A financial folly
The pièce de résistance in Adani vs Land Services of Coast and Country in the Land Court was the financial viability of the Carmichael mine. There had already been a couple of days devoted to economics-related topics, but I had made my excuses – blogging, resting, ironing – to stay away. I got my just desserts, missing a pure-gold piece of evidence from Adani Mining's financial controller, Rajesh Gupta: that the Carmichael mine was not going to create anywhere near the number of jobs it had originally estimated; 1464 as opposed to 10,000.
Overstatement of the economic benefits of the mine continued to be exposed during the final days of the case. Adani's economic modeller, Dr Jerome Fahrer, revealed in his report that revenues initially predicted to be $22 billion were more likely to be in the order of $7.8 billion. Much of Dr Fahrer's evidence was of a rather theoretical nature: how to value a negative externality such as the loss of an endangered species; the failings of input-output modelling as opposed to computable general equilibrium modelling; and the standard assumptions made in mining modelling.
Over the weeks, we had heard so much about the assumptions upon which models are based. In this instance, in the project case scenario (as opposed to the base case), there were several key contentious assumptions: that there will be an increase in world demand for coal; that there will be a shift in the preference of that demand for Carmichael coal; and that putting all that extra coal into the market won't affect supply and demand. Economist Dr Richard Denniss, for Coast and Country, only further undermined economic modelling for me by asserting that a model is a simplification (of a highly complex situation) and can alter the focus of attention by varying the data chosen and how the assumptions interact to achieve a desired outcome.
Dr Denniss had not been previously aware of Dr Fahrer's 'pocket of demand' claim about Carmichael coal. He cheekily enquired of the Court whether the coal has some special properties that no one else knew about. He explained that this compromises the underlying assumption of ceteris paribus (other things being equal) behind scientific enquiry in which perturbing factors are screened out while a series of independent variables is examined in order to determine the most likely outcome. 'Bundling assumptions' is unconventional: I misheard this at first as bungling assumptions.
I have heard it claimed before that attempting to put a price on environmental impacts is in the 'too hard' box. That may lead to inputting inconsistencies that devalue conclusions. If you take a guess at other unknowns then you have to do that for all potential costs and benefits. So, as a model inputter, if you say, 'I don't know what the price of coal is going to be in a decade but I have guesstimated this figure. Similarly, I don't know to what extent improved carbon capture technology will affect demand for coal, so I've guesstimated this figure.' Then you say, 'I can't possibly know the "value" of an endangered Black-throated Finch, so I've put zero', you're not comparing apples with apples, even approximately.
Adani's counsel questioned Dr Denniss's impartiality – he works for The Australia Institute in Canberra which is sometimes ascribed with left-wing bias. He neatly summarised his opinion in relation to mining companies' over-inflated claims about revenue and job opportunities.
I'm not anti-mining. I'm anti people putting nonsense into public debate.
Financial analyst Tim Buckley was the last day's witness. Based in Sydney, he is Director of Energy Finance Studies, Australasia, for the (American) Institute for Energy Economics and Financial Analysis (IEEFA), an independent organisation that 'conducts research and analyses on financial and economic issues related to energy and the environment'. He is also consultant to Carbon Tracker, a UK-based organisation that evaluates carbon risk and its implications for financial markets. A more able number cruncher you never did see.
He described his own long-term modelling of coal markets and electricity markets with particular implications for the Asia-Pacific thermal coal market. He talked about the peak for thermal coal; the point of inflection on the curve of a graph that up until now has shown the growth and more growth of the coal business. There can be little doubt about an inevitable downturn, being brought about by an unprecedented rate of transition in the policies of the energy-needy giants of Asia. The largest coal-producer in the Western world, Peabody Energy in the US, had seen its share value drop 90 per cent in four years. Australia's five largest coal companies have lost 90+ per cent of their share value in the last five years.
Adani's economics expert, Jon Standford, believes the peak will happen perhaps by 2030, certainly within the life of the Carmichael mine. Tim Buckley thinks it has already occurred, in 2013. Both described it as an existential moment for coal.
In China in 2014 coal imports declined by 9 per cent; coal consumption declined by 3 per cent. China wants to protect its energy industry and has made significant strategic decisions. It has made a decade-long investment in hydroelectricity; and implemented a huge roll-out of both wind and solar power last year. This amounts to an aggressive and efficient expansion of alternative energy. Buckley went so far as to say, 'there is war on coal in China'.
Last year also saw a decoupling of GDP and energy growth in China, and that decoupling has accelerated in the first quarter of 2015: there was an 0.8 per cent growth in energy while GDP grew by 7 per cent. Thermal coal plants have seen a 9 per cent decline in their utilisation rate; and the country's largest coal company, Shenhua, saw production decrease by 10 per cent last year and is forecasting another 10 per cent this year.
India's energy industry is similarly in transition. Since Narendra Modi came to power almost a year ago, scarcely an announcement of Power Minister Goyal goes by without an upgrade of transformational targets: 100 GW of solar by 2020; 60 GW of wind by 2022. A dramatic rate of change is accompanied by increased energy efficiency targets and emissions controls. According to Mr Buckley, there is already an over-supply of thermal coal, and the thermal seaborne market is in decline. When asked if India would be the saviour of the Australian thermal export market, he replied, 'Absurd'.
When asked to comment on Adani's claim that adding 40-60 million tonnes of coal to the market will not affect supply and demand, his response again was, 'Absurd'.
(That would also be a suitable ripost to Adani's repeated argument that the Carmichael output would not increase global emissions because if they didn't produce the coal, somebody else would.)
The price impact of Carmichael's coal would be the same as that on supply, about 3-4 per cent. One flow-on consequence would be that not all the coal would be used.
The question of economic viability of the mine, and Tim Buckley's prediction that Adani would make a loss, came down once again to the realism of figures used in modelling. Without going into details of the Newcastle benchmark (ash content and the relative energy values of coal deposits), the costs of extraction, rail and port costs, post-discount pricing, depreciation, the cost of debt, and probably a whole host of other factors, the conclusion had to be reached that, combined with assumptions of market conditions, coal prices and discounts, this 'extremely risky project' would not make a profit, and therefore Adani would not pay any corporate tax to the Queensland government.
Mr Buckley went on to describe how Adani's recent company restructuring might impact on the finances of the project here. There appeared to be some less-than-transparent matters relating to ownership of certain offshoot companies, and the impact of the redistribution of shares in what is no longer a vertically integrated group.
Just as the subject of Carmichael's viability started to get even more interesting, Adani's counsel appealed financial confidentiality to the judge, and the rest of that day in Court, as they say, is history; secret history. (See also, Would members of the public please leave the Court, May 2015.)
Is Adani's Carmichael mine a stranded asset before it even gets into the ground? Despite mounting evidence to that effect, should you choose to examine it, neither the Federal or State governments are yet at the stage when they will make bold decisions about environmental concerns, and that includes Australia's carbon emissions as well as Waxy Cabbage Palms. Even if market conditions evolve rapidly, it is more likely than not that grubbers will move into the mine site long before anyone admits financial folly. By then the Black-throated Finch will have been added to the count of species extinctions and Australia will be the sorrier for it.
