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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, 15 June 16
THE DRY BULK PRICES CORRECTED UPWARDS ROUGHLY 15% - KONSTANTINOS KONTOMICHIS
Once more, the international shipping community turned its attention to Greece and more specifically to Attica that hosted Posidonia, the biggest m ...
Tuesday, 14 June 16
CS COAL INDICES ROSE UP FOR A THIRD STRAIGHT WEEK; 4200 GAR COAL UP 0.73%
COALspot.com: Average 5000 GAR coal index of Indonesian origin was up 0.54 percent week over week to averaging $39.37 per ton this past week, shows ...
Monday, 13 June 16
DEMAND FOR DRY BULK COMMODITIES COULD PROVIDE FUTURE BOOST FOR SHIP OWNERS - HELLENIC SHIPPING NEWS
When it comes to the dry bulk market, shipowners these days are looking for news in any shape or form they can find them. However, as the discussio ...
Monday, 13 June 16
ONSHORE SHALE: WORTH KEEPING IN THE SHIPPING SPOTLIGHT CLARKSONS
Generally, shipping industry watchers spend much of their time monitoring events out to sea: how fleets are evolving, trade volumes growing and fre ...
Monday, 13 June 16
PORT OF NEWCASTLE SHIPPED 5.03% MORE COAL IN MAY; AVERAGE SELLING PRICE DECLINED 2.08% FROM APRIL
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port has shipped $AU 1.162bill ...
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- PowerSource Philippines DevCo
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- Star Paper Mills Limited - India
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- Borneo Indobara - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Sinarmas Energy and Mining - Indonesia
- Binh Thuan Hamico - Vietnam
- Aboitiz Power Corporation - Philippines
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- Global Business Power Corporation, Philippines
- The University of Queensland
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- Latin American Coal - Colombia
- GAC Shipping (India) Pvt Ltd
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- Bulk Trading Sa - Switzerland
- ICICI Bank Limited - India
- Directorate General of MIneral and Coal - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Coalindo Energy - Indonesia
- GMR Energy Limited - India
- Kobexindo Tractors - Indoneisa
- Electricity Generating Authority of Thailand
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- Sojitz Corporation - Japan
- Bayan Resources Tbk. - Indonesia
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- Australian Coal Association
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- Posco Energy - South Korea
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- Orica Australia Pty. Ltd.
- San Jose City I Power Corp, Philippines
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- Toyota Tsusho Corporation, Japan
- Directorate Of Revenue Intelligence - India
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- Barasentosa Lestari - Indonesia
- Bhatia International Limited - India
- Goldman Sachs - Singapore
- LBH Netherlands Bv - Netherlands
- Indogreen Group - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Georgia Ports Authority, United States
- Tamil Nadu electricity Board
- Parliament of New Zealand
- MS Steel International - UAE
- Eastern Energy - Thailand
- Indo Tambangraya Megah - Indonesia
- Thai Mozambique Logistica
- Baramulti Group, Indonesia
- Ceylon Electricity Board - Sri Lanka
- Karaikal Port Pvt Ltd - India
- White Energy Company Limited
- SMG Consultants - Indonesia
- Ministry of Mines - Canada
- Holcim Trading Pte Ltd - Singapore
- Minerals Council of Australia
- Deloitte Consulting - India
- Romanian Commodities Exchange
- Kaltim Prima Coal - Indonesia
- Eastern Coal Council - USA
- Wood Mackenzie - Singapore
- Gujarat Mineral Development Corp Ltd - India
- Siam City Cement PLC, Thailand
- Semirara Mining and Power Corporation, Philippines
- Altura Mining Limited, Indonesia
- McConnell Dowell - Australia
- Banpu Public Company Limited - Thailand
- Xindia Steels Limited - India
- Oldendorff Carriers - Singapore
- SMC Global Power, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Samtan Co., Ltd - South Korea
- TeaM Sual Corporation - Philippines
- Interocean Group of Companies - India
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- Sarangani Energy Corporation, Philippines
- Carbofer General Trading SA - India
- PTC India Limited - India
- Siam City Cement - Thailand
- European Bulk Services B.V. - Netherlands
- Offshore Bulk Terminal Pte Ltd, Singapore
- Chamber of Mines of South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Vijayanagar Sugar Pvt Ltd - India
- Vedanta Resources Plc - India
- Bangladesh Power Developement Board
- Coastal Gujarat Power Limited - India
- SN Aboitiz Power Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Jindal Steel & Power Ltd - India
- Agrawal Coal Company - India
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- Renaissance Capital - South Africa
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- CIMB Investment Bank - Malaysia
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- Mintek Dendrill Indonesia
- Energy Link Ltd, New Zealand
- Cigading International Bulk Terminal - Indonesia
- Commonwealth Bank - Australia
- International Coal Ventures Pvt Ltd - India
- Edison Trading Spa - Italy
- Makarim & Taira - Indonesia
- Tata Chemicals Ltd - India
- Ministry of Transport, Egypt
- Rashtriya Ispat Nigam Limited - India
- Vizag Seaport Private Limited - India
- Timah Investasi Mineral - Indoneisa
- Maheswari Brothers Coal Limited - India
- Antam Resourcindo - Indonesia
- Ministry of Finance - Indonesia
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- Therma Luzon, Inc, Philippines
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- The State Trading Corporation of India Ltd
- Asia Pacific Energy Resources Ventures Inc, Philippines
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- Petron Corporation, Philippines
- South Luzon Thermal Energy Corporation
- Jaiprakash Power Ventures ltd
- Neyveli Lignite Corporation Ltd, - India
- Global Coal Blending Company Limited - Australia
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- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Asmin Koalindo Tuhup - Indonesia
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- Economic Council, Georgia
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- Global Green Power PLC Corporation, Philippines
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- Bukit Asam (Persero) Tbk - Indonesia
- Metalloyd Limited - United Kingdom
- India Bulls Power Limited - India
- Kumho Petrochemical, South Korea
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