobs, mothball mines or sell producing assets to protect profits. Rising supply from countries including Australia, Indonesia and South Africa have coincided with a slackening in Chinese demand growth to weigh on prices.
If it goes ahead with building the Carmichael mine, Adani will need to invest heavily in new infrastructure as the coal is located in the largely untapped and remote Galilee Basin. It will also require a dedicated 117-mile rail line to connect with an existing network serving the Bowen Basin mining district, which produces much of Queensland's coal.
Adani aimed to start building the mine this year and targets output of 60 million tons a year by 2023. However, analysts anticipate delays after it took longer than expected to secure regulatory approval. Environmentalists also have raised concerns about the viability of the Carmichael project, noting that other proposed mines have been delayed because of opposition from groups including local farmers. A spokesman for Adani declined to comment.
"The Queensland government will continue to work with project proponents, the Adani Group, to ensure the project is given its best possible chance of proceeding," said the state's deputy premier, Jeff Seeney, whose portfolio also covers infrastructure and planning.
At its peak, the mine would generate almost A$3 billion for Queensland's coffers, he said.
Mr. Hunt, the federal environment minister, said building the mine and infrastructure would create about 2,500 jobs.
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