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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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Thursday, 28 July 16
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Tuesday, 26 July 16
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- PNOC Exploration Corporation - Philippines
- Straits Asia Resources Limited - Singapore
- Rashtriya Ispat Nigam Limited - India
- Baramulti Group, Indonesia
- Standard Chartered Bank - UAE
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- LBH Netherlands Bv - Netherlands
- Ceylon Electricity Board - Sri Lanka
- Central Java Power - Indonesia
- CIMB Investment Bank - Malaysia
- Savvy Resources Ltd - HongKong
- Latin American Coal - Colombia
- Power Finance Corporation Ltd., India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ind-Barath Power Infra Limited - India
- The Treasury - Australian Government
- Thiess Contractors Indonesia
- Indonesian Coal Mining Association
- Leighton Contractors Pty Ltd - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Bhushan Steel Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- OPG Power Generation Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Marubeni Corporation - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bharathi Cement Corporation - India
- Mercator Lines Limited - India
- Vizag Seaport Private Limited - India
- Globalindo Alam Lestari - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Barasentosa Lestari - Indonesia
- Tata Chemicals Ltd - India
- Commonwealth Bank - Australia
- Indogreen Group - Indonesia
- Attock Cement Pakistan Limited
- Electricity Generating Authority of Thailand
- GMR Energy Limited - India
- Maheswari Brothers Coal Limited - India
- IHS Mccloskey Coal Group - USA
- Indo Tambangraya Megah - Indonesia
- Makarim & Taira - Indonesia
- Rio Tinto Coal - Australia
- The University of Queensland
- Madhucon Powers Ltd - India
- Holcim Trading Pte Ltd - Singapore
- South Luzon Thermal Energy Corporation
- Global Green Power PLC Corporation, Philippines
- Xindia Steels Limited - India
- PTC India Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Bhatia International Limited - India
- Sinarmas Energy and Mining - Indonesia
- Trasteel International SA, Italy
- TNB Fuel Sdn Bhd - Malaysia
- Bayan Resources Tbk. - Indonesia
- Central Electricity Authority - India
- Chamber of Mines of South Africa
- Medco Energi Mining Internasional
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kapuas Tunggal Persada - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Ministry of Transport, Egypt
- Siam City Cement - Thailand
- Timah Investasi Mineral - Indoneisa
- London Commodity Brokers - England
- Posco Energy - South Korea
- Deloitte Consulting - India
- Australian Commodity Traders Exchange
- IEA Clean Coal Centre - UK
- GVK Power & Infra Limited - India
- Gujarat Sidhee Cement - India
- Malabar Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Kideco Jaya Agung - Indonesia
- Meenaskhi Energy Private Limited - India
- Cigading International Bulk Terminal - Indonesia
- Orica Mining Services - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Orica Australia Pty. Ltd.
- European Bulk Services B.V. - Netherlands
- Dalmia Cement Bharat India
- Larsen & Toubro Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Formosa Plastics Group - Taiwan
- Meralco Power Generation, Philippines
- Carbofer General Trading SA - India
- Karbindo Abesyapradhi - Indoneisa
- Bangladesh Power Developement Board
- Port Waratah Coal Services - Australia
- Indian Oil Corporation Limited
- Grasim Industreis Ltd - India
- Wilmar Investment Holdings
- Vijayanagar Sugar Pvt Ltd - India
- Thai Mozambique Logistica
- Toyota Tsusho Corporation, Japan
- Electricity Authority, New Zealand
- Edison Trading Spa - Italy
- Eastern Energy - Thailand
- Interocean Group of Companies - India
- Star Paper Mills Limited - India
- Siam City Cement PLC, Thailand
- Renaissance Capital - South Africa
- Minerals Council of Australia
- Sree Jayajothi Cements Limited - India
- Sakthi Sugars Limited - India
- Manunggal Multi Energi - Indonesia
- ICICI Bank Limited - India
- Energy Development Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- SMC Global Power, Philippines
- Banpu Public Company Limited - Thailand
- Indika Energy - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Independent Power Producers Association of India
- Semirara Mining and Power Corporation, Philippines
- Georgia Ports Authority, United States
- GN Power Mariveles Coal Plant, Philippines
- Merrill Lynch Commodities Europe
- Bulk Trading Sa - Switzerland
- Antam Resourcindo - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- International Coal Ventures Pvt Ltd - India
- Sindya Power Generating Company Private Ltd
- Eastern Coal Council - USA
- Australian Coal Association
- Agrawal Coal Company - India
- Energy Link Ltd, New Zealand
- Borneo Indobara - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Economic Council, Georgia
- Coal and Oil Company - UAE
- PowerSource Philippines DevCo
- Lanco Infratech Ltd - India
- Wood Mackenzie - Singapore
- Jaiprakash Power Ventures ltd
- Cement Manufacturers Association - India
- Parry Sugars Refinery, India
- Mjunction Services Limited - India
- Kumho Petrochemical, South Korea
- Intertek Mineral Services - Indonesia
- Petron Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Tamil Nadu electricity Board
- Karaikal Port Pvt Ltd - India
- Altura Mining Limited, Indonesia
- Kepco SPC Power Corporation, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Jindal Steel & Power Ltd - India
- ASAPP Information Group - India
- Global Business Power Corporation, Philippines
- Parliament of New Zealand
- The State Trading Corporation of India Ltd
- Neyveli Lignite Corporation Ltd, - India
- Coastal Gujarat Power Limited - India
- Aditya Birla Group - India
- Therma Luzon, Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Aboitiz Power Corporation - Philippines
- Indian Energy Exchange, India
- Oldendorff Carriers - Singapore
- Simpson Spence & Young - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Singapore Mercantile Exchange
- Romanian Commodities Exchange
- Billiton Holdings Pty Ltd - Australia
- Bukit Baiduri Energy - Indonesia
- San Jose City I Power Corp, Philippines
- Sarangani Energy Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Goldman Sachs - Singapore
- Essar Steel Hazira Ltd - India
- Heidelberg Cement - Germany
- VISA Power Limited - India
- Kohat Cement Company Ltd. - Pakistan
- McConnell Dowell - Australia
- Mercuria Energy - Indonesia
- TeaM Sual Corporation - Philippines
- SN Aboitiz Power Inc, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Iligan Light & Power Inc, Philippines
- SMG Consultants - Indonesia
- Planning Commission, India
- Ministry of Mines - Canada
- India Bulls Power Limited - India
- CNBM International Corporation - China
- GAC Shipping (India) Pvt Ltd
- Global Coal Blending Company Limited - Australia
- Mintek Dendrill Indonesia
- Binh Thuan Hamico - Vietnam
- Uttam Galva Steels Limited - India
- Chettinad Cement Corporation Ltd - India
- Kaltim Prima Coal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Price Waterhouse Coopers - Russia
- Videocon Industries ltd - India
- Vedanta Resources Plc - India
- Sojitz Corporation - Japan
- Riau Bara Harum - Indonesia
- Samtan Co., Ltd - South Korea
- Metalloyd Limited - United Kingdom
- AsiaOL BioFuels Corp., Philippines
- Sical Logistics Limited - India
- Semirara Mining Corp, Philippines
- Africa Commodities Group - South Africa
- Anglo American - United Kingdom
- New Zealand Coal & Carbon
- Ambuja Cements Ltd - India
- MS Steel International - UAE
- Ministry of Finance - Indonesia
- Kobexindo Tractors - Indoneisa
- Salva Resources Pvt Ltd - India
- White Energy Company Limited
- Coalindo Energy - Indonesia
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