Low prices and dwindling sources of finance are forcing coal producers to turn to export credit agencies (ECAs) to support their capital needs. But ECAs and their governments, increasingly driven by environmental concerns, show little or no appetite for coal projects.
Coal producers have been stung by the recent drastic drop in coal prices. Thermal coal is now at around $51 a tonne – a drop of more than 70 percent since its peak in 2009 – and as a result many banks are unwilling to lend to producers. In addition a new OECD ruling has been agreed which limits ECA support for inefficient coal-power stations.
Neither ECAs nor commercial lenders are particularly willing to support coal projects due to these commercial and regulatory constraints. “There were a wide range of banks involved in coal-power projects in Vietnam for instance, but the bulk of them are no longer interested — no one wants to be the one making the last deal.”
The mood in the industry is decidedly bearish. Recently, AGL, Australia’s second largest energy company, pulled out of its coal seam gas business citing low prices. Likewise, Indian-owned Adani Enterprises announced that it has frozen investment in Australia’s controversial Carmichael mine until prices recover.
Adani has also struggled to find banks willing to support the project which involved building infrastructure near the Great Barrier Reef. Last year Citi, Barclays, Deutsche Bank, RBS, Morgan Stanley and HSBC ruled out any involvement in the deal.
Crikey!, an Australian publication, has alleged that both Korean and USA ECAs, Kexim and US Ex-Im, were approached unsuccessfully by Adani to support the deal.
Both ECAs were approached by TXF but were unavailable to comment.
OECD rules against coal
In December 2015 the Participants to the OECD Arrangement on Officially Supported Export Credits agreed new restrictions on providing support to inefficient coal power stations specifically as a way of tackling climate change.
The ruling is a blow to the coal industry. In their annual coal report the International Energy Agency predicts that South East Asian coal demand is due to triple in the next 25 years as developing economies seek to provide their growing populations with cheap energy. However, the new OECD restrictions are likely to dampen demand both for coal from producers and for new coal-power projects.
Pekka Karkovirta, vice President of Finnvera and chairman of the OECD negotiations surrounding coal, believes that when it comes to the environment ECAs have an opportunity to lead by example.
“I think it will serve the purpose of saying to the private sector, without ECA cover, look, how are you going to move on?
“The life cycle of a power plant could be 30 or 40 years, normally for financing we allow 12 years from the commissioning of a plant but it is still a long time. The banks and others will have to take a position on whether they want to commit to these projects or not.”
The OECD coal ruling was surprisingly popular among member states with only Australia and Japan consistently opposed to the proposal.
Japan argued that Japanese high efficiency coal power plant technology is the best option for developing nations to meet their energy needs.
After two years of negotiations the final agreement made one concession, in favour of Japan, which allows ECAs to support high-efficiency coal project deals. The environmental argument, which the OECD accepted, was that high-efficiency coal technology encourages exporters and buyers to move away from more polluting old coal facilities to the cleaner, more efficient, coal technology.
One recent ECA coal deal which has succeeded is a $25.65 million Euler Hermes-backed loan for Australia’s Whitehaven Coal to expand its production. Whitehaven produces the high-energy coal permissible for ECA cover under the OECD rulings, and which is suited for new high efficiency power plants.
The ten-year loan from ANZ will be used to retool and expand Whitehaven’s fleet of Caterpillar long-wall mining machines. Germany’s Euler Hermes are guaranteeing 95 percent of the loan. Herbert Smith Freehills were the legal advisors for Whitehaven while Gilbert and Tobin advised ANZ.
Milo Houben , an associate director, structured commodity finance, at ANZ who worked on the project, describes the deal as a “select show of confidence in Australian coal,” but admits that large deals like this one are looking very unlikely in the short to medium term.
“The future is looking quite tough, commodity producers are not doing well and they are being very careful about large capital expenditure,” he adds.
The OECD agreement is the first to be based entirely on environmental considerations and may well have set a precedent for ECA support generally.
Other fossil fuel industries, which have been the target for environmental groups for years, could also potentially be targeted by the OECD. However, reaching an agreement for other energy sectors is much less likely as member states would almost certainly put up a greater fight to ensure continued ECA backing for deals.
Reflecting on the recent OECD ruling Karkovirta states: “It could be the case that in the future we will see an enlarging of this principle to cover other fossil fuels, although it’s too early to say yet.”
http://www.txfnews.com/News/Article/5433/ECAs-shy-away-from-dirty-coal-deals