Energy & Resources Partner Bruce Adkins discusses how the death of coal has been greatly exaggerated. Recent transactions in the Australian coal sector right now demonstrate that quality Australian coal assets continue to be in demand. What does the future hold for the Australian coal sector?
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2016 is already proving to be quite busy in the coal sector, particularly for Corrs Chambers Westgarth Partner, Bruce Adkins and his team.
Last week Corrs clients Peabody Energy Australia and CITIC Resources Australia announced their A$120 million sale of the Olive Downs and Willunga coal projects.
Other significant clients Bruce has advised on in the coal sector include:
- Stanmore Coal on the re-start of their Isaac Plains Coal mine, which they purchased from Vale and Sumitomo last year;
- MACH Energy – a company owned by Indonesian billionaire Anthoni Salim – on its A$320 million acquisition of the Mount Pleasant Coal Project; and
- The Administrators of Bandanna Energy on the sale process, which has resulted in the sale of the Dingo West coal project.
Are the reports of the death of coal exaggerated?
Yes, I think the reports of the death of coal have been greatly exaggerated.
There is no doubt that we are in a tough part of the cycle right now. Coal prices are low, and many producers are struggling to make a dollar. In fact, there many mines producing at a loss, and the only reason they continue to produce is because of the take or pay obligations they have under their rail and port contracts.
There is also quite a bit of negative sentiment at the moment. We had the Four Corners “End of Coal” story in June last year, and there have been a number of pension funds, banks and other investors who have come out and said that they will no longer invest in, or lend to, coal projects. And of course the elephant in the room, and the cause for much of the negative sentiment, is the ongoing concern around the climate impacts of burning fossil fuels.
But whether you love it or hate it, one simple fact remains. And that is that coal will continue to be a vital part of the global energy mix for many decades to come.
I agree that renewable energy has a very important role to play, and that role will increase significantly over time.
But coal is the only low cost, abundant and reliable source of base load power generation that we have. So if people here in Australia, and all around the world, want to come home at night and turn on a light, then we need coal to make that happen. As things stand right now, renewable energy simply cannot power the entire world.
Quite apart from its use as a fuel in power generation, coal is also a vital ingredient in the steel making process, and there is no substitute for it. So without coal, there would be no steel to make motor vehicles, household appliances, and many other things that we take for granted every day.
So for all of these reasons, I am firm believer in the future of a vibrant and successful Australian coal sector.
What does the future hold for the Australian coal sector?
I am optimistic. As sure as night follows day, boom always follows bust, and it will again this time. Some people say that this downturn is different, that it will be permanent, but I don’t believe that for a second.
There is no doubt that the current downturn has been long and deep - and conditions remain very tough. But there are already some positive signs emerging.
The Australian dollar has fallen from the highs of a few years ago, and mining and development costs have fallen. On the revenue side, prices have also picked themselves off the floor.
And despite what many people might think, the demand side has held up quite well, with demand continuing to grow, albeit slowly, throughout the downturn.
So when demand does eventually catch up with supply, as it inevitably will, then we will have the beginnings of the next boom. You only have to look at India and China to see it coming. With their rising middle class, over the coming decades we will have more than a billion people in India and China alone who will have an almost insatiable thirst for energy and consumer goods. Coal will have a very big part to play in meeting that demand.