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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, 14 July 16
SHIPPING'S HALF YEAR REPORT - 'MUST DO BETTER' - CLARKSONS
It’s the time of year, with the school holidays and end of term approaching, that many pupils will nervously take home their school reports t ...
Wednesday, 13 July 16
EIA FORECASTS U.S. COAL EXPORTS TO DECLINE BY 15 MMST IN 2016 AND BY 4 MMST IN 2017
COALspot.com: U.S. coal production in June was 57 million short tons (MMst), a 6 MMst (13%) increase from May and 9 MMst (14%) lower than in June 2 ...
Wednesday, 13 July 16
2015 VS. 2016; THE DRY BULK DEMOLITION DERBY - JOHN N. COTZIAS
In the first half of the year 373 Bulkers and General Cargo ships were scrapped representing 23.8mil tons of dwt carrying capacity.
Comparing ...
Tuesday, 12 July 16
DUE TO LONG HOLIDAYS, CS COAL INDICES HELD AT THE SAME LEVEL OF THE PREVIOUS WEEK
COALspot.com: Average 5000 GAR coal index of Indonesian origin was flat week over week to averaging $39.98 per ton this past week.
Due to the ...
Monday, 11 July 16
COAL MARKETS SAW IMPROVED PRICES IN H1 2016 - SGX'S COMMODITIES MID-YEAR REFLECTION
COALspot.com: Coal
Coal markets saw improved prices in H1 2016 with the benchmark coking coal and thermal coal spot prices rising 18% and 25%, re ...
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- Minerals Council of Australia
- Makarim & Taira - Indonesia
- PowerSource Philippines DevCo
- Sojitz Corporation - Japan
- LBH Netherlands Bv - Netherlands
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- Indian Oil Corporation Limited
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- Salva Resources Pvt Ltd - India
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- Central Java Power - Indonesia
- Formosa Plastics Group - Taiwan
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- Merrill Lynch Commodities Europe
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- Chamber of Mines of South Africa
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- Romanian Commodities Exchange
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- The State Trading Corporation of India Ltd
- Power Finance Corporation Ltd., India
- Anglo American - United Kingdom
- Petrochimia International Co. Ltd.- Taiwan
- Kohat Cement Company Ltd. - Pakistan
- Bank of Tokyo Mitsubishi UFJ Ltd
- Xindia Steels Limited - India
- International Coal Ventures Pvt Ltd - India
- GVK Power & Infra Limited - India
- Krishnapatnam Port Company Ltd. - India
- Thai Mozambique Logistica
- Ministry of Finance - Indonesia
- Independent Power Producers Association of India
- Medco Energi Mining Internasional
- Eastern Coal Council - USA
- Star Paper Mills Limited - India
- Siam City Cement PLC, Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Edison Trading Spa - Italy
- Indo Tambangraya Megah - Indonesia
- Global Business Power Corporation, Philippines
- Simpson Spence & Young - Indonesia
- Standard Chartered Bank - UAE
- AsiaOL BioFuels Corp., Philippines
- The University of Queensland
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- Dalmia Cement Bharat India
- MS Steel International - UAE
- Mercator Lines Limited - India
- Indonesian Coal Mining Association
- Bahari Cakrawala Sebuku - Indonesia
- San Jose City I Power Corp, Philippines
- Ambuja Cements Ltd - India
- Renaissance Capital - South Africa
- Metalloyd Limited - United Kingdom
- Borneo Indobara - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Sarangani Energy Corporation, Philippines
- CIMB Investment Bank - Malaysia
- Indogreen Group - Indonesia
- Carbofer General Trading SA - India
- Bhushan Steel Limited - India
- Aditya Birla Group - India
- Wood Mackenzie - Singapore
- Rashtriya Ispat Nigam Limited - India
- Iligan Light & Power Inc, Philippines
- Bangladesh Power Developement Board
- Trasteel International SA, Italy
- Billiton Holdings Pty Ltd - Australia
- Baramulti Group, Indonesia
- Coal and Oil Company - UAE
- Bulk Trading Sa - Switzerland
- Jindal Steel & Power Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Straits Asia Resources Limited - Singapore
- Kaltim Prima Coal - Indonesia
- Jaiprakash Power Ventures ltd
- Electricity Authority, New Zealand
- Planning Commission, India
- Goldman Sachs - Singapore
- Intertek Mineral Services - Indonesia
- Bukit Makmur.PT - Indonesia
- Interocean Group of Companies - India
- Kapuas Tunggal Persada - Indonesia
- Thiess Contractors Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Petron Corporation, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Indika Energy - Indonesia
- Directorate Of Revenue Intelligence - India
- Madhucon Powers Ltd - India
- SN Aboitiz Power Inc, Philippines
- Singapore Mercantile Exchange
- Vedanta Resources Plc - India
- Ministry of Mines - Canada
- Bayan Resources Tbk. - Indonesia
- TeaM Sual Corporation - Philippines
- Heidelberg Cement - Germany
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- Global Green Power PLC Corporation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Leighton Contractors Pty Ltd - Australia
- Tamil Nadu electricity Board
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- IHS Mccloskey Coal Group - USA
- London Commodity Brokers - England
- Larsen & Toubro Limited - India
- Therma Luzon, Inc, Philippines
- Antam Resourcindo - Indonesia
- Lanco Infratech Ltd - India
- Coastal Gujarat Power Limited - India
- Ministry of Transport, Egypt
- Bhatia International Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Riau Bara Harum - Indonesia
- South Luzon Thermal Energy Corporation
- Bhoruka Overseas - Indonesia
- Aboitiz Power Corporation - Philippines
- Meralco Power Generation, Philippines
- Directorate General of MIneral and Coal - Indonesia
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- Energy Link Ltd, New Zealand
- Timah Investasi Mineral - Indoneisa
- SMC Global Power, Philippines
- Parry Sugars Refinery, India
- Port Waratah Coal Services - Australia
- Samtan Co., Ltd - South Korea
- Vizag Seaport Private Limited - India
- Deloitte Consulting - India
- Attock Cement Pakistan Limited
- Kepco SPC Power Corporation, Philippines
- Savvy Resources Ltd - HongKong
- Pendopo Energi Batubara - Indonesia
- Essar Steel Hazira Ltd - India
- GMR Energy Limited - India
- ICICI Bank Limited - India
- Ceylon Electricity Board - Sri Lanka
- Kideco Jaya Agung - Indonesia
- Kartika Selabumi Mining - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- White Energy Company Limited
- Globalindo Alam Lestari - Indonesia
- Sindya Power Generating Company Private Ltd
- Electricity Generating Authority of Thailand
- Australian Coal Association
- Price Waterhouse Coopers - Russia
- The Treasury - Australian Government
- CNBM International Corporation - China
- Indian Energy Exchange, India
- Sical Logistics Limited - India
- Bharathi Cement Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Eastern Energy - Thailand
- Parliament of New Zealand
- Mjunction Services Limited - India
- Coalindo Energy - Indonesia
- Toyota Tsusho Corporation, Japan
- Tata Chemicals Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Mercuria Energy - Indonesia
- Gujarat Sidhee Cement - India
- Wilmar Investment Holdings
- Altura Mining Limited, Indonesia
- Uttam Galva Steels Limited - India
- Malabar Cements Ltd - India
- PNOC Exploration Corporation - Philippines
- IEA Clean Coal Centre - UK
- Holcim Trading Pte Ltd - Singapore
- Africa Commodities Group - South Africa
- European Bulk Services B.V. - Netherlands
- PTC India Limited - India
- Cigading International Bulk Terminal - Indonesia
- Bukit Baiduri Energy - Indonesia
- Marubeni Corporation - India
- GAC Shipping (India) Pvt Ltd
- Cement Manufacturers Association - India
- Meenaskhi Energy Private Limited - India
- Australian Commodity Traders Exchange
- Sinarmas Energy and Mining - Indonesia
- Commonwealth Bank - Australia
- Mintek Dendrill Indonesia
- Latin American Coal - Colombia
- Siam City Cement - Thailand
- Economic Council, Georgia
- Videocon Industries ltd - India
- Banpu Public Company Limited - Thailand
- Alfred C Toepfer International GmbH - Germany
- Ind-Barath Power Infra Limited - India
- Orica Mining Services - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Binh Thuan Hamico - Vietnam
- Kumho Petrochemical, South Korea
- India Bulls Power Limited - India
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- Karaikal Port Pvt Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Georgia Ports Authority, United States
- SMG Consultants - Indonesia
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- OPG Power Generation Pvt Ltd - India
- Semirara Mining Corp, Philippines
- Central Electricity Authority - India
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