(Repeats with no changes to text)
--Clyde Russell is a Reuters columnist. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, July 31 While it's easy
to point the finger of blame at Rio Tinto's former management
and feel a tad smug about their downfall, the real lesson of the
company's humiliating exit from its Mozambique coal assets is
that the wheels of the next commodity boom are now in motion.
This may seem counterintuitive at first, as once all the
arguments over Rio Tinto's wisdom of paying $4 billion
to gain a foothold in Mozambique are stripped away, it comes
down to the fact that weak coal prices made it uneconomic to
spend any more to develop the mines and infrastructure.
Oversupply in the coal sector has been a chronic problem,
and given the amount of mine capacity that is currently
under-utilised, it's likely that prices will struggle for some
time to come even if optimistic demand projections are met.
When Rio bought Riversdale's Mozambique assets in 2011,
thermal coal prices at Australia's Newcastle port,
an Asian benchmark, had peaked at $136.30 a tonne in January of
that year. Coking coal reached an eye-watering $330 a tonne at
Since then, prices have plunged. Newcastle thermal coal is
currently $67.89 a tonne, while Australian spot coking coal
fetches about $114 a tonne.
These prices alone ensure that developing Mozambique's rich
coal basins isn't viable, given that billions of dollars still
has to be spent expanding rail capacity and port infrastructure.
Brazil's Vale is another major player in
Mozambique, and it too is struggling to make the economics work.
Whether it will take the same route as Rio, and exit what
the Anglo-Australian miner had earlier called "the world's next
major coal basin", remains to be seen.
Certainly, the $50 million paid for Rio's Mozambique assets
by International Coal Ventures Private Limited (ICVL), an Indian
government venture seeking overseas assets, reflects the
potential for production rather than actual output.
Mozambique can export about 6 million-7 million tonnes of
coal a year, mainly through a colonial era railway and the
shallow-water port of Beira.
When companies like Rio and Vale entered the poor nation in
southern Africa, the plan was to raise this to more than 100
million tonnes per annum.
That was before the reality of falling prices sunk in -
along with the infrastructure challenges in a country that was
ravaged by two decades of civil war from the mid-seventies.
It could be argued that Rio was too eager to pay top dollar
for Riversdale, and that it didn't do enough due diligence on
just how challenging Mozambique is as a business and operating
Instead, former chief executive Tom Albanese was seduced by
the thought of cheap-to-mine (but difficult-to-transport) coal
and the close proximity to India, the next big thing in coal
demand after the rise of China.
He wasn't the first chief executive to make this type of
miscalculation - think Cynthia Carroll of Anglo American
and the $8.8 billion black hole that is the Minas Rio iron ore
project in Brazil - or Marius Kloppers and BHP Billiton's
stalled $20 billion expansion of the Olympic Dam copper
and uranium mine in South Australia.
All three of those bosses lost their jobs and their
successors have learned this lesson: No big, risky projects are
NEW PROJECTS GRIND TO HALT
What this means is that global resource companies are
concentrating on working existing assets as hard as they can,
cutting operating and capital costs and trying to ride out any
price weakness in the commodities they produce.
While this helps to keep the equity analysts off their
backs, it also ensures that the development of new projects has
virtually ground to a halt.
This is not quite apparent yet, given the large numbers of
projects under construction, with examples being the seven
liquefied natural gas plants in Australia, and iron ore mines in
Australia, West Africa and Brazil.
But it's getting harder to find developments of significance
that have taken final investment decisions (FID) recently, or
even look like they are about to.
There are some LNG ventures in the United States that look
like they are close to FID, but it's worth noting that of the
dozens of projects announced for the United States and Canada,
only one is currently being built.
Likewise, there was much fanfare in Australia over this
week's federal government approval of the $15.5 billion
Carmichael coal and rail project in Queensland state.
This was welcomed by project developer, India's Adani
Mining, but a firm timeline for progressing the project seems to
be lacking, a situation that exists with other major projects,
and not just coal.
The LNG industry is warning that a "second wave" of
investment in Australian projects is unlikely, largely because
of high costs, but also because of renewed uncertainty over the
strength of demand.
The demand equation for most major commodity projects always
tends to boil down to whether China will actually consume what
the resource industry is hoping it will.
While this uncertainty exists, it's extremely unlikely that
multi-billion dollar projects will get the go ahead.
And if this is the case, the likelihood increases that if
Chinese demand does meet, or come close to, consensus forecasts,
additional supply simply won't be there.
Hence, Rio's retreat from Mozambique will function as a
brake on any new ambitious ventures, and in doing so, sow the
seeds of the next commodity boom.
(Editing by Tom Hogue)