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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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Tuesday, 03 May 16
HOW TO AVOID THE LATEST CARGO FRAUDS - BIMCO
BIMCO receives regular reports from members around the world about cargo fraud. This week alone we have had two reports of cargoes being fixed (or ...
Monday, 02 May 16
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Monday, 02 May 16
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Monday, 02 May 16
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The freight market was ...
Saturday, 30 April 16
40 YEARS OF HANDLING COAL AT THE BTW IN WILHELMSHAVEN UNDER THE RHENUS FLAG
Press Release: The first bulk carrier with coal on board docked at the Bulk Terminal Wilhelmshaven (BTW), which is operated by Rhenus Midgar ...
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- Rio Tinto Coal - Australia
- Energy Link Ltd, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Bukit Makmur.PT - Indonesia
- European Bulk Services B.V. - Netherlands
- IEA Clean Coal Centre - UK
- Energy Development Corp, Philippines
- Agrawal Coal Company - India
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- Ind-Barath Power Infra Limited - India
- Maheswari Brothers Coal Limited - India
- Mintek Dendrill Indonesia
- Rashtriya Ispat Nigam Limited - India
- Parliament of New Zealand
- The University of Queensland
- Thai Mozambique Logistica
- Interocean Group of Companies - India
- Kapuas Tunggal Persada - Indonesia
- Bhatia International Limited - India
- Independent Power Producers Association of India
- Kohat Cement Company Ltd. - Pakistan
- Miang Besar Coal Terminal - Indonesia
- Africa Commodities Group - South Africa
- Posco Energy - South Korea
- Orica Australia Pty. Ltd.
- Planning Commission, India
- Ceylon Electricity Board - Sri Lanka
- Baramulti Group, Indonesia
- Power Finance Corporation Ltd., India
- Oldendorff Carriers - Singapore
- Wood Mackenzie - Singapore
- Anglo American - United Kingdom
- PNOC Exploration Corporation - Philippines
- Bukit Baiduri Energy - Indonesia
- Toyota Tsusho Corporation, Japan
- Commonwealth Bank - Australia
- Sojitz Corporation - Japan
- GMR Energy Limited - India
- Bhushan Steel Limited - India
- SMC Global Power, Philippines
- India Bulls Power Limited - India
- Thiess Contractors Indonesia
- Standard Chartered Bank - UAE
- Economic Council, Georgia
- International Coal Ventures Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Metalloyd Limited - United Kingdom
- Bulk Trading Sa - Switzerland
- Mercuria Energy - Indonesia
- Holcim Trading Pte Ltd - Singapore
- CIMB Investment Bank - Malaysia
- Dalmia Cement Bharat India
- Kalimantan Lumbung Energi - Indonesia
- GAC Shipping (India) Pvt Ltd
- GN Power Mariveles Coal Plant, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sarangani Energy Corporation, Philippines
- Latin American Coal - Colombia
- Eastern Energy - Thailand
- Central Java Power - Indonesia
- Banpu Public Company Limited - Thailand
- Borneo Indobara - Indonesia
- Mjunction Services Limited - India
- Coastal Gujarat Power Limited - India
- Iligan Light & Power Inc, Philippines
- Electricity Generating Authority of Thailand
- Indian Energy Exchange, India
- Electricity Authority, New Zealand
- Meenaskhi Energy Private Limited - India
- Altura Mining Limited, Indonesia
- Semirara Mining Corp, Philippines
- Kepco SPC Power Corporation, Philippines
- The Treasury - Australian Government
- Sakthi Sugars Limited - India
- Singapore Mercantile Exchange
- Port Waratah Coal Services - Australia
- Madhucon Powers Ltd - India
- Kaltim Prima Coal - Indonesia
- Price Waterhouse Coopers - Russia
- TNB Fuel Sdn Bhd - Malaysia
- Karaikal Port Pvt Ltd - India
- Mercator Lines Limited - India
- Chamber of Mines of South Africa
- Makarim & Taira - Indonesia
- Timah Investasi Mineral - Indoneisa
- Ministry of Transport, Egypt
- Offshore Bulk Terminal Pte Ltd, Singapore
- Renaissance Capital - South Africa
- Savvy Resources Ltd - HongKong
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Minerals Council of Australia
- Ministry of Mines - Canada
- Riau Bara Harum - Indonesia
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Star Paper Mills Limited - India
- Heidelberg Cement - Germany
- Meralco Power Generation, Philippines
- Central Electricity Authority - India
- Jorong Barutama Greston.PT - Indonesia
- Kideco Jaya Agung - Indonesia
- Australian Commodity Traders Exchange
- Videocon Industries ltd - India
- Vizag Seaport Private Limited - India
- Attock Cement Pakistan Limited
- Bhoruka Overseas - Indonesia
- LBH Netherlands Bv - Netherlands
- OPG Power Generation Pvt Ltd - India
- Siam City Cement - Thailand
- Essar Steel Hazira Ltd - India
- Indian Oil Corporation Limited
- The State Trading Corporation of India Ltd
- Simpson Spence & Young - Indonesia
- Uttam Galva Steels Limited - India
- ICICI Bank Limited - India
- GVK Power & Infra Limited - India
- MS Steel International - UAE
- SMG Consultants - Indonesia
- Sindya Power Generating Company Private Ltd
- Global Green Power PLC Corporation, Philippines
- Cement Manufacturers Association - India
- Binh Thuan Hamico - Vietnam
- Barasentosa Lestari - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- ASAPP Information Group - India
- Globalindo Alam Lestari - Indonesia
- Gujarat Sidhee Cement - India
- Trasteel International SA, Italy
- Carbofer General Trading SA - India
- London Commodity Brokers - England
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kumho Petrochemical, South Korea
- PowerSource Philippines DevCo
- Directorate Of Revenue Intelligence - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Samtan Co., Ltd - South Korea
- Indonesian Coal Mining Association
- Pipit Mutiara Jaya. PT, Indonesia
- Edison Trading Spa - Italy
- Aboitiz Power Corporation - Philippines
- Global Coal Blending Company Limited - Australia
- Indogreen Group - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Romanian Commodities Exchange
- Straits Asia Resources Limited - Singapore
- White Energy Company Limited
- CNBM International Corporation - China
- Xindia Steels Limited - India
- Kartika Selabumi Mining - Indonesia
- Malabar Cements Ltd - India
- PTC India Limited - India
- Ministry of Finance - Indonesia
- Marubeni Corporation - India
- Cigading International Bulk Terminal - Indonesia
- New Zealand Coal & Carbon
- Bank of Tokyo Mitsubishi UFJ Ltd
- Gujarat Electricity Regulatory Commission - India
- Australian Coal Association
- Krishnapatnam Port Company Ltd. - India
- Pendopo Energi Batubara - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- TeaM Sual Corporation - Philippines
- PetroVietnam Power Coal Import and Supply Company
- Petrochimia International Co. Ltd.- Taiwan
- Jaiprakash Power Ventures ltd
- Coalindo Energy - Indonesia
- Goldman Sachs - Singapore
- Vedanta Resources Plc - India
- Larsen & Toubro Limited - India
- Georgia Ports Authority, United States
- Chettinad Cement Corporation Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Aditya Birla Group - India
- Bukit Asam (Persero) Tbk - Indonesia
- Tamil Nadu electricity Board
- Kobexindo Tractors - Indoneisa
- Grasim Industreis Ltd - India
- Salva Resources Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Lanco Infratech Ltd - India
- Intertek Mineral Services - Indonesia
- Ambuja Cements Ltd - India
- Medco Energi Mining Internasional
- Coal and Oil Company - UAE
- Eastern Coal Council - USA
- Siam City Cement PLC, Thailand
- Indo Tambangraya Megah - Indonesia
- Petron Corporation, Philippines
- Deloitte Consulting - India
- Tata Chemicals Ltd - India
- Billiton Holdings Pty Ltd - Australia
- South Luzon Thermal Energy Corporation
- Maharashtra Electricity Regulatory Commission - India
- Orica Mining Services - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Therma Luzon, Inc, Philippines
- Bayan Resources Tbk. - Indonesia
- Global Business Power Corporation, Philippines
- McConnell Dowell - Australia
- Jindal Steel & Power Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Merrill Lynch Commodities Europe
- Indika Energy - Indonesia
- Bangladesh Power Developement Board
- Wilmar Investment Holdings
- Semirara Mining and Power Corporation, Philippines
- Formosa Plastics Group - Taiwan
- Asmin Koalindo Tuhup - Indonesia
- VISA Power Limited - India
- AsiaOL BioFuels Corp., Philippines
- Bharathi Cement Corporation - India
- Sical Logistics Limited - India
- Sree Jayajothi Cements Limited - India
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