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Australia's thermal coal financing options thinning out, but hope alive in Asia

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Dalrymple Bay Coal Terminal in Queensland, Australia, which exports both metallurgical and thermal coal.
Source: Dalrymple Bay Coal Terminal Management

As Australia's key thermal coal customers adopt carbon neutrality goals, new project financing may be threatened as the "big four" banks in the world's second-largest thermal coal exporter continue to distance themselves from the increasingly contentious commodity.

After Whitehaven Coal Ltd. refinanced a A$1 billion secured bank debt facility in February, CFO Kevin Ball told analysts the company lost two European banks when refinancing in 2015, then more in 2017, but has since replaced those with Asian banks.

Ball said Whitehaven started out with an all-Australian banking syndicate with a small Asian contingent, to now being "balanced between Australia and offshore" banks.

Seven months later, politics has potentially reduced that pool further, with China, Japan and South Korea recently pledging carbon neutrality over the next 30 to 40 years, and China reportedly banning coal imports from Australia amid political tensions.

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Rising investment, slim financing options

As for the "big four" Australian banks, National Australia Bank Ltd. said earlier in November it would cut its thermal coal mining exposure to zero by 2030 after Australia and New Zealand Banking Group Ltd., or ANZ, said it would no longer take on any new business customers with thermal coal exposure amounting to more than 10% of total revenue.

Westpac Banking Corp. and Commonwealth Bank of Australia also vowed to cut direct thermal coal investments by 2030.

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A Nov. 23 Australian government report said many of the 45 feasibility-stage coal projects worth an estimated A$59 billion as at Oct. 31 have been delayed amid a growing preference for expansions over new project investments, a "growing reluctance" to commit to greenfield coal projects, and an "expanding list" of lenders and investors who have announced plans to no longer finance thermal coal projects.

"Some pension and equity funds are also divesting from, or limiting, their exposure to thermal coal, narrowing the range of investment financing options available to coal projects," the report stated.

A number of the mines listed as feasible also have proponents announcing they are transitioning out of thermal coal, notably BHP Group, which the report said raises doubts about some coal projects advancing to the committed stage.

Yet the report noted coal exploration expenditure rose by 66% to A$303 million in fiscal 2020, its highest value since fiscal 2014, the third consecutive year of increases.

There has been a "very strong ESG overlay" hanging over any name associated with coal financing, particularly thermal but increasingly even metallurgical, despite its essential use in steel making, Australian broker Morgans Financial Ltd. Resources Analyst Tom Sartor told S&P Global Market Intelligence.

He said the cost of debt funding for Australian thermal coal producers is "probably increasing as the pool of available lenders domestically shrinks."

However, he said it is "slightly more expensive and less ideal" to form an international debt syndicate due to the "logistical and cultural hurdles that brings."

Anecdotally, Sartor said reduced interest from Australian banks is being replaced by customer financing or "customer jurisdiction banks" from Asia, where "there seems to be enough appetite for debt to still finance these projects."

Asian bank trends

An Asia-based senior syndicate banker at an Italian bank who preferred not to be named said Japanese megabanks like Mitsubishi UFJ Financial Group Inc., Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group, Inc. and mainland Chinese banks like Industrial And Commercial Bank Of China Ltd. and Bank of China Ltd. are currently the most common non-Australian financiers of thermal coal projects on the continent.

The banker told Market Intelligence that cash-rich Taiwanese banks and South Korean banks have also become increasingly active. Taiwanese banks, which have in recent years set up near a dozen branches across Sydney and Melbourne, are seen as more attractive to borrowers with lower-than-average lending rates due to high ratings and lower funding costs.

Tensions between China and Australia are already being seen, with the source saying China Development Bank already declined at least one coal refinancing deal in Australia.

If Chinese and Australian banks are out of the picture, this will leave room for Japanese lenders to take a greater role in coal financing Down Under in the near term, along with much smaller Taiwanese and South Korean banks, the banker said.

The banker said the Australian coal loan market is watching the refinancing of Alinta Energy's 2017 A$715 million loan which originally included ANZ, Bank of China, DBS Group Holdings Ltd., Intesa Sanpaolo SpA, Standard Chartered PLC, Sumitomo Mitsui and UOB-Kay Hian Holdings Ltd.

Japanese interest

Spokespeople at Japan's three megabanks, who declined to discuss whether those banking groups are financing coal-fired projects in Australia, said that they see little chance for their banks to take over coal financing from Australian banks as the Japanese lenders have set a clear policy to reduce their outstanding financing for coal projects to zero in two decades.

MUFG said in October that it will do so by March 2041 by reducing its US$3.58 billion of outstanding financing as of March. MUFG aims to halve that amount by March 2031. In May 2019, MUFG said it would limit new financing for coal-fired projects, but it did not specify a target date to eliminate its outstanding financing.

Two other megabanks — Sumitomo Mitsui and Mizuho Financial — already set the same target date of cutting their outstanding financing for coal-fired projects to zero. SMFG said so at its shareholders meeting in June, while MFG bared its plans in a July sustainability report.