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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, 27 June 16
THE BDI UP 3.75 PERCENT ; BCI FELL 1.51% WEEK OVER WEEK
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities rose this past week. The BDI was up 3.75 percent from las ...
Monday, 27 June 16
INDONESIA BANS (AGAIN) SHIPS SAILING TO THE PHILIPPINES FROM INDONESIA
COALspot.com: The Indonesian Transport Ministry strictly prohibited harbour masters issuing permits to all Indonesian-flagged vessels bound for the ...
Friday, 24 June 16
U.S WEEKLY COAL PRODUCTION UP MARGINALLY
COALspot.com – U.S, world’s one of the largest coal producers has produced approximately totalled an estimated 13.4 million short tons ...
Wednesday, 22 June 16
SMALL RISE IN SHIPPING CONFIDENCE - MOORE STEPHENS
In May 2016, the average confidence level expressed by respondents in the markets in which they operate was 5.1 on a scale of 1 (low) to 10 (high). ...
Wednesday, 22 June 16
SHIPPING MARKET INSIGHT - NASSOS SOULAKIS
Stagnation- With the BDI stuck in the low 600 points for almost a month now, if we had to choose a word to describe the state of the Dry Bulk freig ...
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- Parliament of New Zealand
- Aditya Birla Group - India
- Global Coal Blending Company Limited - Australia
- Directorate General of MIneral and Coal - Indonesia
- Globalindo Alam Lestari - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Ministry of Finance - Indonesia
- New Zealand Coal & Carbon
- Madhucon Powers Ltd - India
- SMG Consultants - Indonesia
- SMC Global Power, Philippines
- Price Waterhouse Coopers - Russia
- Rashtriya Ispat Nigam Limited - India
- Cement Manufacturers Association - India
- Indogreen Group - Indonesia
- McConnell Dowell - Australia
- Malabar Cements Ltd - India
- Borneo Indobara - Indonesia
- The State Trading Corporation of India Ltd
- Energy Link Ltd, New Zealand
- Manunggal Multi Energi - Indonesia
- Romanian Commodities Exchange
- The Treasury - Australian Government
- CNBM International Corporation - China
- Salva Resources Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Indonesian Coal Mining Association
- Bahari Cakrawala Sebuku - Indonesia
- Eastern Coal Council - USA
- Australian Commodity Traders Exchange
- Thai Mozambique Logistica
- Goldman Sachs - Singapore
- Vizag Seaport Private Limited - India
- Ministry of Mines - Canada
- Star Paper Mills Limited - India
- Billiton Holdings Pty Ltd - Australia
- Lanco Infratech Ltd - India
- Vedanta Resources Plc - India
- Electricity Authority, New Zealand
- Tamil Nadu electricity Board
- Indian Oil Corporation Limited
- Singapore Mercantile Exchange
- TeaM Sual Corporation - Philippines
- Africa Commodities Group - South Africa
- Sical Logistics Limited - India
- Sakthi Sugars Limited - India
- Jindal Steel & Power Ltd - India
- Heidelberg Cement - Germany
- Mjunction Services Limited - India
- Port Waratah Coal Services - Australia
- Indian Energy Exchange, India
- Banpu Public Company Limited - Thailand
- Intertek Mineral Services - Indonesia
- Marubeni Corporation - India
- Sinarmas Energy and Mining - Indonesia
- Bhushan Steel Limited - India
- Sree Jayajothi Cements Limited - India
- Wood Mackenzie - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Mercuria Energy - Indonesia
- Orica Australia Pty. Ltd.
- Baramulti Group, Indonesia
- Directorate Of Revenue Intelligence - India
- Uttam Galva Steels Limited - India
- South Luzon Thermal Energy Corporation
- Indo Tambangraya Megah - Indonesia
- Electricity Generating Authority of Thailand
- Alfred C Toepfer International GmbH - Germany
- Mintek Dendrill Indonesia
- International Coal Ventures Pvt Ltd - India
- Antam Resourcindo - Indonesia
- OPG Power Generation Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- MS Steel International - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Pendopo Energi Batubara - Indonesia
- Minerals Council of Australia
- Sarangani Energy Corporation, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Central Java Power - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coal and Oil Company - UAE
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bharathi Cement Corporation - India
- Oldendorff Carriers - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Global Business Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Ambuja Cements Ltd - India
- Siam City Cement - Thailand
- Ceylon Electricity Board - Sri Lanka
- Eastern Energy - Thailand
- ICICI Bank Limited - India
- Chamber of Mines of South Africa
- Gujarat Sidhee Cement - India
- Leighton Contractors Pty Ltd - Australia
- GMR Energy Limited - India
- Timah Investasi Mineral - Indoneisa
- PowerSource Philippines DevCo
- Metalloyd Limited - United Kingdom
- Toyota Tsusho Corporation, Japan
- Semirara Mining Corp, Philippines
- Renaissance Capital - South Africa
- Meralco Power Generation, Philippines
- Commonwealth Bank - Australia
- Essar Steel Hazira Ltd - India
- Kumho Petrochemical, South Korea
- Simpson Spence & Young - Indonesia
- San Jose City I Power Corp, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Iligan Light & Power Inc, Philippines
- Interocean Group of Companies - India
- Petron Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Therma Luzon, Inc, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Orica Mining Services - Indonesia
- Jaiprakash Power Ventures ltd
- Bukit Baiduri Energy - Indonesia
- IEA Clean Coal Centre - UK
- Deloitte Consulting - India
- Semirara Mining and Power Corporation, Philippines
- Straits Asia Resources Limited - Singapore
- Chettinad Cement Corporation Ltd - India
- GVK Power & Infra Limited - India
- Kepco SPC Power Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Siam City Cement PLC, Thailand
- Aboitiz Power Corporation - Philippines
- PetroVietnam Power Coal Import and Supply Company
- Energy Development Corp, Philippines
- Larsen & Toubro Limited - India
- Georgia Ports Authority, United States
- Coalindo Energy - Indonesia
- IHS Mccloskey Coal Group - USA
- Latin American Coal - Colombia
- Pipit Mutiara Jaya. PT, Indonesia
- Posco Energy - South Korea
- London Commodity Brokers - England
- Gujarat Electricity Regulatory Commission - India
- Asmin Koalindo Tuhup - Indonesia
- Standard Chartered Bank - UAE
- Altura Mining Limited, Indonesia
- Kaltim Prima Coal - Indonesia
- Grasim Industreis Ltd - India
- Kobexindo Tractors - Indoneisa
- India Bulls Power Limited - India
- Barasentosa Lestari - Indonesia
- Savvy Resources Ltd - HongKong
- Independent Power Producers Association of India
- Meenaskhi Energy Private Limited - India
- Formosa Plastics Group - Taiwan
- GAC Shipping (India) Pvt Ltd
- Bangladesh Power Developement Board
- Rio Tinto Coal - Australia
- Medco Energi Mining Internasional
- SN Aboitiz Power Inc, Philippines
- Australian Coal Association
- Cigading International Bulk Terminal - Indonesia
- PTC India Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Sojitz Corporation - Japan
- Central Electricity Authority - India
- European Bulk Services B.V. - Netherlands
- Agrawal Coal Company - India
- Makarim & Taira - Indonesia
- Economic Council, Georgia
- Bukit Makmur.PT - Indonesia
- Power Finance Corporation Ltd., India
- Attock Cement Pakistan Limited
- Samtan Co., Ltd - South Korea
- Planning Commission, India
- Riau Bara Harum - Indonesia
- Bhatia International Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Carbofer General Trading SA - India
- The University of Queensland
- Kohat Cement Company Ltd. - Pakistan
- Sindya Power Generating Company Private Ltd
- ASAPP Information Group - India
- Kartika Selabumi Mining - Indonesia
- Videocon Industries ltd - India
- Parry Sugars Refinery, India
- LBH Netherlands Bv - Netherlands
- Ministry of Transport, Egypt
- Tata Chemicals Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Mercator Lines Limited - India
- Dalmia Cement Bharat India
- Xindia Steels Limited - India
- Bayan Resources Tbk. - Indonesia
- White Energy Company Limited
- Kideco Jaya Agung - Indonesia
- CIMB Investment Bank - Malaysia
- Edison Trading Spa - Italy
- Kapuas Tunggal Persada - Indonesia
- Global Green Power PLC Corporation, Philippines
- Trasteel International SA, Italy
- Petrochimia International Co. Ltd.- Taiwan
- AsiaOL BioFuels Corp., Philippines
- Ind-Barath Power Infra Limited - India
- Thiess Contractors Indonesia
- VISA Power Limited - India
- Bhoruka Overseas - Indonesia
- Maheswari Brothers Coal Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Coastal Gujarat Power Limited - India
- PNOC Exploration Corporation - Philippines
- Indika Energy - Indonesia
- Wilmar Investment Holdings
- Anglo American - United Kingdom
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