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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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Friday, 06 May 16
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Wednesday, 04 May 16
POWER - WEEK: REAL EXAMPLES AND CASE STUDIES
POWER WEEK
7 - 11 November 2016, PARKROYAL on Beach Road Hotel, Singapore
www.power-week.com
Overview
Designed for the global e ...
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- Leighton Contractors Pty Ltd - Australia
- Samtan Co., Ltd - South Korea
- IEA Clean Coal Centre - UK
- SN Aboitiz Power Inc, Philippines
- Tamil Nadu electricity Board
- Karaikal Port Pvt Ltd - India
- Tata Chemicals Ltd - India
- Economic Council, Georgia
- PowerSource Philippines DevCo
- Kalimantan Lumbung Energi - Indonesia
- LBH Netherlands Bv - Netherlands
- Gujarat Mineral Development Corp Ltd - India
- Baramulti Group, Indonesia
- Medco Energi Mining Internasional
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mercator Lines Limited - India
- Kobexindo Tractors - Indoneisa
- Uttam Galva Steels Limited - India
- Billiton Holdings Pty Ltd - Australia
- Gujarat Sidhee Cement - India
- Pipit Mutiara Jaya. PT, Indonesia
- Bulk Trading Sa - Switzerland
- New Zealand Coal & Carbon
- Indogreen Group - Indonesia
- Makarim & Taira - Indonesia
- Petron Corporation, Philippines
- Kepco SPC Power Corporation, Philippines
- Riau Bara Harum - Indonesia
- Latin American Coal - Colombia
- Ministry of Transport, Egypt
- Ind-Barath Power Infra Limited - India
- Cement Manufacturers Association - India
- Asmin Koalindo Tuhup - Indonesia
- Edison Trading Spa - Italy
- Therma Luzon, Inc, Philippines
- Global Green Power PLC Corporation, Philippines
- Siam City Cement - Thailand
- Mercuria Energy - Indonesia
- Thiess Contractors Indonesia
- Pendopo Energi Batubara - Indonesia
- Carbofer General Trading SA - India
- Bhushan Steel Limited - India
- Metalloyd Limited - United Kingdom
- SMC Global Power, Philippines
- Alfred C Toepfer International GmbH - Germany
- Marubeni Corporation - India
- Minerals Council of Australia
- Aboitiz Power Corporation - Philippines
- Timah Investasi Mineral - Indoneisa
- Mintek Dendrill Indonesia
- GVK Power & Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Formosa Plastics Group - Taiwan
- Central Electricity Authority - India
- India Bulls Power Limited - India
- The University of Queensland
- SMG Consultants - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- MS Steel International - UAE
- Interocean Group of Companies - India
- Oldendorff Carriers - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Independent Power Producers Association of India
- Intertek Mineral Services - Indonesia
- Vedanta Resources Plc - India
- Parry Sugars Refinery, India
- AsiaOL BioFuels Corp., Philippines
- Wilmar Investment Holdings
- Planning Commission, India
- Miang Besar Coal Terminal - Indonesia
- Sree Jayajothi Cements Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- PNOC Exploration Corporation - Philippines
- Videocon Industries ltd - India
- Gujarat Electricity Regulatory Commission - India
- Dalmia Cement Bharat India
- Wood Mackenzie - Singapore
- Singapore Mercantile Exchange
- Altura Mining Limited, Indonesia
- Semirara Mining Corp, Philippines
- Energy Development Corp, Philippines
- ASAPP Information Group - India
- Eastern Coal Council - USA
- Deloitte Consulting - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Holcim Trading Pte Ltd - Singapore
- Grasim Industreis Ltd - India
- Coalindo Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Indian Oil Corporation Limited
- Orica Australia Pty. Ltd.
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Directorate Of Revenue Intelligence - India
- Price Waterhouse Coopers - Russia
- Sindya Power Generating Company Private Ltd
- Coastal Gujarat Power Limited - India
- Electricity Generating Authority of Thailand
- Semirara Mining and Power Corporation, Philippines
- Romanian Commodities Exchange
- Banpu Public Company Limited - Thailand
- Sakthi Sugars Limited - India
- Straits Asia Resources Limited - Singapore
- Africa Commodities Group - South Africa
- Port Waratah Coal Services - Australia
- Indonesian Coal Mining Association
- Ambuja Cements Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- IHS Mccloskey Coal Group - USA
- Kartika Selabumi Mining - Indonesia
- Parliament of New Zealand
- Directorate General of MIneral and Coal - Indonesia
- Bhatia International Limited - India
- Sojitz Corporation - Japan
- Toyota Tsusho Corporation, Japan
- Xindia Steels Limited - India
- Rio Tinto Coal - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bhoruka Overseas - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Australian Coal Association
- Globalindo Alam Lestari - Indonesia
- Heidelberg Cement - Germany
- Bahari Cakrawala Sebuku - Indonesia
- Siam City Cement PLC, Thailand
- Binh Thuan Hamico - Vietnam
- Star Paper Mills Limited - India
- The State Trading Corporation of India Ltd
- Vijayanagar Sugar Pvt Ltd - India
- Agrawal Coal Company - India
- Maheswari Brothers Coal Limited - India
- Chamber of Mines of South Africa
- Vizag Seaport Private Limited - India
- Simpson Spence & Young - Indonesia
- Sical Logistics Limited - India
- International Coal Ventures Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- ICICI Bank Limited - India
- Aditya Birla Group - India
- Energy Link Ltd, New Zealand
- Krishnapatnam Port Company Ltd. - India
- GAC Shipping (India) Pvt Ltd
- Posco Energy - South Korea
- Iligan Light & Power Inc, Philippines
- Cigading International Bulk Terminal - Indonesia
- Madhucon Powers Ltd - India
- Goldman Sachs - Singapore
- Eastern Energy - Thailand
- Borneo Indobara - Indonesia
- CIMB Investment Bank - Malaysia
- San Jose City I Power Corp, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- PTC India Limited - India
- Ministry of Mines - Canada
- McConnell Dowell - Australia
- Trasteel International SA, Italy
- Bharathi Cement Corporation - India
- Renaissance Capital - South Africa
- Kideco Jaya Agung - Indonesia
- Coal and Oil Company - UAE
- Meralco Power Generation, Philippines
- Indo Tambangraya Megah - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- The Treasury - Australian Government
- Savvy Resources Ltd - HongKong
- Power Finance Corporation Ltd., India
- Larsen & Toubro Limited - India
- White Energy Company Limited
- Bayan Resources Tbk. - Indonesia
- London Commodity Brokers - England
- Bukit Baiduri Energy - Indonesia
- Merrill Lynch Commodities Europe
- Petrochimia International Co. Ltd.- Taiwan
- Bangladesh Power Developement Board
- Kaltim Prima Coal - Indonesia
- Mjunction Services Limited - India
- Malabar Cements Ltd - India
- Electricity Authority, New Zealand
- GN Power Mariveles Coal Plant, Philippines
- Jindal Steel & Power Ltd - India
- Indian Energy Exchange, India
- Australian Commodity Traders Exchange
- Standard Chartered Bank - UAE
- Orica Mining Services - Indonesia
- European Bulk Services B.V. - Netherlands
- Rashtriya Ispat Nigam Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Attock Cement Pakistan Limited
- GMR Energy Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Chettinad Cement Corporation Ltd - India
- Essar Steel Hazira Ltd - India
- Kumho Petrochemical, South Korea
- Ceylon Electricity Board - Sri Lanka
- Commonwealth Bank - Australia
- Georgia Ports Authority, United States
- Jaiprakash Power Ventures ltd
- Ministry of Finance - Indonesia
- Sarangani Energy Corporation, Philippines
- Salva Resources Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Anglo American - United Kingdom
- Central Java Power - Indonesia
- Global Coal Blending Company Limited - Australia
- Manunggal Multi Energi - Indonesia
- Lanco Infratech Ltd - India
- TeaM Sual Corporation - Philippines
- South Luzon Thermal Energy Corporation
- Bukit Asam (Persero) Tbk - Indonesia
- VISA Power Limited - India
- Indika Energy - Indonesia
- Global Business Power Corporation, Philippines
- Thai Mozambique Logistica
- CNBM International Corporation - China
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