Does Gautam Adani really need Galilee Basin coal?

Many Australians may only be aware of Gautam Adani through the controversy surrounding the Carmichael mine in Queensland’s Galilee Basin, but the Indian entrepreneur is a remarkable man.

He has risen, although not from poverty, but from a modest background, to become one of India’s richest men. After dropping out of university, he has ridden the Indian tiger after the reforms of the early 1990s. Some attribute the acceleration of his wealth and prominence, to his friendship with Indian prime minister Narendra Modi.

Indeed it was when Modi was Chief Minister of Gujarat that he took over the operations of the Mundra Port, the success and consequences of which catapulted Adani into the big league. Today, Adani Enterprises is the biggest coal importer in India, Adani Ports has the largest throughput of cargo in India and Adani Power is the biggest private power company in India.

The financing of this mercurial rise has been through debt, which leaves the group profitable but highly geared. This financing model has earned Adani Power another “biggest” title, as Bloomberg reports that it has the biggest debt-equity ratio on the Bombay Stock Exchange’s BSE100 index. For this reason, some speculate about the sustainability of his more ambitious plans.

Adani’s relationship with Modi is important, so if we are to understand the strategic vision of Gautam Adani, we need to look to the strategic vision of Narendra Modi. Modi has announced the Make in India policy which seeks to have India muscling in on China’s manufacturing hegemony. Developing manufacturing capacity helped Taiwan, Japan, South Korea and China, to name only a few, grow their industrial base and lift their people from poverty.

It is logical for India to follow the same route. One of the key pillars of Modi’s Make in India policy is the development of renewable energy manufacturing capacity.

Gautam Adani’s actions now point to the Adani Group being a key element in the implementation of the Make in India policy. He has signed a joint venture with SunEdison to manufacture low lost solar panels in Gujarat, a pact with the Rajasthan Government to deliver 10 GW of solar panels over 10 years, and is scheduled to deliver 648MW as part of a 2GW solar park in Tamil Nadu in March 2016.

In Adani’s own words: “We have embarked upon a mission of becoming a world leader in renewable power generation technologies, with a special focus on solar.”

So where does Australia’s Galilee coal fit in this plan for India’s manufacturing revolution? The interest in coal projects in Indonesia and Australia came from the need for Adani Power to have alternatives to domestic coal supply. Much has been said about the poor performance of India’s coal industry, so it is not surprising that Adani Power sought to secure coal supply from international sources. Adani’s Indonesian mining concern is already shipping coal to India, but the Australian Galilee Basin project, a far more ambitious plan, has languished.

A further point to note is that Adani’s Indonesian and Australian projects were initiated before Modi came to power with his plans to advance India’s domestic manufacturing and mining base. If the Adani group’s high debt levels limit access to finance and restrict Adani’s ambitions, a choice will have to be made between the Galilee Basin project and the development of Indian renewable power technologies. Which is he going to choose? Which would satisfy Modi’s ambitions for world leadership in renewable power generation technologies?

There has been a significant investment in the Australian operation, but it was always going to yield relatively expensive coal because of the transportation costs involved. As I have written before, coal-fired generation is inappropriate for energy- and income-poor states in India. With a new focus in India on driving renewable energy technologies, the shrinking of their operation in Australia since before the federal court’s decision to overturn approval for the Carmichael mine, is entirely understandable.

So will Adani just mothball the Australian asset, will he continue investing to maintain value for a potential sale, or will he stick with the project? Sticking with the project will mean renegotiating with the Central Electricity Regulatory Commission to increase the rates at which he supplies his power to allow for the additional cost of Australian coal. None of these alternatives involve easy decisions.

Lynette Molyneaux does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond the academic appointment above.