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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, 16 May 16
THE FREIGHT MARKET WAS WEAK AND ALL SEGMENTS EXCEPT PANAMAX WERE DOWN
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities decline this week.
The freight market was weak and a ...
Friday, 13 May 16
COAL CARGOES - SOME RECENT DEVELOPMENTS: SWEDISH CLUB
KNOWLEDGE TO ELEVATE
Indonesia continues to be amongst the world’s major exporters of coal, some 426Mt being traded in 2013 mostly to In ...
Friday, 13 May 16
US WEEKLY COAL PRODUCTION IS RUNNING 33% BELOW THE SAME PERIOD IN 2015 - EIA
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 10.9 million short tons (mm ...
Friday, 13 May 16
DRY BULK SHIPPING MARKET RECOVERY WILL BE A LONG, HARD-FOUGHT BATTLE - HELLENIC SHIPPING NEWS
Anyone who expects a strong rally in dry bulk market rates to end the industry’s downturn will be bitterly disappointed. By contrast – ...
Wednesday, 11 May 16
U.S. FORECAST COAL PRODUCTION IS EXPECTED TO DECLINED BY 150 MMST IN 2016; THE LARGEST DECLINE SINCE 1949 - EIA
COALspot.com: EIA estimates that U.S. coal production in April was 46 million short tons (MMst), a 6 MMst (12%) decrease from the previous month an ...
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Showing 2436 to 2440 news of total 6871 |
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- Samtan Co., Ltd - South Korea
- Kideco Jaya Agung - Indonesia
- Trasteel International SA, Italy
- Directorate General of MIneral and Coal - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Straits Asia Resources Limited - Singapore
- Africa Commodities Group - South Africa
- Tamil Nadu electricity Board
- Uttam Galva Steels Limited - India
- Tata Chemicals Ltd - India
- Banpu Public Company Limited - Thailand
- Australian Commodity Traders Exchange
- Maheswari Brothers Coal Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Sakthi Sugars Limited - India
- Marubeni Corporation - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Planning Commission, India
- Larsen & Toubro Limited - India
- Gujarat Electricity Regulatory Commission - India
- Malabar Cements Ltd - India
- Wood Mackenzie - Singapore
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Maharashtra Electricity Regulatory Commission - India
- Central Electricity Authority - India
- IHS Mccloskey Coal Group - USA
- Ceylon Electricity Board - Sri Lanka
- TeaM Sual Corporation - Philippines
- Merrill Lynch Commodities Europe
- Indo Tambangraya Megah - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Miang Besar Coal Terminal - Indonesia
- Altura Mining Limited, Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Electricity Authority, New Zealand
- Renaissance Capital - South Africa
- Anglo American - United Kingdom
- Standard Chartered Bank - UAE
- Mintek Dendrill Indonesia
- Minerals Council of Australia
- Ministry of Finance - Indonesia
- Goldman Sachs - Singapore
- Sinarmas Energy and Mining - Indonesia
- Wilmar Investment Holdings
- IEA Clean Coal Centre - UK
- Orica Mining Services - Indonesia
- Electricity Generating Authority of Thailand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Jaiprakash Power Ventures ltd
- Bhoruka Overseas - Indonesia
- Makarim & Taira - Indonesia
- South Luzon Thermal Energy Corporation
- Siam City Cement PLC, Thailand
- Holcim Trading Pte Ltd - Singapore
- Thai Mozambique Logistica
- Riau Bara Harum - Indonesia
- Singapore Mercantile Exchange
- Bayan Resources Tbk. - Indonesia
- Barasentosa Lestari - Indonesia
- San Jose City I Power Corp, Philippines
- Chettinad Cement Corporation Ltd - India
- Energy Development Corp, Philippines
- Manunggal Multi Energi - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Alfred C Toepfer International GmbH - Germany
- Madhucon Powers Ltd - India
- ASAPP Information Group - India
- Romanian Commodities Exchange
- CIMB Investment Bank - Malaysia
- New Zealand Coal & Carbon
- Deloitte Consulting - India
- Posco Energy - South Korea
- ICICI Bank Limited - India
- SMC Global Power, Philippines
- Carbofer General Trading SA - India
- White Energy Company Limited
- Sree Jayajothi Cements Limited - India
- Sarangani Energy Corporation, Philippines
- Semirara Mining Corp, Philippines
- Gujarat Sidhee Cement - India
- Petron Corporation, Philippines
- Parry Sugars Refinery, India
- London Commodity Brokers - England
- Neyveli Lignite Corporation Ltd, - India
- Power Finance Corporation Ltd., India
- Timah Investasi Mineral - Indoneisa
- Latin American Coal - Colombia
- SN Aboitiz Power Inc, Philippines
- Heidelberg Cement - Germany
- Sojitz Corporation - Japan
- Leighton Contractors Pty Ltd - Australia
- Aboitiz Power Corporation - Philippines
- Sindya Power Generating Company Private Ltd
- Dalmia Cement Bharat India
- Ind-Barath Power Infra Limited - India
- Thiess Contractors Indonesia
- Independent Power Producers Association of India
- Lanco Infratech Ltd - India
- Parliament of New Zealand
- Eastern Coal Council - USA
- Indika Energy - Indonesia
- AsiaOL BioFuels Corp., Philippines
- International Coal Ventures Pvt Ltd - India
- VISA Power Limited - India
- Billiton Holdings Pty Ltd - Australia
- Cement Manufacturers Association - India
- Star Paper Mills Limited - India
- Meenaskhi Energy Private Limited - India
- Indian Energy Exchange, India
- Price Waterhouse Coopers - Russia
- Simpson Spence & Young - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Salva Resources Pvt Ltd - India
- Baramulti Group, Indonesia
- Agrawal Coal Company - India
- Aditya Birla Group - India
- Medco Energi Mining Internasional
- Krishnapatnam Port Company Ltd. - India
- CNBM International Corporation - China
- Ambuja Cements Ltd - India
- Borneo Indobara - Indonesia
- Central Java Power - Indonesia
- Bukit Baiduri Energy - Indonesia
- Iligan Light & Power Inc, Philippines
- Ministry of Transport, Egypt
- The University of Queensland
- Vedanta Resources Plc - India
- Siam City Cement - Thailand
- Energy Link Ltd, New Zealand
- European Bulk Services B.V. - Netherlands
- TNB Fuel Sdn Bhd - Malaysia
- Globalindo Alam Lestari - Indonesia
- Directorate Of Revenue Intelligence - India
- Australian Coal Association
- Jindal Steel & Power Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Port Waratah Coal Services - Australia
- Economic Council, Georgia
- Cigading International Bulk Terminal - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Eastern Energy - Thailand
- Formosa Plastics Group - Taiwan
- Coal and Oil Company - UAE
- Therma Luzon, Inc, Philippines
- Mjunction Services Limited - India
- PTC India Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Bangladesh Power Developement Board
- Kohat Cement Company Ltd. - Pakistan
- Bukit Makmur.PT - Indonesia
- Mercator Lines Limited - India
- GMR Energy Limited - India
- Ministry of Mines - Canada
- Georgia Ports Authority, United States
- Jorong Barutama Greston.PT - Indonesia
- Toyota Tsusho Corporation, Japan
- Asmin Koalindo Tuhup - Indonesia
- Kartika Selabumi Mining - Indonesia
- Oldendorff Carriers - Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Orica Australia Pty. Ltd.
- Metalloyd Limited - United Kingdom
- Bhushan Steel Limited - India
- Bhatia International Limited - India
- Rio Tinto Coal - Australia
- OPG Power Generation Pvt Ltd - India
- Edison Trading Spa - Italy
- McConnell Dowell - Australia
- PowerSource Philippines DevCo
- Savvy Resources Ltd - HongKong
- Bulk Trading Sa - Switzerland
- Global Business Power Corporation, Philippines
- Antam Resourcindo - Indonesia
- GAC Shipping (India) Pvt Ltd
- The Treasury - Australian Government
- Coastal Gujarat Power Limited - India
- Mercuria Energy - Indonesia
- Intertek Mineral Services - Indonesia
- Attock Cement Pakistan Limited
- Videocon Industries ltd - India
- Global Coal Blending Company Limited - Australia
- Sical Logistics Limited - India
- Meralco Power Generation, Philippines
- MS Steel International - UAE
- Kaltim Prima Coal - Indonesia
- Binh Thuan Hamico - Vietnam
- PNOC Exploration Corporation - Philippines
- Vizag Seaport Private Limited - India
- Bharathi Cement Corporation - India
- Commonwealth Bank - Australia
- Indian Oil Corporation Limited
- India Bulls Power Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Rashtriya Ispat Nigam Limited - India
- Grasim Industreis Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Chamber of Mines of South Africa
- LBH Netherlands Bv - Netherlands
- Karaikal Port Pvt Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- GVK Power & Infra Limited - India
- Pendopo Energi Batubara - Indonesia
- Xindia Steels Limited - India
- Semirara Mining and Power Corporation, Philippines
- Interocean Group of Companies - India
- Kumho Petrochemical, South Korea
- Global Green Power PLC Corporation, Philippines
- Essar Steel Hazira Ltd - India
- The State Trading Corporation of India Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kobexindo Tractors - Indoneisa
- Coalindo Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Indogreen Group - Indonesia
- SMG Consultants - Indonesia
- Kepco SPC Power Corporation, Philippines
- Indonesian Coal Mining Association
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