The giant Indian conglomerate has signed a memorandum of understanding to give Arrium Steel sole right to supply all the steel required for the double-tracked 400km rail line between the central Queensland mine site and the port at Abbot Point.

The deal is being touted as a significant boost for Arrium, which is under administration and facing closure, with crippling debt and a lack of orders.

Whyalla Mayor Lyn Breuer says the town’s council has been speaking with Adani for some time about the prospect of a solar power station in the area, but the steel plan has come “out of the blue.”

“This was a bit out of the blue, it’s a bit of a shock when this news arrived, but it’s very, very welcome news for Whyalla,” Breuer told ABC radio on Thursday.

Breuer said Arrium is likely to have a new owner within a few weeks, one of two final bidders, and this development would bode well for them.

“What we’re looking for in Whyalla is this huge order which will really, really be a great benefit for us,” she said.

Breuer, a former state Labor MP, said questions about how the mine could affect the Great Barrier Reef should be handled elsewhere.

The move poses a political challenge for Labor, with the State Government opposed to coal-fired electricity and Premier Jay Weatherill declaring earlier this year: “There is no future in coal.”

His Energy Minister Tom Koutsantonis said today the move would not be a “game-changer” for Whyalla.

“Well Adani are looking at purchasing 50,000 tonnes of steel over two years,” he told ABC Radio Adelaide. “Arrium makes 1.2 million tonnes of steel per year. This is good for Arrium but it’s not a silver bullet and it’s not a game-changer.”

When asked about his attitude towards the Adani mine, he said: “Look and let’s be very clear about this – mining coal is not prohibited in South Australia either it’s just that our resources are very poor and no private company is making that investment. Now in Queensland the Commonwealth Government have decided that they want to subsidise a coal mine, a new coal mine, giving it billion dollars of taxpayers’ money at very low interest rates to Adani. Now they haven’t got approval yet and they haven’t even got the mineral rights yet, whereas a lot of other mines do have the mineral rights and they’re out trying to raise the money from the private sector.”

Another South Australian Labor MP, the party’s federal climate change spokesman Mark Butler, made it clear he wasn’t enthusiastic about taxpayer support for the Adani mine.

“The Indian Government has a policy, very clear policy, of phasing out thermal coal imports over the course of the next few years,” he said. “They’ve already been reducing them very dramatically, and that is raising questions including within the coal industry about whether or not this mine is going to stack up. And if it does get built whether it will simply displace jobs in other thermal coalmines either elsewhere in Queensland or in New South Wales.

“If the project stacks up, the big billionaire mining companies from India should pay for it, not Australian taxpayers.”

Think tank The Australia Institute poured scorn on the deal, saying the spin around the Adani steel order was “deceptive”.

“Describing a one off order of 56,000 tonnes of railway line as a ‘lifeline’ for Arrium Steel is a cruel hoax,” said the institute’s chief economist, Richard Denniss.

“Arrium Steel can produce 2.5 million tonnes of steel per year. Adani’s apparent order of 56,000 tonnes over 2.5 years would utilise less than one percent of Arrium’s capacity. That’s more like dental floss than a lifeline.

“Arrium is under administration, having collapsed with debt of $2.8 billion. This $73 million order represents 2.5% of that debt, without considering the costs of making the steel. South Australians should go and ask the administrators KordaMentha whether they consider this a ‘lifeline’.”

South Australian Senator Nick Xenophon said there are still some hurdles in place as to whether the Adani mine project “stacks up” financially and environmentally, but it should undoubtedly use Whyalla steel if it goes ahead.

“If there’s one cent of Commonwealth or state money involved, it ought to be mandated, the use of Australian steel,” he said.

South Australia’s only coal mine, in Leigh Creek, closed in 2015.

– with AAP