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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, 20 July 16
EDIBLE OIL MARKETS ACROSS THE GLOBE REMAIN UNDER PRESSURE - STELIOS KOLLINTZAS
The edible oil markets across the globe remain under pressure on the back of lackluster demand. Some of the main factors causing the low activity a ...
Tuesday, 19 July 16
INDONESIAN THERMAL COAL INDEXES CONTINUALLY FIRM UP ON ROBUST BUYING INTEREST - CS COAL INDEX
COALspot.com: Average 5000 GAR coal index of Indonesian origin rose One percent week over week to averaging $40.38 per ton this past week, shows CS ...
Monday, 18 July 16
FROM PIT TO PORT: DRY BULK NEEDS A NEW PATH TO PROFITABILITY - TOC EUROPE
During the golden years for commodities, from 2005 to 2014, high demand and big profit margins pushed companies to produce more and more, sacrifici ...
Monday, 18 July 16
BALTIC DRY INDEX REMAIN FIRM, UP BY 5.97 WEEK OVER WEEK
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities continued to remain firm with all segments ending in posi ...
Friday, 15 July 16
US COAL PRODUCTION DOWN 8.4% WEEK-OVER-WEEK
COALspot.com – U.S, world’s second largest coal producers has produced approximately totalled an estimated 12.9 million short tons (mms ...
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- Dalmia Cement Bharat India
- Semirara Mining and Power Corporation, Philippines
- Cement Manufacturers Association - India
- Georgia Ports Authority, United States
- ICICI Bank Limited - India
- Electricity Authority, New Zealand
- Coalindo Energy - Indonesia
- Samtan Co., Ltd - South Korea
- Pendopo Energi Batubara - Indonesia
- Sarangani Energy Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- Trasteel International SA, Italy
- Carbofer General Trading SA - India
- CIMB Investment Bank - Malaysia
- Power Finance Corporation Ltd., India
- Petrochimia International Co. Ltd.- Taiwan
- Kumho Petrochemical, South Korea
- Mercuria Energy - Indonesia
- Ministry of Mines - Canada
- Price Waterhouse Coopers - Russia
- Grasim Industreis Ltd - India
- Bharathi Cement Corporation - India
- Semirara Mining Corp, Philippines
- Eastern Coal Council - USA
- Vizag Seaport Private Limited - India
- Indo Tambangraya Megah - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Global Coal Blending Company Limited - Australia
- Coal and Oil Company - UAE
- Anglo American - United Kingdom
- Meenaskhi Energy Private Limited - India
- Globalindo Alam Lestari - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Billiton Holdings Pty Ltd - Australia
- GVK Power & Infra Limited - India
- PNOC Exploration Corporation - Philippines
- Deloitte Consulting - India
- AsiaOL BioFuels Corp., Philippines
- Central Electricity Authority - India
- MS Steel International - UAE
- European Bulk Services B.V. - Netherlands
- Binh Thuan Hamico - Vietnam
- Indogreen Group - Indonesia
- Savvy Resources Ltd - HongKong
- Standard Chartered Bank - UAE
- New Zealand Coal & Carbon
- Makarim & Taira - Indonesia
- Mjunction Services Limited - India
- Sical Logistics Limited - India
- GAC Shipping (India) Pvt Ltd
- Bangladesh Power Developement Board
- Interocean Group of Companies - India
- IHS Mccloskey Coal Group - USA
- Ind-Barath Power Infra Limited - India
- London Commodity Brokers - England
- Straits Asia Resources Limited - Singapore
- Ministry of Finance - Indonesia
- Mintek Dendrill Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Australian Commodity Traders Exchange
- Maharashtra Electricity Regulatory Commission - India
- Gujarat Electricity Regulatory Commission - India
- Sindya Power Generating Company Private Ltd
- OPG Power Generation Pvt Ltd - India
- Indian Oil Corporation Limited
- Bukit Makmur.PT - Indonesia
- LBH Netherlands Bv - Netherlands
- Marubeni Corporation - India
- PetroVietnam Power Coal Import and Supply Company
- Minerals Council of Australia
- Sree Jayajothi Cements Limited - India
- Energy Development Corp, Philippines
- Goldman Sachs - Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bhushan Steel Limited - India
- Gujarat Sidhee Cement - India
- Videocon Industries ltd - India
- Siam City Cement PLC, Thailand
- Oldendorff Carriers - Singapore
- Intertek Mineral Services - Indonesia
- The University of Queensland
- Singapore Mercantile Exchange
- Riau Bara Harum - Indonesia
- Manunggal Multi Energi - Indonesia
- Therma Luzon, Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- SN Aboitiz Power Inc, Philippines
- The State Trading Corporation of India Ltd
- Miang Besar Coal Terminal - Indonesia
- Kobexindo Tractors - Indoneisa
- GN Power Mariveles Coal Plant, Philippines
- IEA Clean Coal Centre - UK
- GMR Energy Limited - India
- Bayan Resources Tbk. - Indonesia
- Wilmar Investment Holdings
- CNBM International Corporation - China
- Timah Investasi Mineral - Indoneisa
- Simpson Spence & Young - Indonesia
- Orica Australia Pty. Ltd.
- Barasentosa Lestari - Indonesia
- Rio Tinto Coal - Australia
- Australian Coal Association
- Port Waratah Coal Services - Australia
- Sojitz Corporation - Japan
- Offshore Bulk Terminal Pte Ltd, Singapore
- Romanian Commodities Exchange
- Kohat Cement Company Ltd. - Pakistan
- Wood Mackenzie - Singapore
- Bukit Baiduri Energy - Indonesia
- Malabar Cements Ltd - India
- Orica Mining Services - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Thiess Contractors Indonesia
- The Treasury - Australian Government
- Renaissance Capital - South Africa
- Latin American Coal - Colombia
- Sinarmas Energy and Mining - Indonesia
- Maheswari Brothers Coal Limited - India
- White Energy Company Limited
- Kartika Selabumi Mining - Indonesia
- South Luzon Thermal Energy Corporation
- Star Paper Mills Limited - India
- Heidelberg Cement - Germany
- Siam City Cement - Thailand
- Tamil Nadu electricity Board
- Edison Trading Spa - Italy
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Economic Council, Georgia
- Formosa Plastics Group - Taiwan
- San Jose City I Power Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- India Bulls Power Limited - India
- Madhucon Powers Ltd - India
- Lanco Infratech Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Larsen & Toubro Limited - India
- SMC Global Power, Philippines
- Medco Energi Mining Internasional
- Borneo Indobara - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Ceylon Electricity Board - Sri Lanka
- Global Green Power PLC Corporation, Philippines
- Cigading International Bulk Terminal - Indonesia
- Meralco Power Generation, Philippines
- Agrawal Coal Company - India
- Banpu Public Company Limited - Thailand
- Directorate Of Revenue Intelligence - India
- Thai Mozambique Logistica
- Bulk Trading Sa - Switzerland
- International Coal Ventures Pvt Ltd - India
- Antam Resourcindo - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Vedanta Resources Plc - India
- Planning Commission, India
- Bhoruka Overseas - Indonesia
- McConnell Dowell - Australia
- Posco Energy - South Korea
- Petron Corporation, Philippines
- Indonesian Coal Mining Association
- Alfred C Toepfer International GmbH - Germany
- Karaikal Port Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Indian Energy Exchange, India
- Uttam Galva Steels Limited - India
- Eastern Energy - Thailand
- Xindia Steels Limited - India
- Energy Link Ltd, New Zealand
- Parry Sugars Refinery, India
- TNB Fuel Sdn Bhd - Malaysia
- Attock Cement Pakistan Limited
- Bhatia International Limited - India
- SMG Consultants - Indonesia
- Mercator Lines Limited - India
- Altura Mining Limited, Indonesia
- Parliament of New Zealand
- Electricity Generating Authority of Thailand
- Krishnapatnam Port Company Ltd. - India
- Coastal Gujarat Power Limited - India
- Chettinad Cement Corporation Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Independent Power Producers Association of India
- Metalloyd Limited - United Kingdom
- Indika Energy - Indonesia
- Commonwealth Bank - Australia
- Global Business Power Corporation, Philippines
- Jaiprakash Power Ventures ltd
- Baramulti Group, Indonesia
- VISA Power Limited - India
- Jindal Steel & Power Ltd - India
- Africa Commodities Group - South Africa
- Leighton Contractors Pty Ltd - Australia
- Central Java Power - Indonesia
- Essar Steel Hazira Ltd - India
- ASAPP Information Group - India
- Aditya Birla Group - India
- Kapuas Tunggal Persada - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Ministry of Transport, Egypt
- Kideco Jaya Agung - Indonesia
- PowerSource Philippines DevCo
- TeaM Sual Corporation - Philippines
- Kaltim Prima Coal - Indonesia
- Aboitiz Power Corporation - Philippines
- Salva Resources Pvt Ltd - India
- Ambuja Cements Ltd - India
- Sakthi Sugars Limited - India
- Merrill Lynch Commodities Europe
- Tata Chemicals Ltd - India
- Kepco SPC Power Corporation, Philippines
- Chamber of Mines of South Africa
- PTC India Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Toyota Tsusho Corporation, Japan
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