SYDNEY: 15 December 2014 – The Australian Government Treasury in their Mid-Year Economic and Fiscal Outlook (MYEFO) statement today revealed their assessment that there will be no recovery in the thermal or coking coal price over the forecast period. According to Treasury, thermal coal prices will flat-line through to mid-2016 at US$63 per tonne.

This pessimistic forecast is well below current market expectations and strongly suggests the Federal government should exercise extreme caution on any plan to commit taxpayer funds to building water, port or rail infrastructure to open up the Galilee Coal Basin, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

“We have long argued that once the A$10-14bn of capital costs are taken into account, the Galilee coal projects are commercially unviable given the structural decline of thermal coal. It now seems the Australian Treasury agrees with us,” Tim Buckley, Director of Energy Finance Studies Australasia at IEEFA said.

“This is yet further strong evidence of the increased risk of stranded assets,” he said.

A key part of Treasury’s forecast is that China’s real economic growth would continue to slow to a more sustainable 6.75% in 2015 before slowing further to 6.5% by 2016.

This follows UK Energy Secretary Ed Davey last week warning that fossil fuel companies could become “the sub-prime assets of the future… Investing in new coal mines is going to get very risky”.

IEEFA also notes that global mining major Anglo American Plc last week announced plans to exit its Australian and South African thermal coal mining activities. Combined with the previous moves by Rio Tinto and BHP Billiton to cut capital expenditure and sell or spin-off coal asset assets across Mozambique, Mongolia, South Africa and Australia, plus Vale SA’s move to exit Australian coal mining, the global mining majors are increasingly showing in actions that the progressive move away from coal is gaining momentum.

Only last week Consol Energy Inc. also announced plans to spin-off their thermal coal mining assets in the US by way of initial public offering, and E.ON of Germany also announced plans to spin-off their fossil fuel generation assets. Put together, this starts to look like a trend – the smart money moving to the exit.

IEEFA’s December 2014 report, “Stranded Out West: The imminent failure of Lanco Infratech’s investment in Griffin Coal” highlights the similarities of these two Galilee proposals with that of Indian conglomerate Lanco Infratech in Western Australia. Lack of Australian market or coal mining experience, ongoing losses, excessive financial leverage, consistent delays, local community opposition and a reliance on state government subsidies are all common themes.

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research.

Mr Buckley has spent the past five years investigating the trends in global renewable energy and as a result questions viability of the Galilee developments.

Tim has produced detailed reports on Lanco Infratech, GVK and Adani, plus the Indian electricity sector.

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