Ascended Modi after Gujarat rode
Does Gautam Adani really need Galilee coal?
Many Australians may only know Gautam Adani through the controversy surrounding the Carmichael mine in the Queensland Galilee Basin, but the Indian entrepreneur is a remarkable man.
He did not rise from poverty, but from a humble background to become one of the richest men in India. After leaving university, he rode the Indian tiger following the reforms of the early 1990s. Some attribute the acceleration of his prosperity and prominence to his friendship with Indian Prime Minister Narendra Modi.
Indeed, as chief minister of Gujarat, Modi 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 largest coal importer in India, Adani Ports has the largest cargo handling in India and Adani Power is the largest private electricity company in India.
This recovery was financed through debt, which makes the group profitable but highly oriented. This financing model has brought Adani Power another "largest" stock, as according to Bloomberg the highest debt ratio is recorded in the BSE100 index of the Bombay Stock Exchange. Because of this, some speculate about the sustainability of his more ambitious plans.
Adani's relationship with Modi is important. So if we are to understand Gautam Adani's strategic vision, we need to look at Narendra Modi's strategic vision. Modi announced the "Make in India" policy, which aims for India to dominate Chinese hegemony in manufacturing. Developing manufacturing capacities helped Taiwan, Japan, South Korea and China, to name a few, expand their industrial base and lift their people out of poverty.
It is logical that India should follow the same path. One of the most important pillars of Modi's Make-in-India policy is the development of renewable energy production capacity.
Gautam Adani's approach indicates that the Adani Group is a key element in the implementation of the "Make in India" policy. He has signed a joint venture with SunEdison to manufacture low-loss solar modules in Gujarat, a pact with the Rajasthan government to supply 10 GW solar modules over a 10-year period and is said to be 648 MW as part of a 2GW solar park in Tamil Nadu deliver in March 2016.
In Adani's own words: "We have set ourselves the goal of becoming a global leader in the field of renewable energy generation technologies, with a special focus on solar energy."
Where does Australian Galilee coal fit into this plan for India's industrial revolution? The interest in coal projects in Indonesia and Australia came from the need for Adani Power to have alternatives to domestic coal supplies. Much has been said about the poor performance of India's coal industry, so it is not surprising that Adani Power wanted to secure coal supplies from international sources. Adani's Indonesian mining company is already bringing coal to India, but Australia's Galilee Basin project, a far more ambitious plan, has deteriorated.
Another important point is that Adanis Indonesian and Australian projects were initiated before Modi wanted to advance India's Indian manufacturing and mining base with his plans. If the Adani Group's high debt limits access to finance and limits Adani's ambitions, a decision will have to be made between the Galilee Basin project and the development of Indian renewable energy technologies. Which one will he choose? What would meet Modi's ambitions to be the world leader in renewable energy generation technologies?
The Australian operation has made significant investments, but the transportation costs involved have always produced relatively expensive coal. As I wrote earlier, coal production is not suitable for countries with energy and income poverty in India. With a new focus in India on promoting renewable energy technologies, the decline in operations in Australia since the federal court ruling to revoke the approval of the Carmichael mine is understandable.
So will Adani just mothball Australian capital, will he keep investing to maintain value for a potential sale, or will he stick with the project? To hold on to the project will require renegotiation with the Central Electricity Regulatory Commission to increase the rate at which it supplies its energy to account for the additional cost of Australian coal. None of these alternatives require easy decisions.
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