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