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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, 11 May 16
MARKET INSIGHT - KATERINA RESTIS
On Saturday 7th May, Riyadh replaced the long-serving oil minister of more than two decades, Ali-Al-Naimi, as part of a major government overhaul, ...
Tuesday, 10 May 16
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Along with cyclicality, the other characteristic of the shipping markets which receives frequent mention is volatility. This is so evident that the ...
Monday, 09 May 16
INDONESIAN CS COAL INDICES UP CONTINUES; POSITIVE DIRECTION
COALspot.com: Average 5000 GAR coal index of Indonesian origin up 0.10 percent week over week to averaging $38.82 per ton on this past Wednesday, a ...
Monday, 09 May 16
DRY BULK SHIPPING TO WITNESS STEADY PROGRESS MOVING FORWARD ON THE BACK OF GROWING TRADE VOLUMES - BIMCO
In its latest short-term analysis of the shipping markets, BIMCO reiterated its optimism on the prospects of the dry bulk market moving forward. Ac ...
Monday, 09 May 16
BALTIC DRY INDEX ENDS WEEK ON A NEGATIVE NOTE
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities decline this week.
The freight market was weak and a ...
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- Malabar Cements Ltd - India
- Minerals Council of Australia
- Lanco Infratech Ltd - India
- Globalindo Alam Lestari - Indonesia
- Economic Council, Georgia
- White Energy Company Limited
- Toyota Tsusho Corporation, Japan
- Essar Steel Hazira Ltd - India
- Karaikal Port Pvt Ltd - India
- Georgia Ports Authority, United States
- Uttam Galva Steels Limited - India
- Aditya Birla Group - India
- Mercuria Energy - Indonesia
- Bangladesh Power Developement Board
- Coalindo Energy - Indonesia
- Binh Thuan Hamico - Vietnam
- Sakthi Sugars Limited - India
- Ind-Barath Power Infra Limited - India
- Global Coal Blending Company Limited - Australia
- Price Waterhouse Coopers - Russia
- Independent Power Producers Association of India
- Cigading International Bulk Terminal - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Australian Coal Association
- Rio Tinto Coal - Australia
- Krishnapatnam Port Company Ltd. - India
- Gujarat Electricity Regulatory Commission - India
- Borneo Indobara - Indonesia
- Deloitte Consulting - India
- Eastern Coal Council - USA
- ICICI Bank Limited - India
- Alfred C Toepfer International GmbH - Germany
- Goldman Sachs - Singapore
- Mjunction Services Limited - India
- Vedanta Resources Plc - India
- Kaltim Prima Coal - Indonesia
- Formosa Plastics Group - Taiwan
- VISA Power Limited - India
- Jindal Steel & Power Ltd - India
- Intertek Mineral Services - Indonesia
- Singapore Mercantile Exchange
- Electricity Authority, New Zealand
- Kobexindo Tractors - Indoneisa
- Commonwealth Bank - Australia
- Siam City Cement - Thailand
- Bukit Baiduri Energy - Indonesia
- Energy Link Ltd, New Zealand
- Altura Mining Limited, Indonesia
- IEA Clean Coal Centre - UK
- Bhoruka Overseas - Indonesia
- Vizag Seaport Private Limited - India
- Indonesian Coal Mining Association
- Coastal Gujarat Power Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ceylon Electricity Board - Sri Lanka
- Indian Energy Exchange, India
- Thai Mozambique Logistica
- Sree Jayajothi Cements Limited - India
- Aboitiz Power Corporation - Philippines
- Holcim Trading Pte Ltd - Singapore
- Posco Energy - South Korea
- Therma Luzon, Inc, Philippines
- Meenaskhi Energy Private Limited - India
- Larsen & Toubro Limited - India
- Sical Logistics Limited - India
- Indogreen Group - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- AsiaOL BioFuels Corp., Philippines
- IHS Mccloskey Coal Group - USA
- Coal and Oil Company - UAE
- Dalmia Cement Bharat India
- GVK Power & Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Merrill Lynch Commodities Europe
- Star Paper Mills Limited - India
- Salva Resources Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- The State Trading Corporation of India Ltd
- Straits Asia Resources Limited - Singapore
- Kideco Jaya Agung - Indonesia
- Makarim & Taira - Indonesia
- LBH Netherlands Bv - Netherlands
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Savvy Resources Ltd - HongKong
- Jorong Barutama Greston.PT - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- New Zealand Coal & Carbon
- Chamber of Mines of South Africa
- Petron Corporation, Philippines
- Thiess Contractors Indonesia
- Agrawal Coal Company - India
- Heidelberg Cement - Germany
- Central Java Power - Indonesia
- Romanian Commodities Exchange
- Planning Commission, India
- The University of Queensland
- Standard Chartered Bank - UAE
- Ministry of Mines - Canada
- Asmin Koalindo Tuhup - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- TeaM Sual Corporation - Philippines
- India Bulls Power Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- PTC India Limited - India
- Power Finance Corporation Ltd., India
- Directorate Of Revenue Intelligence - India
- CIMB Investment Bank - Malaysia
- Indika Energy - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Miang Besar Coal Terminal - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- San Jose City I Power Corp, Philippines
- South Luzon Thermal Energy Corporation
- Jaiprakash Power Ventures ltd
- ASAPP Information Group - India
- Gujarat Mineral Development Corp Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Baramulti Group, Indonesia
- Videocon Industries ltd - India
- Meralco Power Generation, Philippines
- GMR Energy Limited - India
- Indian Oil Corporation Limited
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Latin American Coal - Colombia
- Cement Manufacturers Association - India
- Pipit Mutiara Jaya. PT, Indonesia
- MS Steel International - UAE
- Marubeni Corporation - India
- Gujarat Sidhee Cement - India
- Medco Energi Mining Internasional
- Maheswari Brothers Coal Limited - India
- Oldendorff Carriers - Singapore
- Siam City Cement PLC, Thailand
- Trasteel International SA, Italy
- Energy Development Corp, Philippines
- Australian Commodity Traders Exchange
- Port Waratah Coal Services - Australia
- Xindia Steels Limited - India
- Ministry of Finance - Indonesia
- GAC Shipping (India) Pvt Ltd
- Wood Mackenzie - Singapore
- SMC Global Power, Philippines
- Mintek Dendrill Indonesia
- Metalloyd Limited - United Kingdom
- McConnell Dowell - Australia
- Bhatia International Limited - India
- London Commodity Brokers - England
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- PNOC Exploration Corporation - Philippines
- Africa Commodities Group - South Africa
- Tata Chemicals Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Parry Sugars Refinery, India
- Billiton Holdings Pty Ltd - Australia
- Kumho Petrochemical, South Korea
- Orica Australia Pty. Ltd.
- International Coal Ventures Pvt Ltd - India
- Interocean Group of Companies - India
- Bharathi Cement Corporation - India
- Bahari Cakrawala Sebuku - Indonesia
- SMG Consultants - Indonesia
- Pendopo Energi Batubara - Indonesia
- Central Electricity Authority - India
- Ministry of Transport, Egypt
- Tamil Nadu electricity Board
- Indo Tambangraya Megah - Indonesia
- Manunggal Multi Energi - Indonesia
- Carbofer General Trading SA - India
- Attock Cement Pakistan Limited
- Sindya Power Generating Company Private Ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Samtan Co., Ltd - South Korea
- Renaissance Capital - South Africa
- Sarangani Energy Corporation, Philippines
- The Treasury - Australian Government
- Kohat Cement Company Ltd. - Pakistan
- Banpu Public Company Limited - Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- PowerSource Philippines DevCo
- Rashtriya Ispat Nigam Limited - India
- Electricity Generating Authority of Thailand
- Bayan Resources Tbk. - Indonesia
- Bhushan Steel Limited - India
- Bulk Trading Sa - Switzerland
- Barasentosa Lestari - Indonesia
- Eastern Energy - Thailand
- SN Aboitiz Power Inc, Philippines
- Kepco SPC Power Corporation, Philippines
- Anglo American - United Kingdom
- Vijayanagar Sugar Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Semirara Mining Corp, Philippines
- European Bulk Services B.V. - Netherlands
- Ambuja Cements Ltd - India
- CNBM International Corporation - China
- Orica Mining Services - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Riau Bara Harum - Indonesia
- Madhucon Powers Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Antam Resourcindo - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Simpson Spence & Young - Indonesia
- Timah Investasi Mineral - Indoneisa
- Sojitz Corporation - Japan
- Bukit Makmur.PT - Indonesia
- Wilmar Investment Holdings
- Iligan Light & Power Inc, Philippines
- Parliament of New Zealand
- Leighton Contractors Pty Ltd - Australia
- Mercator Lines Limited - India
- Chettinad Cement Corporation Ltd - India
- Grasim Industreis Ltd - India
- Global Business Power Corporation, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Edison Trading Spa - Italy
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