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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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Monday, 04 July 16
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- Altura Mining Limited, Indonesia
- Singapore Mercantile Exchange
- Port Waratah Coal Services - Australia
- PowerSource Philippines DevCo
- Straits Asia Resources Limited - Singapore
- Mjunction Services Limited - India
- Energy Development Corp, Philippines
- ASAPP Information Group - India
- Georgia Ports Authority, United States
- IEA Clean Coal Centre - UK
- Mercuria Energy - Indonesia
- Marubeni Corporation - India
- Commonwealth Bank - Australia
- Kalimantan Lumbung Energi - Indonesia
- Madhucon Powers Ltd - India
- Bayan Resources Tbk. - Indonesia
- Australian Coal Association
- Directorate General of MIneral and Coal - Indonesia
- GVK Power & Infra Limited - India
- Standard Chartered Bank - UAE
- Deloitte Consulting - India
- Power Finance Corporation Ltd., India
- Bangladesh Power Developement Board
- Alfred C Toepfer International GmbH - Germany
- Romanian Commodities Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- GAC Shipping (India) Pvt Ltd
- Orica Mining Services - Indonesia
- Anglo American - United Kingdom
- Iligan Light & Power Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Siam City Cement - Thailand
- Bukit Makmur.PT - Indonesia
- Sree Jayajothi Cements Limited - India
- Sical Logistics Limited - India
- Holcim Trading Pte Ltd - Singapore
- Bhushan Steel Limited - India
- Tamil Nadu electricity Board
- Parry Sugars Refinery, India
- Indonesian Coal Mining Association
- Intertek Mineral Services - Indonesia
- Bukit Baiduri Energy - Indonesia
- Aboitiz Power Corporation - Philippines
- TeaM Sual Corporation - Philippines
- Medco Energi Mining Internasional
- Kideco Jaya Agung - Indonesia
- Carbofer General Trading SA - India
- Vedanta Resources Plc - India
- India Bulls Power Limited - India
- Metalloyd Limited - United Kingdom
- Global Coal Blending Company Limited - Australia
- Aditya Birla Group - India
- Thai Mozambique Logistica
- Uttam Galva Steels Limited - India
- Lanco Infratech Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Indian Oil Corporation Limited
- Wood Mackenzie - Singapore
- PetroVietnam Power Coal Import and Supply Company
- Star Paper Mills Limited - India
- Agrawal Coal Company - India
- Indian Energy Exchange, India
- Coal and Oil Company - UAE
- Price Waterhouse Coopers - Russia
- Petrochimia International Co. Ltd.- Taiwan
- Indika Energy - Indonesia
- SMG Consultants - Indonesia
- Global Green Power PLC Corporation, Philippines
- Interocean Group of Companies - India
- McConnell Dowell - Australia
- Videocon Industries ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- SN Aboitiz Power Inc, Philippines
- PTC India Limited - India
- White Energy Company Limited
- Kobexindo Tractors - Indoneisa
- Energy Link Ltd, New Zealand
- Independent Power Producers Association of India
- Gujarat Sidhee Cement - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bhoruka Overseas - Indonesia
- International Coal Ventures Pvt Ltd - India
- Eastern Coal Council - USA
- Bulk Trading Sa - Switzerland
- GN Power Mariveles Coal Plant, Philippines
- Simpson Spence & Young - Indonesia
- Timah Investasi Mineral - Indoneisa
- Sojitz Corporation - Japan
- Ind-Barath Power Infra Limited - India
- Kartika Selabumi Mining - Indonesia
- Ceylon Electricity Board - Sri Lanka
- The State Trading Corporation of India Ltd
- Kohat Cement Company Ltd. - Pakistan
- AsiaOL BioFuels Corp., Philippines
- Karaikal Port Pvt Ltd - India
- Global Business Power Corporation, Philippines
- Ministry of Mines - Canada
- Directorate Of Revenue Intelligence - India
- Grasim Industreis Ltd - India
- Meenaskhi Energy Private Limited - India
- Tata Chemicals Ltd - India
- Manunggal Multi Energi - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Cement Manufacturers Association - India
- Wilmar Investment Holdings
- Bhatia International Limited - India
- Electricity Authority, New Zealand
- Xindia Steels Limited - India
- Thiess Contractors Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Indo Tambangraya Megah - Indonesia
- Baramulti Group, Indonesia
- Ambuja Cements Ltd - India
- Merrill Lynch Commodities Europe
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Riau Bara Harum - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Sinarmas Energy and Mining - Indonesia
- CNBM International Corporation - China
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Attock Cement Pakistan Limited
- Malabar Cements Ltd - India
- The University of Queensland
- Economic Council, Georgia
- Kapuas Tunggal Persada - Indonesia
- Africa Commodities Group - South Africa
- Kumho Petrochemical, South Korea
- IHS Mccloskey Coal Group - USA
- Cigading International Bulk Terminal - Indonesia
- PNOC Exploration Corporation - Philippines
- Parliament of New Zealand
- Rashtriya Ispat Nigam Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Electricity Generating Authority of Thailand
- The Treasury - Australian Government
- SMC Global Power, Philippines
- Coalindo Energy - Indonesia
- Posco Energy - South Korea
- European Bulk Services B.V. - Netherlands
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- CIMB Investment Bank - Malaysia
- GMR Energy Limited - India
- Gujarat Electricity Regulatory Commission - India
- Kepco SPC Power Corporation, Philippines
- ICICI Bank Limited - India
- Heidelberg Cement - Germany
- Semirara Mining and Power Corporation, Philippines
- Orica Australia Pty. Ltd.
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Binh Thuan Hamico - Vietnam
- Pipit Mutiara Jaya. PT, Indonesia
- Jindal Steel & Power Ltd - India
- Antam Resourcindo - Indonesia
- Savvy Resources Ltd - HongKong
- Bharathi Cement Corporation - India
- Leighton Contractors Pty Ltd - Australia
- Borneo Indobara - Indonesia
- Sakthi Sugars Limited - India
- Siam City Cement PLC, Thailand
- Latin American Coal - Colombia
- Gujarat Mineral Development Corp Ltd - India
- South Luzon Thermal Energy Corporation
- Chettinad Cement Corporation Ltd - India
- MS Steel International - UAE
- Ministry of Finance - Indonesia
- Globalindo Alam Lestari - Indonesia
- New Zealand Coal & Carbon
- Samtan Co., Ltd - South Korea
- Makarim & Taira - Indonesia
- Oldendorff Carriers - Singapore
- Rio Tinto Coal - Australia
- Salva Resources Pvt Ltd - India
- Maheswari Brothers Coal Limited - India
- Chamber of Mines of South Africa
- Dalmia Cement Bharat India
- Meralco Power Generation, Philippines
- Coastal Gujarat Power Limited - India
- Toyota Tsusho Corporation, Japan
- Formosa Plastics Group - Taiwan
- Edison Trading Spa - Italy
- Jorong Barutama Greston.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- Minerals Council of Australia
- Therma Luzon, Inc, Philippines
- Sarangani Energy Corporation, Philippines
- Petron Corporation, Philippines
- Goldman Sachs - Singapore
- Mintek Dendrill Indonesia
- Planning Commission, India
- LBH Netherlands Bv - Netherlands
- Essar Steel Hazira Ltd - India
- Ministry of Transport, Egypt
- Central Java Power - Indonesia
- Larsen & Toubro Limited - India
- Australian Commodity Traders Exchange
- VISA Power Limited - India
- Mercator Lines Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Jaiprakash Power Ventures ltd
- Asmin Koalindo Tuhup - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Central Electricity Authority - India
- Semirara Mining Corp, Philippines
- Banpu Public Company Limited - Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Eastern Energy - Thailand
- Indogreen Group - Indonesia
- Renaissance Capital - South Africa
- Sindya Power Generating Company Private Ltd
- Trasteel International SA, Italy
- London Commodity Brokers - England
- Barasentosa Lestari - Indonesia
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