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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, 27 April 16
INDONESIAN COAL MINER KIDECO REPORTED NET PROFIT OF US$138.1 MILLION IN 2015
COALspot.com: Kideco Jaya Agung, one of the Indonesia's leading coal miners has reported net profit of US$138.1 million on revenue of US$1.65 b ...
Tuesday, 26 April 16
INDONESIA BANNED COAL EXPORTS TO PHILIPPINES BY BARGES DUE TO SECURITY CONCERN
COALspot.com: The Ministry of Energy and Mineral Resources (ESDM) on behalf of the government of Indonesia has Freeze coal exports by barges to Phi ...
Tuesday, 26 April 16
NEWBUILDING DEMAND DOWN EVERYWHERE? - CLARKSONS
Newbuild activity provides one indication of an owner country’s likely future fleet growth, though secondhand sale and purchase and demolitio ...
Monday, 25 April 16
CHINESE STEEL PRICE SURGE NOT SUSTAINABLE - FITCH
The rapid increase in Chinese steel prices so far this year is not sustainable, as it is largely due to a seasonal pick-up in construction and elev ...
Monday, 25 April 16
WEEKLY CS (I) COAL INDICES END ALMOST FLAT
COALspot.com: Average 5000 GAR coal index of Indonesian origin up 0.05 percent week over week to averaging $38.67 per ton on this past Friday, acco ...
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- Xindia Steels Limited - India
- Bangladesh Power Developement Board
- Coal and Oil Company - UAE
- Larsen & Toubro Limited - India
- Iligan Light & Power Inc, Philippines
- Cement Manufacturers Association - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Tamil Nadu electricity Board
- Petrochimia International Co. Ltd.- Taiwan
- VISA Power Limited - India
- Indogreen Group - Indonesia
- Bayan Resources Tbk. - Indonesia
- Manunggal Multi Energi - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Carbofer General Trading SA - India
- GAC Shipping (India) Pvt Ltd
- Trasteel International SA, Italy
- Oldendorff Carriers - Singapore
- Maheswari Brothers Coal Limited - India
- Global Coal Blending Company Limited - Australia
- Malabar Cements Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Aboitiz Power Corporation - Philippines
- Romanian Commodities Exchange
- Borneo Indobara - Indonesia
- Africa Commodities Group - South Africa
- Bhatia International Limited - India
- LBH Netherlands Bv - Netherlands
- IEA Clean Coal Centre - UK
- Bukit Makmur.PT - Indonesia
- Coastal Gujarat Power Limited - India
- Gujarat Electricity Regulatory Commission - India
- Madhucon Powers Ltd - India
- London Commodity Brokers - England
- Price Waterhouse Coopers - Russia
- Kumho Petrochemical, South Korea
- Kideco Jaya Agung - Indonesia
- Thiess Contractors Indonesia
- Bharathi Cement Corporation - India
- Bhoruka Overseas - Indonesia
- Australian Coal Association
- Rio Tinto Coal - Australia
- Ministry of Finance - Indonesia
- Binh Thuan Hamico - Vietnam
- Port Waratah Coal Services - Australia
- Karaikal Port Pvt Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Eastern Energy - Thailand
- Independent Power Producers Association of India
- Ministry of Transport, Egypt
- Heidelberg Cement - Germany
- Wilmar Investment Holdings
- Kobexindo Tractors - Indoneisa
- Meenaskhi Energy Private Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Agrawal Coal Company - India
- Merrill Lynch Commodities Europe
- Global Green Power PLC Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- McConnell Dowell - Australia
- Ind-Barath Power Infra Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Makarim & Taira - Indonesia
- New Zealand Coal & Carbon
- PNOC Exploration Corporation - Philippines
- Jorong Barutama Greston.PT - Indonesia
- PTC India Limited - India
- Sindya Power Generating Company Private Ltd
- Jindal Steel & Power Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Semirara Mining and Power Corporation, Philippines
- Planning Commission, India
- Indo Tambangraya Megah - Indonesia
- Essar Steel Hazira Ltd - India
- Minerals Council of Australia
- Intertek Mineral Services - Indonesia
- Australian Commodity Traders Exchange
- Savvy Resources Ltd - HongKong
- Economic Council, Georgia
- Pipit Mutiara Jaya. PT, Indonesia
- Sojitz Corporation - Japan
- Goldman Sachs - Singapore
- Meralco Power Generation, Philippines
- Kaltim Prima Coal - Indonesia
- ICICI Bank Limited - India
- Standard Chartered Bank - UAE
- The State Trading Corporation of India Ltd
- Miang Besar Coal Terminal - Indonesia
- Samtan Co., Ltd - South Korea
- Edison Trading Spa - Italy
- Alfred C Toepfer International GmbH - Germany
- Ceylon Electricity Board - Sri Lanka
- PetroVietnam Power Coal Import and Supply Company
- Indika Energy - Indonesia
- Energy Link Ltd, New Zealand
- Mjunction Services Limited - India
- Toyota Tsusho Corporation, Japan
- Medco Energi Mining Internasional
- Chettinad Cement Corporation Ltd - India
- Jaiprakash Power Ventures ltd
- Vizag Seaport Private Limited - India
- Chamber of Mines of South Africa
- Directorate General of MIneral and Coal - Indonesia
- SMG Consultants - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- India Bulls Power Limited - India
- Commonwealth Bank - Australia
- South Luzon Thermal Energy Corporation
- Wood Mackenzie - Singapore
- Central Java Power - Indonesia
- Bhushan Steel Limited - India
- MS Steel International - UAE
- GVK Power & Infra Limited - India
- Sinarmas Energy and Mining - Indonesia
- Mintek Dendrill Indonesia
- Latin American Coal - Colombia
- Karbindo Abesyapradhi - Indoneisa
- Therma Luzon, Inc, Philippines
- San Jose City I Power Corp, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- GN Power Mariveles Coal Plant, Philippines
- SN Aboitiz Power Inc, Philippines
- Parry Sugars Refinery, India
- TNB Fuel Sdn Bhd - Malaysia
- TeaM Sual Corporation - Philippines
- Global Business Power Corporation, Philippines
- Posco Energy - South Korea
- Sarangani Energy Corporation, Philippines
- Videocon Industries ltd - India
- Eastern Coal Council - USA
- Electricity Generating Authority of Thailand
- Formosa Plastics Group - Taiwan
- Parliament of New Zealand
- IHS Mccloskey Coal Group - USA
- Salva Resources Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- Banpu Public Company Limited - Thailand
- Rashtriya Ispat Nigam Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Attock Cement Pakistan Limited
- The Treasury - Australian Government
- Vijayanagar Sugar Pvt Ltd - India
- Indian Energy Exchange, India
- Anglo American - United Kingdom
- Maharashtra Electricity Regulatory Commission - India
- White Energy Company Limited
- Georgia Ports Authority, United States
- Thai Mozambique Logistica
- European Bulk Services B.V. - Netherlands
- Orica Australia Pty. Ltd.
- Holcim Trading Pte Ltd - Singapore
- Kepco SPC Power Corporation, Philippines
- Billiton Holdings Pty Ltd - Australia
- Metalloyd Limited - United Kingdom
- Marubeni Corporation - India
- Semirara Mining Corp, Philippines
- Siam City Cement - Thailand
- Globalindo Alam Lestari - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Renaissance Capital - South Africa
- Bahari Cakrawala Sebuku - Indonesia
- Uttam Galva Steels Limited - India
- Coalindo Energy - Indonesia
- Siam City Cement PLC, Thailand
- Singapore Mercantile Exchange
- Gujarat Sidhee Cement - India
- Dalmia Cement Bharat India
- Electricity Authority, New Zealand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Baramulti Group, Indonesia
- ASAPP Information Group - India
- Energy Development Corp, Philippines
- Ambuja Cements Ltd - India
- Star Paper Mills Limited - India
- The University of Queensland
- Aditya Birla Group - India
- Timah Investasi Mineral - Indoneisa
- GMR Energy Limited - India
- CIMB Investment Bank - Malaysia
- Sical Logistics Limited - India
- Interocean Group of Companies - India
- International Coal Ventures Pvt Ltd - India
- Power Finance Corporation Ltd., India
- Mercator Lines Limited - India
- Kapuas Tunggal Persada - Indonesia
- Petron Corporation, Philippines
- Grasim Industreis Ltd - India
- PowerSource Philippines DevCo
- Ministry of Mines - Canada
- Riau Bara Harum - Indonesia
- CNBM International Corporation - China
- Sree Jayajothi Cements Limited - India
- Straits Asia Resources Limited - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- AsiaOL BioFuels Corp., Philippines
- Indonesian Coal Mining Association
- Sakthi Sugars Limited - India
- Indian Oil Corporation Limited
- SMC Global Power, Philippines
- Pendopo Energi Batubara - Indonesia
- Vedanta Resources Plc - India
- Central Electricity Authority - India
- Kartika Selabumi Mining - Indonesia
- Mercuria Energy - Indonesia
- Deloitte Consulting - India
- Lanco Infratech Ltd - India
- Orica Mining Services - Indonesia
- Tata Chemicals Ltd - India
- Altura Mining Limited, Indonesia
- Barasentosa Lestari - Indonesia
- Simpson Spence & Young - Indonesia
- Directorate Of Revenue Intelligence - India
- OPG Power Generation Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Antam Resourcindo - Indonesia
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