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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, 08 June 16
THE DRY BULK MARKET KEPT MOVING SIDEWAYS LAST WEEK; SECOND HAND PURCHASES MOVING NORTH - INTERMODAL
Once again its Posidonia time and the biannual exhibition takes place during a very warm June here in Athens, as if the performance of the dry bulk ...
Tuesday, 07 June 16
CS COAL INDEX ROSE FOR SECOND STRAIGHT WEEK
COALspot.com: Average 5000 GAR coal index of Indonesian origin was up 0.38 percent week over week to averaging $39.16 per ton this past week, shows ...
Monday, 06 June 16
BDI GAINED ON A STRONGER DEMAND FOR CAPESIZE SHIPS
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities rose this past week on a stronger demand for Capesize ves ...
Friday, 03 June 16
DRY BULK VESSEL DELIVERIES COULD BE LESS THAN 50 MILLION DWT IN 2016, AS OWNERS DELAY OR CANCEL NEWBUILDING ORDERS
The dry bulk market has been caught between a rock and a hard place over the course of the past couple of years, as on one hand demand has plunged, ...
Friday, 03 June 16
U.S WEEKLY COAL PRODUCTION SLIDES 1.3% - EIA
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 11.5 million short tons (mm ...
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- Maharashtra Electricity Regulatory Commission - India
- Indian Energy Exchange, India
- Kobexindo Tractors - Indoneisa
- Eastern Coal Council - USA
- South Luzon Thermal Energy Corporation
- Electricity Generating Authority of Thailand
- Kalimantan Lumbung Energi - Indonesia
- Maheswari Brothers Coal Limited - India
- Rashtriya Ispat Nigam Limited - India
- Africa Commodities Group - South Africa
- Thai Mozambique Logistica
- Simpson Spence & Young - Indonesia
- Global Business Power Corporation, Philippines
- Billiton Holdings Pty Ltd - Australia
- Petron Corporation, Philippines
- Lanco Infratech Ltd - India
- VISA Power Limited - India
- ASAPP Information Group - India
- Kumho Petrochemical, South Korea
- Sarangani Energy Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Borneo Indobara - Indonesia
- Malabar Cements Ltd - India
- Semirara Mining and Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Mercuria Energy - Indonesia
- Coastal Gujarat Power Limited - India
- Australian Coal Association
- GN Power Mariveles Coal Plant, Philippines
- Holcim Trading Pte Ltd - Singapore
- Global Green Power PLC Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Heidelberg Cement - Germany
- Romanian Commodities Exchange
- Miang Besar Coal Terminal - Indonesia
- Uttam Galva Steels Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Antam Resourcindo - Indonesia
- Directorate Of Revenue Intelligence - India
- Krishnapatnam Port Company Ltd. - India
- Sakthi Sugars Limited - India
- Baramulti Group, Indonesia
- Savvy Resources Ltd - HongKong
- Renaissance Capital - South Africa
- White Energy Company Limited
- Videocon Industries ltd - India
- SN Aboitiz Power Inc, Philippines
- PTC India Limited - India
- Kapuas Tunggal Persada - Indonesia
- Manunggal Multi Energi - Indonesia
- Oldendorff Carriers - Singapore
- Rio Tinto Coal - Australia
- Mercator Lines Limited - India
- Parry Sugars Refinery, India
- Kaltim Prima Coal - Indonesia
- Tata Chemicals Ltd - India
- Dalmia Cement Bharat India
- Sinarmas Energy and Mining - Indonesia
- Deloitte Consulting - India
- Larsen & Toubro Limited - India
- Australian Commodity Traders Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Indika Energy - Indonesia
- New Zealand Coal & Carbon
- Commonwealth Bank - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Central Electricity Authority - India
- Pendopo Energi Batubara - Indonesia
- Agrawal Coal Company - India
- TeaM Sual Corporation - Philippines
- Metalloyd Limited - United Kingdom
- Ministry of Finance - Indonesia
- Sindya Power Generating Company Private Ltd
- Cigading International Bulk Terminal - Indonesia
- Vedanta Resources Plc - India
- San Jose City I Power Corp, Philippines
- Intertek Mineral Services - Indonesia
- Globalindo Alam Lestari - Indonesia
- International Coal Ventures Pvt Ltd - India
- Mintek Dendrill Indonesia
- Marubeni Corporation - India
- Independent Power Producers Association of India
- Riau Bara Harum - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Barasentosa Lestari - Indonesia
- Posco Energy - South Korea
- Global Coal Blending Company Limited - Australia
- Medco Energi Mining Internasional
- GVK Power & Infra Limited - India
- Ministry of Transport, Egypt
- Siam City Cement - Thailand
- Goldman Sachs - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Karaikal Port Pvt Ltd - India
- Energy Development Corp, Philippines
- Thiess Contractors Indonesia
- Therma Luzon, Inc, Philippines
- Gujarat Sidhee Cement - India
- Makarim & Taira - Indonesia
- Planning Commission, India
- Bayan Resources Tbk. - Indonesia
- Bharathi Cement Corporation - India
- SMC Global Power, Philippines
- Kohat Cement Company Ltd. - Pakistan
- OPG Power Generation Pvt Ltd - India
- Mjunction Services Limited - India
- Ind-Barath Power Infra Limited - India
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- Kepco SPC Power Corporation, Philippines
- Meralco Power Generation, Philippines
- Price Waterhouse Coopers - Russia
- Semirara Mining Corp, Philippines
- MS Steel International - UAE
- Bukit Asam (Persero) Tbk - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- European Bulk Services B.V. - Netherlands
- Chamber of Mines of South Africa
- Eastern Energy - Thailand
- CIMB Investment Bank - Malaysia
- Binh Thuan Hamico - Vietnam
- Indonesian Coal Mining Association
- Interocean Group of Companies - India
- Coal and Oil Company - UAE
- Ambuja Cements Ltd - India
- Coalindo Energy - Indonesia
- McConnell Dowell - Australia
- Vijayanagar Sugar Pvt Ltd - India
- Orica Mining Services - Indonesia
- Salva Resources Pvt Ltd - India
- Wilmar Investment Holdings
- IHS Mccloskey Coal Group - USA
- Sree Jayajothi Cements Limited - India
- Minerals Council of Australia
- CNBM International Corporation - China
- Alfred C Toepfer International GmbH - Germany
- Wood Mackenzie - Singapore
- Sojitz Corporation - Japan
- Orica Australia Pty. Ltd.
- Electricity Authority, New Zealand
- Bukit Baiduri Energy - Indonesia
- The State Trading Corporation of India Ltd
- India Bulls Power Limited - India
- PowerSource Philippines DevCo
- Meenaskhi Energy Private Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Indogreen Group - Indonesia
- Essar Steel Hazira Ltd - India
- Kideco Jaya Agung - Indonesia
- Carbofer General Trading SA - India
- Siam City Cement PLC, Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Jaiprakash Power Ventures ltd
- Chettinad Cement Corporation Ltd - India
- London Commodity Brokers - England
- Asmin Koalindo Tuhup - Indonesia
- Bulk Trading Sa - Switzerland
- AsiaOL BioFuels Corp., Philippines
- Iligan Light & Power Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- SMG Consultants - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Toyota Tsusho Corporation, Japan
- Power Finance Corporation Ltd., India
- Anglo American - United Kingdom
- Xindia Steels Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Parliament of New Zealand
- Grasim Industreis Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Indo Tambangraya Megah - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Central Java Power - Indonesia
- Cement Manufacturers Association - India
- Vizag Seaport Private Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Port Waratah Coal Services - Australia
- Bangladesh Power Developement Board
- Singapore Mercantile Exchange
- Sical Logistics Limited - India
- Tamil Nadu electricity Board
- Kartika Selabumi Mining - Indonesia
- GAC Shipping (India) Pvt Ltd
- Bhatia International Limited - India
- Aboitiz Power Corporation - Philippines
- IEA Clean Coal Centre - UK
- Georgia Ports Authority, United States
- PNOC Exploration Corporation - Philippines
- Bhushan Steel Limited - India
- Edison Trading Spa - Italy
- Bhoruka Overseas - Indonesia
- Economic Council, Georgia
- The University of Queensland
- GMR Energy Limited - India
- Trasteel International SA, Italy
- Bank of Tokyo Mitsubishi UFJ Ltd
- Indian Oil Corporation Limited
- Attock Cement Pakistan Limited
- Altura Mining Limited, Indonesia
- ICICI Bank Limited - India
- Merrill Lynch Commodities Europe
- Gujarat Electricity Regulatory Commission - India
- Samtan Co., Ltd - South Korea
- Formosa Plastics Group - Taiwan
- Latin American Coal - Colombia
- Straits Asia Resources Limited - Singapore
- Aditya Birla Group - India
- Madhucon Powers Ltd - India
- Jindal Steel & Power Ltd - India
- The Treasury - Australian Government
- Jorong Barutama Greston.PT - Indonesia
- Star Paper Mills Limited - India
- Energy Link Ltd, New Zealand
- Standard Chartered Bank - UAE
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