Three big projects and a handful of smaller ones are proposed for the Galilee, a vast area of land rich in thermal coal some 450km inland from the coastal city of Rockhampton.
In theory, the Galilee ought to already be one of the world’s premier sources of coal.
In reality there have been multiple hurdles, with some of them seemingly too high for even the best connected project to clear.
Everyone involved in the Galilee, from two of Australia’s richest people, Gina Rinehart and Clive Palmer, to some of India’s richest, including Gautam Adani, are confident that the region will be developed.
Others are not so sure and while he would prefer to be an optimist Hogsback is struggling to see how the stars can align for the Galilee any time soon without being kick-started by some form of catalyst.
Positive events of the past month include the pre-Christmas official green light for the China First coal mine proposed by Palmer and a similar official green light for the GVK/Hancock project that includes Rinehart as a minority partner.
Under normal circumstances the awarding of government approval would be followed quickly by the awarding of construction contracts.
These are not normal times – as everyone with an interest in coal understands – with the price of both thermal and metallurgical coal stuck in the cellar, environmental protestors becoming bolder by the day and banks remaining sidelined until they can see the financial attractions of lending to a new mine.
It’s that final point about sidelined banks (and sidelined equity investors) that The Hog reckons is the highest hurdle for the Galilee because while environmental objections can be managed, there is no guarantee that banks can be persuaded to provide the debt component of a development proposal, even if it is backed by super-rich owners.
For the Galilee to achieve its potential something significant needs to change and that really comes down to just two possibilities – a sharp rise in the price of coal, or a sharp fall in the value of the Australian dollar.
The coal price, as far as can be seen, is not going anywhere soon.
It is being weighed down by chronic oversupply and intensifying competition from other fuel sources, including the big new bogeyman on the scene, a surplus of natural gas, which is the politically preferred fuel of the day.
The dollar might be a different matter, with signs emerging that the Australian currency is on the verge of returning to its status of a decade ago as the South Pacific peso.
Tipping foreign exchange moves is even tougher than tipping coal-price moves but of the two it seems currency could be the saviour of the Galilee and if coal edges up a bit in US dollar terms then so much the better.
To wrap a few numbers around the importance of currency, consider what’s happened to the price of coal since around March 2013, a time when thermal coal was trading at around $US97 a tonne and the exchange rate was around $1.05, producing an Australian domestic coal price of $A92/t.
Today, the price of thermal coal exported from Australia has fallen to $US86/t while the exchange rate has fallen further, to around 89c.
That currency fall has had the effect of lifting the Australian domestic coal price to around $A96.60/t.
In other words, while coal has been going down in US dollars it has been going up on conversion – with currency winds blowing strongly in favour of a continuation of that trend.
To put an interesting spin on the coal/currency situation, consider what happens to the Australian domestic coal price if the exchange rate slides to US80c, a value that looks highly likely over the next 12 months.
At 80c and assuming no change in the US dollar coal price, the Australian coal price rockets back through the $A100 mark and sits at $107.50/t – a price that will make the Galilee projects look more attractive.
Other factors are at work in the Galilee, with negative influences outweighing the positive, which is why everyone is sitting on their hands waiting for a rise in coal prices and a fall in project construction costs.
Meanwhile, the catalyst that could change the outlook for the region is the factor that has been ignored until now and that’s the currency effect, which is slowly shunting the Galilee towards an overdue start on construction – at some time.