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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, 29 April 16
U.S. COAL IMPORTS IN Q4' 15 DECLINED TO 2.7 MMST FROM 3 MMST IN Q3' 15
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 10.3 million short tons (mm ...
Thursday, 28 April 16
PRICES OF POWER-STATION COAL IN INDONESIA IS INCREASING
COALspot.com: Inquiries for Indonesian 4200 - 4400 Kcal/kg GAR thermal coal cargoes from India suddenly increase recent days.
A Jakarta-based ...
Thursday, 28 April 16
KOMIPO TO IMPORT 710K MT OF BITUMINOUS COAL DURING JULY - SEPTEMBER 2016
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 710,000 Metric Tons of Bituminous Coal for its B ...
Thursday, 28 April 16
CAPE: BIT MORE OPTIMISM IN THE MARKET; SUPRAMAX: FORWARD CURVE IS FALLING - FEARNLEYS
Cape
A bit of a slower week. Activity level has dropped, though the rates do still remain firm, says Fearnleys in its latest weekly report.
...
Wednesday, 27 April 16
THE OCEAN SHIPPING EXPERIENCED DRAMATIC VOLATILITY IN THE BEGINNING OF 2016 - PANOS TSILINGIRIS
Shipping’s new (ab)normal
The global economy and ocean shipping experienced dramatic volatility in the beginning of 2016 and as the glob ...
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- European Bulk Services B.V. - Netherlands
- Sinarmas Energy and Mining - Indonesia
- GAC Shipping (India) Pvt Ltd
- Kepco SPC Power Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Edison Trading Spa - Italy
- Petrochimia International Co. Ltd.- Taiwan
- Ministry of Finance - Indonesia
- Mercuria Energy - Indonesia
- Coal and Oil Company - UAE
- Indika Energy - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Aditya Birla Group - India
- Kobexindo Tractors - Indoneisa
- Bukit Asam (Persero) Tbk - Indonesia
- Sojitz Corporation - Japan
- The State Trading Corporation of India Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Georgia Ports Authority, United States
- International Coal Ventures Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- South Luzon Thermal Energy Corporation
- Africa Commodities Group - South Africa
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Carbofer General Trading SA - India
- Price Waterhouse Coopers - Russia
- AsiaOL BioFuels Corp., Philippines
- New Zealand Coal & Carbon
- Global Business Power Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Therma Luzon, Inc, Philippines
- Singapore Mercantile Exchange
- Energy Link Ltd, New Zealand
- TeaM Sual Corporation - Philippines
- Port Waratah Coal Services - Australia
- Bulk Trading Sa - Switzerland
- Trasteel International SA, Italy
- Baramulti Group, Indonesia
- LBH Netherlands Bv - Netherlands
- Anglo American - United Kingdom
- Indo Tambangraya Megah - Indonesia
- PTC India Limited - India
- Interocean Group of Companies - India
- Power Finance Corporation Ltd., India
- Miang Besar Coal Terminal - Indonesia
- Global Green Power PLC Corporation, Philippines
- Eastern Energy - Thailand
- Tamil Nadu electricity Board
- Bukit Makmur.PT - Indonesia
- Siam City Cement - Thailand
- Pendopo Energi Batubara - Indonesia
- Orica Australia Pty. Ltd.
- Heidelberg Cement - Germany
- PNOC Exploration Corporation - Philippines
- Ceylon Electricity Board - Sri Lanka
- SMC Global Power, Philippines
- Xindia Steels Limited - India
- The University of Queensland
- Sindya Power Generating Company Private Ltd
- GN Power Mariveles Coal Plant, Philippines
- Alfred C Toepfer International GmbH - Germany
- Karaikal Port Pvt Ltd - India
- Central Java Power - Indonesia
- Salva Resources Pvt Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- SMG Consultants - Indonesia
- Kideco Jaya Agung - Indonesia
- Kumho Petrochemical, South Korea
- Electricity Generating Authority of Thailand
- Coalindo Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- IHS Mccloskey Coal Group - USA
- Vizag Seaport Private Limited - India
- Wood Mackenzie - Singapore
- Savvy Resources Ltd - HongKong
- Offshore Bulk Terminal Pte Ltd, Singapore
- Metalloyd Limited - United Kingdom
- San Jose City I Power Corp, Philippines
- Bayan Resources Tbk. - Indonesia
- GVK Power & Infra Limited - India
- Energy Development Corp, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Semirara Mining and Power Corporation, Philippines
- Independent Power Producers Association of India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Agrawal Coal Company - India
- Karbindo Abesyapradhi - Indoneisa
- Uttam Galva Steels Limited - India
- Tata Chemicals Ltd - India
- Meralco Power Generation, Philippines
- Indonesian Coal Mining Association
- Australian Coal Association
- CNBM International Corporation - China
- Meenaskhi Energy Private Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- Ambuja Cements Ltd - India
- OPG Power Generation Pvt Ltd - India
- ICICI Bank Limited - India
- Parliament of New Zealand
- Neyveli Lignite Corporation Ltd, - India
- Bhushan Steel Limited - India
- Commonwealth Bank - Australia
- Directorate General of MIneral and Coal - Indonesia
- Electricity Authority, New Zealand
- Ministry of Transport, Egypt
- Bhoruka Overseas - Indonesia
- IEA Clean Coal Centre - UK
- Indogreen Group - Indonesia
- CIMB Investment Bank - Malaysia
- Gujarat Sidhee Cement - India
- Parry Sugars Refinery, India
- Krishnapatnam Port Company Ltd. - India
- Medco Energi Mining Internasional
- Mercator Lines Limited - India
- Chettinad Cement Corporation Ltd - India
- PowerSource Philippines DevCo
- Sakthi Sugars Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Formosa Plastics Group - Taiwan
- Indian Energy Exchange, India
- SN Aboitiz Power Inc, Philippines
- Bharathi Cement Corporation - India
- Timah Investasi Mineral - Indoneisa
- Grasim Industreis Ltd - India
- Economic Council, Georgia
- Toyota Tsusho Corporation, Japan
- Sarangani Energy Corporation, Philippines
- Ministry of Mines - Canada
- Global Coal Blending Company Limited - Australia
- London Commodity Brokers - England
- Sical Logistics Limited - India
- Marubeni Corporation - India
- Standard Chartered Bank - UAE
- Manunggal Multi Energi - Indonesia
- Iligan Light & Power Inc, Philippines
- Thai Mozambique Logistica
- Cement Manufacturers Association - India
- Videocon Industries ltd - India
- MS Steel International - UAE
- Malabar Cements Ltd - India
- Eastern Coal Council - USA
- Bhatia International Limited - India
- Oldendorff Carriers - Singapore
- Australian Commodity Traders Exchange
- Deloitte Consulting - India
- Gujarat Mineral Development Corp Ltd - India
- White Energy Company Limited
- Mjunction Services Limited - India
- Posco Energy - South Korea
- Directorate Of Revenue Intelligence - India
- Aboitiz Power Corporation - Philippines
- Minerals Council of Australia
- Merrill Lynch Commodities Europe
- Maheswari Brothers Coal Limited - India
- Riau Bara Harum - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Indian Oil Corporation Limited
- Altura Mining Limited, Indonesia
- Rashtriya Ispat Nigam Limited - India
- Binh Thuan Hamico - Vietnam
- Goldman Sachs - Singapore
- McConnell Dowell - Australia
- Vedanta Resources Plc - India
- Kaltim Prima Coal - Indonesia
- Siam City Cement PLC, Thailand
- Star Paper Mills Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Bahari Cakrawala Sebuku - Indonesia
- Latin American Coal - Colombia
- Petron Corporation, Philippines
- Central Electricity Authority - India
- Orica Mining Services - Indonesia
- Sree Jayajothi Cements Limited - India
- Chamber of Mines of South Africa
- Wilmar Investment Holdings
- Asmin Koalindo Tuhup - Indonesia
- Borneo Indobara - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Madhucon Powers Ltd - India
- Attock Cement Pakistan Limited
- Cigading International Bulk Terminal - Indonesia
- Antam Resourcindo - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Renaissance Capital - South Africa
- ASAPP Information Group - India
- VISA Power Limited - India
- Jaiprakash Power Ventures ltd
- Banpu Public Company Limited - Thailand
- Planning Commission, India
- Bukit Baiduri Energy - Indonesia
- Semirara Mining Corp, Philippines
- Globalindo Alam Lestari - Indonesia
- The Treasury - Australian Government
- TNB Fuel Sdn Bhd - Malaysia
- Romanian Commodities Exchange
- India Bulls Power Limited - India
- Mintek Dendrill Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Dalmia Cement Bharat India
- Makarim & Taira - Indonesia
- Lanco Infratech Ltd - India
- Samtan Co., Ltd - South Korea
- Straits Asia Resources Limited - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Gujarat Electricity Regulatory Commission - India
- Coastal Gujarat Power Limited - India
- Ind-Barath Power Infra Limited - India
- Thiess Contractors Indonesia
- Rio Tinto Coal - Australia
- Jindal Steel & Power Ltd - India
- Essar Steel Hazira Ltd - India
- Barasentosa Lestari - Indonesia
- Bangladesh Power Developement Board
- Larsen & Toubro Limited - India
- GMR Energy Limited - India
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