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Thursday, 12 November 15
FOREIGN COAL MINE ACQUISITION - STRATEGY VERSUS OPPORTUNITY FOR INDIAN UTILITIES - DIPESH DIPU
.jpg) The acquisition market for thermal coal assets abroad is dull. Sellers of all hues are in the market; some are actively scouting for buyers while others, hoping against hope that someone looking to buy might knock the door and hence, are their running operations even in cash losses. The coal assets were acquired by many Indian power utilities and commodity trading companies, and some were acquired even leading to unrelated diversification. Indonesia was the toast of coal mine acquisition investments from Indian companies, while there were big investments in Australia, South Africa and other countries too. Why now, when the quoted asset prices are all time low, most Indian investors are shying away when the contrarian strategy would typically require one to grab the opportunity?
The global prices of thermal coal are lower than the March 2009 levels, a lowest observed in a decade after the fall due to global financial crisis. Costs on the other hand have been rising, marginal costs of mining in Australia for a large percentile of coal mines is upward of US $ 60 per tonne, which is nearly the price they fetch for high grade coal. Percentiles for South African and Indonesian mines are better as these are the lowest cost producers in the world. It is common sense that when the commodity price is low, below the marginal cash cost of production, it is advisable to buy the lowest cost producer, which will survive and benefit once the commodity price recovers after the more expensive players are forced out of the market. Now, when the coal prices are lower than the marginal costs and there are several low cost producers willing to sell or have been forced to sell due to financial distress, the absence of buyers indicates only one thing – the concern about price recovery.
Global thermal coal prices had been stable in nominal terms through the mid-1970s till 2003, almost range-bound from US$ 25-35 per tonne. This essentially meant that in real terms prices fell through the three decades. However, since then demand led price hikes scaled new peaks every year and reached close to US$ 200 per tonne in July 2008. The global meltdown in the aftermath of financial crisis led to coal prices tumbling down to US$ 60-65 per tonne in March 2009 before heading back to US$ 135-140 per tonne by early 2011. And since then, there has been a constant downward trend that remains unabated till now.
China has been a prime mover of the global coal industry. The prices turned to its peaks when China became a net importer of coal in 2008-09. In 2014-15, domestic production of coal in China has seen a slowdown due to cost pressures, while its imports have fallen as well by nearly a third from last year. It is being considered that for cleaner environment, China is attempting to lower its dependence on coal-based power generation. While in India, domestic coal supply scenario has improved on two counts - Coal India and SCCL have improved production, and the demand for coal hasn’t picked up as expected. This has led to thermal coal imports falling albeit at a slow pace. Indian power generation capacity addition which was rapid in 2009-2012 has taken a hit, largely due to fuel crisis during that period, apart from challenges such as delays in approvals and clearances and resulting financing constraints. Coal India has also embarked upon a near-1 billion tonnes per annum production by 2020, which may improve domestic coal supplies, while capacity addition growth in power generation may take some time as investor confidence returns to the sector. China and India, thus, do not paint a picture of global coal price recovery soon.
US coal companies are faced with existential questions and have begun to look at the international markets for exports, given that local demand has suffered due to environmental protection laws. Australia also seems to have oversupply challenge. Several key projects that could have further enhanced coal production in Bowen and Galilee basins are now mothballed. Japan has plans to increase coal based generation that will positively impact the demand for coal, but that may not absorb the high oversupplies already in the market.
The other significant disruptor for coal sector has been the emergence of renewable energy, solar power in particular, with scalability and economics gradually tilting in their favour. On a total cost basis, including environmental costs, the inflexion point between coal based and solar power seems to have been reached. The pace of change in technology in these renewables is high, which has resulted in fall of solar power tariffs from Indian Rupees (INR) 12-15 per unit in 2009-10 to INR 4.63 in the recently concluded bids by NTPC. The trend of falling tariffs in solar power coupled with scalabilities that till recently were not considered achievable brought coal based power generation to the inflexion point. While concerns about quality of supplies may persist for some time, suffice it to say that the disruption in coal sector is imminent and inevitable, and that may have an impact on global coal prices.
Given these, it may be optimistic to evaluate coal assets on a price recovery outlook. It may make sense to invest in the assets that may sustain profitability at slightly lower than current prices, possibly in the marginal cost range of US$ 35-45 per tonne for coal of 5000-6000 kCal/kg gross calorific values on as received basis. Investors should prefer operating assets, which may not have construction and development risks as well as risks of permits. Essentially, with these, the investors also need to look at regulatory risks in the destination country.
Indonesian coal sector has been in a flux and has led to enhanced perception of regulatory risks even though from the logistics and mining costs points of view, it may appear the favourable place to buy coalmines. The divestment clause that restricts foreign ownership and eventually makes a foreign buyer a minority stakeholder has the potential to restrict investments only to smaller projects where reserves can be exhausted before a mine transfers ownership. South Africa and southern African countries like Mozambique, Malawi, Zimbabwe, Namibia and Botswana have challenges of logistics even though the regulatory regimes are favourable. Mozambique, for instance, has only one operating Sena rail link connecting the coalfields in Tete to Beira port, which is already running at capacity, and is about 900 kilometers. Infrastructure development plans are now doubtful given the concern of coal price recoveries. Australia has challenges of higher cost of production, compliance costs and higher logistics costs, particularly for coal assets in Galilee basin.
Given these, the attractiveness of coal mine acquisition is low even though the low asset prices provide opportunities. As reported in the national newspapers, Indian government owned companies seem to be scouting for assets, which is far more challenging for them given their approach and methodologies for acquisition. Tendering route may be considered the least efficient for such acquisition as the market size in such tenders gets limited to only those assets who choose to respond to the tenders. It is a passive approach which gets hampered by inefficiencies in information channels as well and may not reach the potential sellers with good assets. In my recently concluded assignments for a few of such government-owned companies, it was observed that most bidders turned out to be Indian companies that invested abroad and have not been able to develop the coal assets well for themselves. For success in the market, it is required that ground work is done privately to assess target zones and identify strategically fitting assets and then approach the owners to nudge them to sell. This, however, may be tough for the government-owned companies in light of their internal processes, which obviously have not been designed for such acquisitions.
For Indian companies to acquire foreign coal assets, it is critical that they identify their strategic objectives and not go by the opportunities the market seemingly provides in terms of large number of sellers in the market willing to sell at relatively low prices. Private sector companies have better procedural manoeuvrability while government-owned companies get tied up in their own processes to effectively acquire assets that fit them. In any case, the long term price outlook being uncertain, investors need to tread with caution and pick assets that may sustain profitability even with worse forecasts. Else, the winners curse follows.
By Dipesh Dipu
Energy, Natural Resources and Infrastructure Expert
India
Views and opinions / conclusion expressed herein are personal views of the author and not that of COALspot.com.
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Wednesday, 03 August 16
SHIP TRADING AND ORDERING CLOSE TO A STALEMATE AS SUMMER LULL KICKS IN
With newbuilding activity already at a near standstill since the start of the year, most of 2016’s trading activity in shipping was evident i ...
Tuesday, 02 August 16
INDONESIAN CS COAL INDICES STAY POSITIVE
COALspot.com: Average 5000 GAR coal index of Indonesian origin rose 0.71% week over week to averaging $41.12 per ton this past week, shows CS (i) C ...
Monday, 01 August 16
4200 GAR INDONESIAN COAL PRICE MAY TOUCH $ 32/33 A TON LEVELS SOON
COALspot.com: Indonesian coal prices are likely surge further in 2016 as the recent price movement in Indonesian coal markets suggests that the mar ...
Monday, 01 August 16
BALTIC INDEX ENDED NEGATIVE NOTE THIS PAST WEEK ON WEAKER RATES ACROSS ALL LARGE VESSEL SEGMENTS
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities slide slightly as Cape, Panamax and Supramax segments end ...
Friday, 29 July 16
U.S. COAL OUTPUT SLIPS SLIGHTLY WEEK OVER WEEK
COALspot.com – U.S., the world’s second largest coal producers has produced approximately totalled an estimated 15 million short tons ( ...
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- Price Waterhouse Coopers - Russia
- Siam City Cement PLC, Thailand
- SMG Consultants - Indonesia
- Barasentosa Lestari - Indonesia
- Carbofer General Trading SA - India
- Therma Luzon, Inc, Philippines
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- Globalindo Alam Lestari - Indonesia
- International Coal Ventures Pvt Ltd - India
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- Deloitte Consulting - India
- Renaissance Capital - South Africa
- Bangladesh Power Developement Board
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- Indian Oil Corporation Limited
- Meralco Power Generation, Philippines
- Mintek Dendrill Indonesia
- Indogreen Group - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Edison Trading Spa - Italy
- Mjunction Services Limited - India
- Sarangani Energy Corporation, Philippines
- Port Waratah Coal Services - Australia
- IHS Mccloskey Coal Group - USA
- PowerSource Philippines DevCo
- Eastern Coal Council - USA
- New Zealand Coal & Carbon
- Sical Logistics Limited - India
- SN Aboitiz Power Inc, Philippines
- Energy Development Corp, Philippines
- Energy Link Ltd, New Zealand
- Minerals Council of Australia
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- ICICI Bank Limited - India
- Chamber of Mines of South Africa
- Latin American Coal - Colombia
- Chettinad Cement Corporation Ltd - India
- Baramulti Group, Indonesia
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- Riau Bara Harum - Indonesia
- Cement Manufacturers Association - India
- Romanian Commodities Exchange
- Parliament of New Zealand
- Singapore Mercantile Exchange
- The Treasury - Australian Government
- Orica Australia Pty. Ltd.
- Antam Resourcindo - Indonesia
- Posco Energy - South Korea
- Gujarat Mineral Development Corp Ltd - India
- Anglo American - United Kingdom
- Siam City Cement - Thailand
- Binh Thuan Hamico - Vietnam
- Semirara Mining and Power Corporation, Philippines
- India Bulls Power Limited - India
- Vizag Seaport Private Limited - India
- Grasim Industreis Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Marubeni Corporation - India
- Indo Tambangraya Megah - Indonesia
- Eastern Energy - Thailand
- Global Coal Blending Company Limited - Australia
- Coal and Oil Company - UAE
- Mercuria Energy - Indonesia
- Attock Cement Pakistan Limited
- Toyota Tsusho Corporation, Japan
- Ind-Barath Power Infra Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Bhatia International Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Aboitiz Power Corporation - Philippines
- Ministry of Transport, Egypt
- Gujarat Sidhee Cement - India
- Heidelberg Cement - Germany
- Australian Commodity Traders Exchange
- GAC Shipping (India) Pvt Ltd
- GMR Energy Limited - India
- Kideco Jaya Agung - Indonesia
- Bukit Makmur.PT - Indonesia
- ASAPP Information Group - India
- Bayan Resources Tbk. - Indonesia
- Thiess Contractors Indonesia
- IEA Clean Coal Centre - UK
- Manunggal Multi Energi - Indonesia
- Malabar Cements Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Uttam Galva Steels Limited - India
- Lanco Infratech Ltd - India
- Sojitz Corporation - Japan
- Central Java Power - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Jindal Steel & Power Ltd - India
- Jaiprakash Power Ventures ltd
- Tata Chemicals Ltd - India
- Oldendorff Carriers - Singapore
- The State Trading Corporation of India Ltd
- San Jose City I Power Corp, Philippines
- Pendopo Energi Batubara - Indonesia
- Agrawal Coal Company - India
- Aditya Birla Group - India
- Tamil Nadu electricity Board
- Global Green Power PLC Corporation, Philippines
- Petron Corporation, Philippines
- CNBM International Corporation - China
- Essar Steel Hazira Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Videocon Industries ltd - India
- Metalloyd Limited - United Kingdom
- Savvy Resources Ltd - HongKong
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- MS Steel International - UAE
- Bukit Baiduri Energy - Indonesia
- Georgia Ports Authority, United States
- Kalimantan Lumbung Energi - Indonesia
- PNOC Exploration Corporation - Philippines
- Coalindo Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Samtan Co., Ltd - South Korea
- Bukit Asam (Persero) Tbk - Indonesia
- OPG Power Generation Pvt Ltd - India
- Thai Mozambique Logistica
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Salva Resources Pvt Ltd - India
- Planning Commission, India
- Billiton Holdings Pty Ltd - Australia
- SMC Global Power, Philippines
- White Energy Company Limited
- Ministry of Mines - Canada
- Kapuas Tunggal Persada - Indonesia
- Altura Mining Limited, Indonesia
- Vedanta Resources Plc - India
- Indika Energy - Indonesia
- Kumho Petrochemical, South Korea
- Xindia Steels Limited - India
- Economic Council, Georgia
- Timah Investasi Mineral - Indoneisa
- London Commodity Brokers - England
- Pipit Mutiara Jaya. PT, Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Ambuja Cements Ltd - India
- Interocean Group of Companies - India
- Africa Commodities Group - South Africa
- Banpu Public Company Limited - Thailand
- Holcim Trading Pte Ltd - Singapore
- TNB Fuel Sdn Bhd - Malaysia
- Electricity Generating Authority of Thailand
- Intertek Mineral Services - Indonesia
- Directorate Of Revenue Intelligence - India
- Dalmia Cement Bharat India
- Electricity Authority, New Zealand
- Parry Sugars Refinery, India
- Sakthi Sugars Limited - India
- TeaM Sual Corporation - Philippines
- Krishnapatnam Port Company Ltd. - India
- Borneo Indobara - Indonesia
- Semirara Mining Corp, Philippines
- Maheswari Brothers Coal Limited - India
- South Luzon Thermal Energy Corporation
- Kobexindo Tractors - Indoneisa
- Kartika Selabumi Mining - Indonesia
- Makarim & Taira - Indonesia
- Miang Besar Coal Terminal - Indonesia
- European Bulk Services B.V. - Netherlands
- Central Electricity Authority - India
- McConnell Dowell - Australia
- Orica Mining Services - Indonesia
- Merrill Lynch Commodities Europe
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- AsiaOL BioFuels Corp., Philippines
- Jorong Barutama Greston.PT - Indonesia
- Power Finance Corporation Ltd., India
- Trasteel International SA, Italy
- Global Business Power Corporation, Philippines
- PTC India Limited - India
- VISA Power Limited - India
- Alfred C Toepfer International GmbH - Germany
- Coastal Gujarat Power Limited - India
- Bhoruka Overseas - Indonesia
- Indonesian Coal Mining Association
- Medco Energi Mining Internasional
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Star Paper Mills Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Directorate General of MIneral and Coal - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Maharashtra Electricity Regulatory Commission - India
- Bhushan Steel Limited - India
- Larsen & Toubro Limited - India
- Independent Power Producers Association of India
- Wood Mackenzie - Singapore
- PetroVietnam Power Coal Import and Supply Company
- CIMB Investment Bank - Malaysia
- Straits Asia Resources Limited - Singapore
- Simpson Spence & Young - Indonesia
- Iligan Light & Power Inc, Philippines
- Bulk Trading Sa - Switzerland
- Wilmar Investment Holdings
- Sree Jayajothi Cements Limited - India
- GVK Power & Infra Limited - India
- Commonwealth Bank - Australia
- Mercator Lines Limited - India
- Formosa Plastics Group - Taiwan
- Sinarmas Energy and Mining - Indonesia
- Rio Tinto Coal - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- LBH Netherlands Bv - Netherlands
- Bharathi Cement Corporation - India
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- Rashtriya Ispat Nigam Limited - India
- The University of Queensland
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Australian Coal Association
- Madhucon Powers Ltd - India
- Indian Energy Exchange, India
- GN Power Mariveles Coal Plant, Philippines
- Standard Chartered Bank - UAE
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