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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, 13 June 16
BALTIC INDEX FLAT, INDEX FOR CAPE RISE
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities flat this past week. The freight market was almost same l ...
Friday, 10 June 16
INDONESIAN 6322 GAR COAL PRICE REFERENCE RISES TO $51.81 A TON
COALspot.com: The Indonesia Coal Benchmark Price increased in June 2016.
The Director General of Mineral and Coal of Indonesia, the regulator ...
Friday, 10 June 16
WEEKLY U.S. COAL PRODUCTION TOTALED AN ESTIMATED 12 MMST IN THE WEEK ENDED JUNE 4, UP 4% W/W - EIA
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 12 million short tons (mmst ...
Wednesday, 08 June 16
BPI ACHIEVES FINANCIAL CLOSE FOR ITS 2000 MW POWER PROJECT IN CENTRAL JAVA
COALspot.com: PT Bhimasena Power Indonesia (BPI) on June 6th, 2016 Achieves financial close for its 2x1,000 MW power project in Batang Regency, Cen ...
Wednesday, 08 June 16
U.S COAL IMPORTS ARE PROJECTED TO BE 12 MMST IN 2016 AND 11 MMST IN 2017 - EIA
Coal Supply
U.S. coal production in May was 50 million short tons (MMst), a 4 MMst (10%) increase from the previous month but 19 MMst (28%) lower ...
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- Sindya Power Generating Company Private Ltd
- New Zealand Coal & Carbon
- Thiess Contractors Indonesia
- Barasentosa Lestari - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Independent Power Producers Association of India
- Renaissance Capital - South Africa
- IHS Mccloskey Coal Group - USA
- Holcim Trading Pte Ltd - Singapore
- ASAPP Information Group - India
- CNBM International Corporation - China
- Ministry of Transport, Egypt
- PNOC Exploration Corporation - Philippines
- Central Electricity Authority - India
- Kartika Selabumi Mining - Indonesia
- Bhatia International Limited - India
- Antam Resourcindo - Indonesia
- Intertek Mineral Services - Indonesia
- Aboitiz Power Corporation - Philippines
- Miang Besar Coal Terminal - Indonesia
- Standard Chartered Bank - UAE
- Agrawal Coal Company - India
- OPG Power Generation Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Petrochimia International Co. Ltd.- Taiwan
- Bayan Resources Tbk. - Indonesia
- Sarangani Energy Corporation, Philippines
- Interocean Group of Companies - India
- MS Steel International - UAE
- Bukit Makmur.PT - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Indika Energy - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Tamil Nadu electricity Board
- CIMB Investment Bank - Malaysia
- Maheswari Brothers Coal Limited - India
- TeaM Sual Corporation - Philippines
- Sical Logistics Limited - India
- Parry Sugars Refinery, India
- Thai Mozambique Logistica
- Iligan Light & Power Inc, Philippines
- San Jose City I Power Corp, Philippines
- Ind-Barath Power Infra Limited - India
- Energy Development Corp, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Mjunction Services Limited - India
- Gujarat Sidhee Cement - India
- Kalimantan Lumbung Energi - Indonesia
- Merrill Lynch Commodities Europe
- Uttam Galva Steels Limited - India
- Deloitte Consulting - India
- Goldman Sachs - Singapore
- Maharashtra Electricity Regulatory Commission - India
- Coastal Gujarat Power Limited - India
- Bangladesh Power Developement Board
- Lanco Infratech Ltd - India
- SMC Global Power, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Anglo American - United Kingdom
- ICICI Bank Limited - India
- Banpu Public Company Limited - Thailand
- Ministry of Finance - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Meralco Power Generation, Philippines
- Malabar Cements Ltd - India
- Bharathi Cement Corporation - India
- Bhoruka Overseas - Indonesia
- Mercuria Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Kepco SPC Power Corporation, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Bulk Trading Sa - Switzerland
- Ambuja Cements Ltd - India
- Orica Australia Pty. Ltd.
- Georgia Ports Authority, United States
- Bukit Baiduri Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Makarim & Taira - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PetroVietnam Power Coal Import and Supply Company
- Dalmia Cement Bharat India
- Kaltim Prima Coal - Indonesia
- Siam City Cement - Thailand
- PowerSource Philippines DevCo
- Formosa Plastics Group - Taiwan
- Indonesian Coal Mining Association
- Kapuas Tunggal Persada - Indonesia
- Coalindo Energy - Indonesia
- McConnell Dowell - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Global Business Power Corporation, Philippines
- Bhushan Steel Limited - India
- Petron Corporation, Philippines
- Borneo Indobara - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Singapore Mercantile Exchange
- Ministry of Mines - Canada
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Meenaskhi Energy Private Limited - India
- Australian Coal Association
- Bahari Cakrawala Sebuku - Indonesia
- Price Waterhouse Coopers - Russia
- Kideco Jaya Agung - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Essar Steel Hazira Ltd - India
- Coal and Oil Company - UAE
- Siam City Cement PLC, Thailand
- SMG Consultants - Indonesia
- Jindal Steel & Power Ltd - India
- Indian Oil Corporation Limited
- Krishnapatnam Port Company Ltd. - India
- VISA Power Limited - India
- Heidelberg Cement - Germany
- Power Finance Corporation Ltd., India
- Medco Energi Mining Internasional
- Indian Energy Exchange, India
- Therma Luzon, Inc, Philippines
- South Luzon Thermal Energy Corporation
- Global Coal Blending Company Limited - Australia
- Minerals Council of Australia
- LBH Netherlands Bv - Netherlands
- Tata Chemicals Ltd - India
- Simpson Spence & Young - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Commonwealth Bank - Australia
- Videocon Industries ltd - India
- Alfred C Toepfer International GmbH - Germany
- Semirara Mining Corp, Philippines
- GVK Power & Infra Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Gujarat Electricity Regulatory Commission - India
- Star Paper Mills Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Carbofer General Trading SA - India
- Marubeni Corporation - India
- Indogreen Group - Indonesia
- Electricity Generating Authority of Thailand
- IEA Clean Coal Centre - UK
- Jaiprakash Power Ventures ltd
- The State Trading Corporation of India Ltd
- Samtan Co., Ltd - South Korea
- Electricity Authority, New Zealand
- Eastern Coal Council - USA
- Africa Commodities Group - South Africa
- Savvy Resources Ltd - HongKong
- Oldendorff Carriers - Singapore
- Economic Council, Georgia
- Asmin Koalindo Tuhup - Indonesia
- Energy Link Ltd, New Zealand
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- GMR Energy Limited - India
- Sree Jayajothi Cements Limited - India
- Globalindo Alam Lestari - Indonesia
- Australian Commodity Traders Exchange
- Binh Thuan Hamico - Vietnam
- Edison Trading Spa - Italy
- Parliament of New Zealand
- India Bulls Power Limited - India
- European Bulk Services B.V. - Netherlands
- Trasteel International SA, Italy
- Attock Cement Pakistan Limited
- Chamber of Mines of South Africa
- Posco Energy - South Korea
- International Coal Ventures Pvt Ltd - India
- White Energy Company Limited
- Mercator Lines Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- The University of Queensland
- Grasim Industreis Ltd - India
- Salva Resources Pvt Ltd - India
- Romanian Commodities Exchange
- Sakthi Sugars Limited - India
- GAC Shipping (India) Pvt Ltd
- Aditya Birla Group - India
- Manunggal Multi Energi - Indonesia
- Vedanta Resources Plc - India
- Rio Tinto Coal - Australia
- Xindia Steels Limited - India
- PTC India Limited - India
- Latin American Coal - Colombia
- SN Aboitiz Power Inc, Philippines
- Karaikal Port Pvt Ltd - India
- The Treasury - Australian Government
- Rashtriya Ispat Nigam Limited - India
- Mintek Dendrill Indonesia
- Kobexindo Tractors - Indoneisa
- Larsen & Toubro Limited - India
- Pendopo Energi Batubara - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Port Waratah Coal Services - Australia
- Vizag Seaport Private Limited - India
- Indo Tambangraya Megah - Indonesia
- Cement Manufacturers Association - India
- Altura Mining Limited, Indonesia
- Sojitz Corporation - Japan
- Kumho Petrochemical, South Korea
- Straits Asia Resources Limited - Singapore
- Directorate Of Revenue Intelligence - India
- Timah Investasi Mineral - Indoneisa
- Central Java Power - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Madhucon Powers Ltd - India
- Planning Commission, India
- Directorate General of MIneral and Coal - Indonesia
- London Commodity Brokers - England
- Baramulti Group, Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Toyota Tsusho Corporation, Japan
- Chettinad Cement Corporation Ltd - India
- Orica Mining Services - Indonesia
- Global Green Power PLC Corporation, Philippines
- Riau Bara Harum - Indonesia
- Wilmar Investment Holdings
- Eastern Energy - Thailand
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