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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, 06 July 16
KOMIPO INVITES BIDS FOR 780000 MT OF BITUMINOUS COAL
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 780,000 Metric Tons of Bituminous Coal for its B ...
Wednesday, 06 July 16
MARKET INSIGHT - VASSILIS VASSILIOU
After a fairly silent first half of the year in the ship repair sector, we have finally a harmonized workload in the shipyards around the world. Ma ...
Tuesday, 05 July 16
DRY BULK SHIPPING'S RECOVERY NOT SEEN UNTIL 2018 - SGX
SGX freight derivative volumes totaled 36,542 contracts in June (-28% m/m; +52% y/y), while open interest averaged 121,189 contracts during the mon ...
Tuesday, 05 July 16
SPOT COAL INDEXES FOR INDONESIAN COAL CONTINUE TO HOLD FIRM - CS COAL INDEX
COALspot.com: Average 5000 GAR coal index of Indonesian origin was up by 0.83 percent week over week to averaging $39.98 per ton this past week, sh ...
Monday, 04 July 16
INDONESIA COAL PRICE REFERENCE CLIMBED 2.30% IN JULY
COALspot.com: The Indonesia Coal Benchmark Price increased in July 2016.
The Director General of Mineral and Coal of Indonesia, the r ...
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- Heidelberg Cement - Germany
- Renaissance Capital - South Africa
- Semirara Mining and Power Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Videocon Industries ltd - India
- Sinarmas Energy and Mining - Indonesia
- Altura Mining Limited, Indonesia
- ICICI Bank Limited - India
- Xindia Steels Limited - India
- Indian Oil Corporation Limited
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Chettinad Cement Corporation Ltd - India
- Ind-Barath Power Infra Limited - India
- Essar Steel Hazira Ltd - India
- Ambuja Cements Ltd - India
- PTC India Limited - India
- Vedanta Resources Plc - India
- Global Coal Blending Company Limited - Australia
- AsiaOL BioFuels Corp., Philippines
- Toyota Tsusho Corporation, Japan
- ASAPP Information Group - India
- Timah Investasi Mineral - Indoneisa
- Savvy Resources Ltd - HongKong
- Kalimantan Lumbung Energi - Indonesia
- Alfred C Toepfer International GmbH - Germany
- SN Aboitiz Power Inc, Philippines
- Goldman Sachs - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Gujarat Sidhee Cement - India
- TeaM Sual Corporation - Philippines
- Minerals Council of Australia
- Baramulti Group, Indonesia
- Tata Chemicals Ltd - India
- Wilmar Investment Holdings
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- Karaikal Port Pvt Ltd - India
- Oldendorff Carriers - Singapore
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- Indogreen Group - Indonesia
- Commonwealth Bank - Australia
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- Wood Mackenzie - Singapore
- LBH Netherlands Bv - Netherlands
- Tamil Nadu electricity Board
- Merrill Lynch Commodities Europe
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- Thiess Contractors Indonesia
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- PowerSource Philippines DevCo
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- Directorate Of Revenue Intelligence - India
- The University of Queensland
- Electricity Generating Authority of Thailand
- Economic Council, Georgia
- India Bulls Power Limited - India
- Romanian Commodities Exchange
- Kobexindo Tractors - Indoneisa
- Binh Thuan Hamico - Vietnam
- Intertek Mineral Services - Indonesia
- Chamber of Mines of South Africa
- Australian Commodity Traders Exchange
- Georgia Ports Authority, United States
- Power Finance Corporation Ltd., India
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- Star Paper Mills Limited - India
- Parry Sugars Refinery, India
- Central Java Power - Indonesia
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- Electricity Authority, New Zealand
- PNOC Exploration Corporation - Philippines
- Formosa Plastics Group - Taiwan
- The State Trading Corporation of India Ltd
- Orica Australia Pty. Ltd.
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- Mintek Dendrill Indonesia
- Mercuria Energy - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Kumho Petrochemical, South Korea
- IHS Mccloskey Coal Group - USA
- Semirara Mining Corp, Philippines
- San Jose City I Power Corp, Philippines
- GN Power Mariveles Coal Plant, Philippines
- CIMB Investment Bank - Malaysia
- Rio Tinto Coal - Australia
- Lanco Infratech Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Ministry of Mines - Canada
- Edison Trading Spa - Italy
- IEA Clean Coal Centre - UK
- Sakthi Sugars Limited - India
- South Luzon Thermal Energy Corporation
- GVK Power & Infra Limited - India
- Bharathi Cement Corporation - India
- Uttam Galva Steels Limited - India
- Sojitz Corporation - Japan
- The Treasury - Australian Government
- Meralco Power Generation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Riau Bara Harum - Indonesia
- Madhucon Powers Ltd - India
- Thai Mozambique Logistica
- Port Waratah Coal Services - Australia
- Petrochimia International Co. Ltd.- Taiwan
- International Coal Ventures Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Kideco Jaya Agung - Indonesia
- Anglo American - United Kingdom
- Price Waterhouse Coopers - Russia
- SMG Consultants - Indonesia
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- Cigading International Bulk Terminal - Indonesia
- Indo Tambangraya Megah - Indonesia
- Coalindo Energy - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Indika Energy - Indonesia
- CNBM International Corporation - China
- Siam City Cement - Thailand
- Grasim Industreis Ltd - India
- Ministry of Finance - Indonesia
- Manunggal Multi Energi - Indonesia
- Energy Development Corp, Philippines
- European Bulk Services B.V. - Netherlands
- Aboitiz Power Corporation - Philippines
- MS Steel International - UAE
- Marubeni Corporation - India
- Krishnapatnam Port Company Ltd. - India
- Salva Resources Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Eastern Energy - Thailand
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bangladesh Power Developement Board
- Neyveli Lignite Corporation Ltd, - India
- Cement Manufacturers Association - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Maheswari Brothers Coal Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Interocean Group of Companies - India
- Coal and Oil Company - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Sical Logistics Limited - India
- Larsen & Toubro Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Independent Power Producers Association of India
- Mjunction Services Limited - India
- Metalloyd Limited - United Kingdom
- Bayan Resources Tbk. - Indonesia
- Simpson Spence & Young - Indonesia
- Bhatia International Limited - India
- Central Electricity Authority - India
- Iligan Light & Power Inc, Philippines
- Attock Cement Pakistan Limited
- Borneo Indobara - Indonesia
- Petron Corporation, Philippines
- Standard Chartered Bank - UAE
- Jorong Barutama Greston.PT - Indonesia
- Indian Energy Exchange, India
- GMR Energy Limited - India
- Singapore Mercantile Exchange
- Meenaskhi Energy Private Limited - India
- Agrawal Coal Company - India
- Indonesian Coal Mining Association
- Ministry of Transport, Egypt
- Bhushan Steel Limited - India
- Samtan Co., Ltd - South Korea
- Antam Resourcindo - Indonesia
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
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- Bulk Trading Sa - Switzerland
- Dalmia Cement Bharat India
- Medco Energi Mining Internasional
- Makarim & Taira - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- TNB Fuel Sdn Bhd - Malaysia
- Global Business Power Corporation, Philippines
- Eastern Coal Council - USA
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- White Energy Company Limited
- Global Green Power PLC Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
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- Kepco SPC Power Corporation, Philippines
- Parliament of New Zealand
- Leighton Contractors Pty Ltd - Australia
- Africa Commodities Group - South Africa
- VISA Power Limited - India
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- Aditya Birla Group - India
- Karbindo Abesyapradhi - Indoneisa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Therma Luzon, Inc, Philippines
- McConnell Dowell - Australia
- Kapuas Tunggal Persada - Indonesia
- Coastal Gujarat Power Limited - India
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- Energy Link Ltd, New Zealand
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