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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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Monday, 18 April 16
INDONESIAN 5000 GAR COAL INDEX DECLINE 1.43 PERCENT WEEK OVER WEEK - CS (I) COAL INDEX
COALspot.com: Average 5000 GAR coal index of Indonesian origin fell 1.43 percent week over week to averaging $38.65 per ton on this past Friday, ac ...
Monday, 18 April 16
SOUTH KOREA STATE-OWNED UTILITY KOMIPO INVITES COAL BIDS FOR BORYEONG POWER PLANT
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 70,000 Metric Tons of 4,600 kcal/kg NAR coal for ...
Monday, 18 April 16
SOUTH AFRICA RB1 COAL HAS LOST GROUND IN INDIA; RB2 MAY LOSE GRIP IF THE PRICE CROSSES US$ 50 A TON - TRADERS
COALspot.com: Indian coal consumers preferred to buy South Africa RB2 coal instead of RB1 coal recent months due to RB2's low CFR price level. ...
Monday, 18 April 16
CAPESIZE INDEX ROSE 44.66 PER CENT WEEK OVER WEEK
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities continued to rose this week.
The freight market was ...
Friday, 15 April 16
PANAMAX MARKET CONTINUES TO FIRM - FEARNLEYS
Cape
It has been a positive freight market for the past few weeks, however, this week the market is taking a small breather, says Fearnleys in it ...
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- Bahari Cakrawala Sebuku - Indonesia
- Interocean Group of Companies - India
- Intertek Mineral Services - Indonesia
- Indika Energy - Indonesia
- Aditya Birla Group - India
- Madhucon Powers Ltd - India
- Chettinad Cement Corporation Ltd - India
- Binh Thuan Hamico - Vietnam
- Australian Coal Association
- Energy Development Corp, Philippines
- Tata Chemicals Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Timah Investasi Mineral - Indoneisa
- Vizag Seaport Private Limited - India
- Georgia Ports Authority, United States
- Ambuja Cements Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Price Waterhouse Coopers - Russia
- GVK Power & Infra Limited - India
- India Bulls Power Limited - India
- Xindia Steels Limited - India
- Vedanta Resources Plc - India
- CNBM International Corporation - China
- Bayan Resources Tbk. - Indonesia
- Kobexindo Tractors - Indoneisa
- Medco Energi Mining Internasional
- Karbindo Abesyapradhi - Indoneisa
- Bhushan Steel Limited - India
- Barasentosa Lestari - Indonesia
- Indian Energy Exchange, India
- Power Finance Corporation Ltd., India
- LBH Netherlands Bv - Netherlands
- Trasteel International SA, Italy
- Singapore Mercantile Exchange
- SN Aboitiz Power Inc, Philippines
- Thai Mozambique Logistica
- Vijayanagar Sugar Pvt Ltd - India
- Tamil Nadu electricity Board
- The Treasury - Australian Government
- Iligan Light & Power Inc, Philippines
- Borneo Indobara - Indonesia
- ASAPP Information Group - India
- Star Paper Mills Limited - India
- San Jose City I Power Corp, Philippines
- CIMB Investment Bank - Malaysia
- Global Coal Blending Company Limited - Australia
- Standard Chartered Bank - UAE
- Banpu Public Company Limited - Thailand
- Cement Manufacturers Association - India
- Electricity Generating Authority of Thailand
- Ministry of Mines - Canada
- SMC Global Power, Philippines
- Electricity Authority, New Zealand
- Simpson Spence & Young - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maheswari Brothers Coal Limited - India
- Sarangani Energy Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Energy Link Ltd, New Zealand
- TNB Fuel Sdn Bhd - Malaysia
- Jindal Steel & Power Ltd - India
- White Energy Company Limited
- Wood Mackenzie - Singapore
- Bhatia International Limited - India
- PowerSource Philippines DevCo
- Attock Cement Pakistan Limited
- Indian Oil Corporation Limited
- Ceylon Electricity Board - Sri Lanka
- Altura Mining Limited, Indonesia
- Africa Commodities Group - South Africa
- Rashtriya Ispat Nigam Limited - India
- International Coal Ventures Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Bangladesh Power Developement Board
- ICICI Bank Limited - India
- Posco Energy - South Korea
- Semirara Mining Corp, Philippines
- Global Green Power PLC Corporation, Philippines
- TeaM Sual Corporation - Philippines
- MS Steel International - UAE
- Directorate Of Revenue Intelligence - India
- Alfred C Toepfer International GmbH - Germany
- Anglo American - United Kingdom
- Coastal Gujarat Power Limited - India
- Eastern Coal Council - USA
- Bukit Baiduri Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Sindya Power Generating Company Private Ltd
- Coal and Oil Company - UAE
- Indogreen Group - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Aboitiz Power Corporation - Philippines
- South Luzon Thermal Energy Corporation
- Straits Asia Resources Limited - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Videocon Industries ltd - India
- Globalindo Alam Lestari - Indonesia
- Kaltim Prima Coal - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Salva Resources Pvt Ltd - India
- Romanian Commodities Exchange
- Gujarat Electricity Regulatory Commission - India
- Dalmia Cement Bharat India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Lanco Infratech Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Economic Council, Georgia
- Ministry of Transport, Egypt
- London Commodity Brokers - England
- Central Java Power - Indonesia
- Minerals Council of Australia
- Jaiprakash Power Ventures ltd
- Riau Bara Harum - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Wilmar Investment Holdings
- European Bulk Services B.V. - Netherlands
- Indo Tambangraya Megah - Indonesia
- Deloitte Consulting - India
- Independent Power Producers Association of India
- Larsen & Toubro Limited - India
- Kapuas Tunggal Persada - Indonesia
- Ind-Barath Power Infra Limited - India
- The University of Queensland
- Grasim Industreis Ltd - India
- SMG Consultants - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Rio Tinto Coal - Australia
- Oldendorff Carriers - Singapore
- Sree Jayajothi Cements Limited - India
- Bharathi Cement Corporation - India
- Ministry of Finance - Indonesia
- Australian Commodity Traders Exchange
- Neyveli Lignite Corporation Ltd, - India
- Sical Logistics Limited - India
- GMR Energy Limited - India
- Orica Mining Services - Indonesia
- Agrawal Coal Company - India
- PTC India Limited - India
- Eastern Energy - Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Mjunction Services Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Meenaskhi Energy Private Limited - India
- Parliament of New Zealand
- Kideco Jaya Agung - Indonesia
- Formosa Plastics Group - Taiwan
- Parry Sugars Refinery, India
- Sinarmas Energy and Mining - Indonesia
- Semirara Mining and Power Corporation, Philippines
- VISA Power Limited - India
- Merrill Lynch Commodities Europe
- Holcim Trading Pte Ltd - Singapore
- Thiess Contractors Indonesia
- Asmin Koalindo Tuhup - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Mercator Lines Limited - India
- OPG Power Generation Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Petron Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Meralco Power Generation, Philippines
- Billiton Holdings Pty Ltd - Australia
- Kartika Selabumi Mining - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Bukit Asam (Persero) Tbk - Indonesia
- Latin American Coal - Colombia
- Kumho Petrochemical, South Korea
- Global Business Power Corporation, Philippines
- The State Trading Corporation of India Ltd
- Uttam Galva Steels Limited - India
- Indonesian Coal Mining Association
- Heidelberg Cement - Germany
- Antam Resourcindo - Indonesia
- Planning Commission, India
- Commonwealth Bank - Australia
- Mintek Dendrill Indonesia
- Gujarat Sidhee Cement - India
- Baramulti Group, Indonesia
- Bulk Trading Sa - Switzerland
- Bhoruka Overseas - Indonesia
- Central Electricity Authority - India
- Toyota Tsusho Corporation, Japan
- AsiaOL BioFuels Corp., Philippines
- Coalindo Energy - Indonesia
- Sakthi Sugars Limited - India
- IHS Mccloskey Coal Group - USA
- Kalimantan Lumbung Energi - Indonesia
- Carbofer General Trading SA - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- PNOC Exploration Corporation - Philippines
- Pendopo Energi Batubara - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Siam City Cement - Thailand
- Edison Trading Spa - Italy
- IEA Clean Coal Centre - UK
- Savvy Resources Ltd - HongKong
- Bukit Makmur.PT - Indonesia
- Malabar Cements Ltd - India
- Mercuria Energy - Indonesia
- Marubeni Corporation - India
- Essar Steel Hazira Ltd - India
- Makarim & Taira - Indonesia
- Renaissance Capital - South Africa
- New Zealand Coal & Carbon
- Port Waratah Coal Services - Australia
- Goldman Sachs - Singapore
- GAC Shipping (India) Pvt Ltd
- Kepco SPC Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- Sojitz Corporation - Japan
- McConnell Dowell - Australia
- Therma Luzon, Inc, Philippines
- Metalloyd Limited - United Kingdom
- Chamber of Mines of South Africa
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