Australian coal miners are sounding increasingly dire warnings about their ability to secure finance, despite the industry being one of the country’s biggest export earners. Jacob Atkins looks at the future of coal financing and what export markets could develop as the world tilts away from fossil fuels.
No more coal mines can be built, investment in coal projects must slow to a trickle and the global trade in coal will almost entirely evaporate in the next 30 years.
The conclusions of the International Energy Agency’s (IEA) landmark report, published in May, on what a net zero emissions target for 2050 must look like for the energy industry are stark. But in Australia, the world’s top coal exporter by value, the picture is messier.
As the world hurtles toward ever greater curbs on greenhouse gas emissions – climate scientists say the increase of average global temperatures by 1.5 degree Celsius on pre-industrial levels allowed under the 2015 Paris Agreement is only the bare minimum required – Australian coal companies complain financing is already drying up.
Survival may depend on miners’ “ability to scrape the bottom of the lending barrel”, says Jack Bertolus, from shareholder activist group Market Forces.
While plans by all four of Australia’s major banks to scuttle the sector over the next 10 years are well advanced, demand for the country’s thermal coal is expected to taper off more slowly.
In Queensland, an Australian state which exports 90% of the coal dug up each year in its 51 coal mines, the progressive government estimated last year that “international demand will support Queensland’s coal exports over the coming two decades”.
Demand is led by Japan, South Korea, India and Taiwan. China, formerly the country’s top export market, stopped buying Australian thermal coal last year amid a trade dispute.
Coal companies, such as Whitehaven Coal, New Hope and Centennial, say they have had to lean more heavily on Asian banks in recent years to finance their operations, with Australian lenders shrinking their exposures but still taking part in syndicates.
The four majors – ANZ, Commonwealth Bank, National Australia Bank and Westpac – have all indicated they will reduce coal exposures to zero by the end of the decade. The coal companies say that may also spell the end of Asian lenders’ involvement in financing, because they are typically only willing to join syndications when a local bank is also providing lending.
It is unclear how that knot will be untangled. In a submission to a parliamentary committee inquiry into financing for coal exports, New South Wales-based Whitehaven Coal says some producers will have to move to unspecified “higher-cost and higher-risk debt sources” which “come with significant attendant risks”.
The committee will hold public hearings in July that are likely to prepare the ground for Australia’s conservative government to throw lifelines to the coal industry, which it has long supported. In 2017 Prime Minister Scott Morrison brandished a lump of coal – reportedly supplied by the mining industry’s top lobby group – while addressing parliament.
The industry also enjoys support, although less vocally, from the opposition Labor party, which holds or covets parliamentary seats in coal mining communities.
Asked what measures the government may extend to coal miners facing rapidly dwindling financing options, the federal resources minister Keith Pitt tells GTR in an email: “As far as any support that can be provided, I will await the report and recommendations from the independent parliamentary committee, which includes members from both sides of politics.
“I believe most Australians would agree that a legitimate industry, like the coal mining sector, should not be discriminated against by financial institutions on the basis of misguided ideology,” Pitt says.
“These are issues that need to be addressed. There’s no excuse for Australian banks, insurance companies and superannuation [pension] funds not backing Australian industry.”
Australia, which has declined to set a 2050 net zero target, appears increasingly at odds with an accelerating global move away from coal. The G7 – Canada, France, Germany, Italy, Japan, the UK and US – committed on May 21 to ceasing direct government support for “unabated international thermal coal power generation” by the end of this year, including export finance facilities.
White knights of Asia?
Even as coal miners look to Australia’s northern neighbours to replace evaporating financing, energy finance experts say white knights – in the form of banks from top coal importers – are unlikely to start racing across the outback.
Typically lagging Europe on sustainability issues, observers say Asian financial institutions are quickly catching up.
Tim Buckley, the director of energy finance studies for Australia and South Asia at the Institute for Energy Economics and Financial Analysis, a think tank that supports energy decarbonisation, has maintained a list of significant financial institutions globally which have published concrete statements on exiting coal.
Around a third of the list are currently Asian financial institutions, he tells GTR, whereas even a year ago there were almost none.
“You’re just getting a drumbeat of [coal] exits from Asia which a year ago didn’t exist. If you try to do a refinancing today in Asia, you’ll find most of the financial institutions have coal exit policies and won’t be part of the syndicate.”
Many of the statements contain loopholes. Some of the lenders have pledged to end financing new coal mining projects but have not ruled out re-financing or expansion for existing mines, for example, or have vowed to end financing for new coal-fired power stations but not necessarily coal mining overseas or financing for imports. Some also exclude coking coal, which is used in steelmaking.
“I am confident that we will start to see a decline in finance moving forward, simply because it’s what is required by the Paris Agreement,” Market Forces’ Bertolus tells GTR.
“A lot of finance experts are moving on from investment in coal, it’s just becoming so irrelevant.”
In late May, the world’s largest bank by assets, the Industrial and Commercial Bank of China (ICBC), said it would create a “gradual” roadmap for the withdrawal of coal financing, without providing further details.
Buckley says the move is indicative that China – whose state-run banking giants loom large in Asia – is also edging away from coal, although the country is likely to remain a strong domestic user of the fossil fuel for some time.
Chinese and Japanese banks have joined lending facilities for Australian miners as recently as last year. Bank of China, Bank of Communications, ICBC, Mizuho, MUFG and SMBC acted as mandated lead arrangers on a A$1bn additional facility for Whitehaven Coal in February 2020, according to project finance journal IJ Global.
Financial institutions are also looking askance at the infrastructure underpinning exports. Indian firm Adani, which owns a Queensland coal mine, has said one of its major contractors has been unable to find an insurer willing to provide cover to its work on a railway linking the mine to a port.
The Port of Newcastle, which says it is the world’s largest coal export terminal, was also ditched by ANZ earlier this year in a move that triggered parliament’s inquiry. National Australia Bank said in May it would step in to provide a A$515mn sustainable loan to the port with lower debt margins if it met sustainability targets related to its operations.
The port, about 160km north of Sydney, wants to transition away from coal but is hamstrung by government rules that prevent it from transforming into a container port.
That’s not a battery, this is a battery
The future described as necessary by the IEA report – one fuelled by electrification, batteries and bioenergy fuels – also offers opportunities for a resources-rich country tucked at the bottom of Asia.
Australia is well placed to profit from forecast growth in use of cobalt, graphite, vanadium and lithium by exporting raw or partly processed minerals to production facilities in Asia, according to a May report from the Department of Industry’s chief economist.
Mining of the critical minerals “and associated downstream investment could see the battery value add supply chain expand in Australia: domestic lithium refining is rapidly expanding, there is potential for rare earths refining and for domestic manufacturing of vanadium batteries and graphite anodes”, the report says.
Interest in drawing on Australian deposits of such critical minerals and creating some downstream processing in the country is expected to escalate as end producers seek to diversify supply chains away from China.
Australia, like other countries, is also eyeing the forecast boom in use of green hydrogen, a zero-carbon energy source.
In the state of Victoria, Japanese energy giant J-Power is trialling the export of liquefied hydrogen on the world’s first purpose-built liquefied hydrogen carrier through the Hydrogen Energy Supply Chain project.
The hydrogen produced through the project is made from coal, unlike green hydrogen which is made through renewable energy sources, although the carbon dioxide created during the process will be buried in the seabed.
The potential value of Australia’s hydrogen exports to Japan alone could be up to A$8.3bn by 2040, according to a 2018 report by consultancy Acil Allen for a government renewable energy body. The National Hydrogen Strategy says the industry could be worth A$55bn to Australia by 2050 as long as production costs can be kept under A$2 per kilogramme.
“Australia is particularly well-positioned to play a key role in the hydrogen export market with its abundant renewable resources, existing bilateral trade relationships with Japan and Korea and low sovereign risk,” says John Hirjee, ANZ’s executive director for institutional corporate finance, in a recent blog post. The bank is also a member of the Australian Hydrogen Council.
But even optimistic forecasts of hydrogen’s potential export value are likely to take a long time to reach that of coal. Australia exported A$43bn-worth of thermal coal alone in 2020 and because producing green hydrogen simply requires a renewable energy source, other countries with bountiful sunshine or wind are also tipping money into the nascent industry.
Nevertheless, Australia’s export make up is likely to look markedly different in the next decade, according to Ian Rogers, Westpac’s director of trade finance.
“If you’re comparing a thermal coal deal with a hydrogen deal, I’m probably going to look more at the hydrogen deal than I would at the thermal coal transaction when considering sustainability,” he tells GTR.
Sustainability is not only increasing in banks’ priorities but also increasingly that of their customers, he says. “I think companies are already moving in that direction and they’re expecting their financial institutions to move in that direction as well.”
“If you ask me in 10 years’ time, I think it likely that most products we offer will have a sustainable component to them. And I think anyone who is offering non-sustainable products in future years is probably going to be out of the market to some degree.”