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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, 15 April 16
U.S WEEKLY COAL OUTPUT FALLS ACROSS ALL BASINS - EIA
COALspot.com – U.S the world’s second largest coal producer has produced approximately totaled an estimated 10.2 million short tons (mm ...
Thursday, 14 April 16
AUSTRALIAN MINING SERVICES SECTOR SQUEEZED BY MINERS' COST CUTS - FITCH RATINGS
Fitch Ratings says mining services companies' revenues and margins will remain under pressure as miners continue to focus on reducing costs ami ...
Thursday, 14 April 16
DRY BULKERS' PRICES COULD BE HEADING UPWARDS AS BUYERS' APPETITE INCREASES - HELLENIC SHIPPING NEWS
Investment sentiment is beginning to trend upwards in the market for second hand dry bulk carriers. According to the latest weekly report from ship ...
Wednesday, 13 April 16
U.S COAL PRODUCTION IS EXPECTED TO DECREASE BY 16 PER CENT IN 2016; THE LARGEST ANNUAL PERCENTAGE DECLINE SINCE 1958 - EIA
EIA estimates that U.S. coal production in March 2016 was 52 million short tons (MMst), a 2 MMst (4%) decrease from the previous month and 29 MMst ...
Tuesday, 12 April 16
INDONESIA COAL BENCHMARK PRICE INCREASES FOR SECOND STRAIGHT MONTH
COALspot.com: The Indonesia Coal Benchmark Price Increases For Second Straight Month in April 2016.
The Director General of Mine ...
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- Meralco Power Generation, Philippines
- Australian Coal Association
- Bukit Baiduri Energy - Indonesia
- Antam Resourcindo - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Videocon Industries ltd - India
- Wilmar Investment Holdings
- Directorate Of Revenue Intelligence - India
- Petrochimia International Co. Ltd.- Taiwan
- Interocean Group of Companies - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- IHS Mccloskey Coal Group - USA
- Jaiprakash Power Ventures ltd
- TNB Fuel Sdn Bhd - Malaysia
- Ambuja Cements Ltd - India
- Commonwealth Bank - Australia
- Borneo Indobara - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Rio Tinto Coal - Australia
- Vijayanagar Sugar Pvt Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Banpu Public Company Limited - Thailand
- Iligan Light & Power Inc, Philippines
- Coal and Oil Company - UAE
- International Coal Ventures Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Attock Cement Pakistan Limited
- Vizag Seaport Private Limited - India
- The State Trading Corporation of India Ltd
- Orica Mining Services - Indonesia
- Singapore Mercantile Exchange
- Mercator Lines Limited - India
- GAC Shipping (India) Pvt Ltd
- Maheswari Brothers Coal Limited - India
- Chamber of Mines of South Africa
- Kohat Cement Company Ltd. - Pakistan
- McConnell Dowell - Australia
- Makarim & Taira - Indonesia
- Parliament of New Zealand
- Sarangani Energy Corporation, Philippines
- SMG Consultants - Indonesia
- Simpson Spence & Young - Indonesia
- Kepco SPC Power Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Therma Luzon, Inc, Philippines
- Aditya Birla Group - India
- PowerSource Philippines DevCo
- Sakthi Sugars Limited - India
- Goldman Sachs - Singapore
- ICICI Bank Limited - India
- Latin American Coal - Colombia
- Xindia Steels Limited - India
- Posco Energy - South Korea
- Economic Council, Georgia
- Anglo American - United Kingdom
- Krishnapatnam Port Company Ltd. - India
- Romanian Commodities Exchange
- Kobexindo Tractors - Indoneisa
- Timah Investasi Mineral - Indoneisa
- Salva Resources Pvt Ltd - India
- Mintek Dendrill Indonesia
- MS Steel International - UAE
- SN Aboitiz Power Inc, Philippines
- TeaM Sual Corporation - Philippines
- Port Waratah Coal Services - Australia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Uttam Galva Steels Limited - India
- Standard Chartered Bank - UAE
- Sindya Power Generating Company Private Ltd
- Ministry of Finance - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Eastern Coal Council - USA
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Manunggal Multi Energi - Indonesia
- Indo Tambangraya Megah - Indonesia
- Dalmia Cement Bharat India
- IEA Clean Coal Centre - UK
- Karbindo Abesyapradhi - Indoneisa
- Sojitz Corporation - Japan
- Bharathi Cement Corporation - India
- CIMB Investment Bank - Malaysia
- Energy Development Corp, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Pipit Mutiara Jaya. PT, Indonesia
- Mercuria Energy - Indonesia
- Bhatia International Limited - India
- Malabar Cements Ltd - India
- SMC Global Power, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Rashtriya Ispat Nigam Limited - India
- Tata Chemicals Ltd - India
- Chettinad Cement Corporation Ltd - India
- Larsen & Toubro Limited - India
- Africa Commodities Group - South Africa
- Savvy Resources Ltd - HongKong
- Kartika Selabumi Mining - Indonesia
- European Bulk Services B.V. - Netherlands
- Orica Australia Pty. Ltd.
- Asia Pacific Energy Resources Ventures Inc, Philippines
- The Treasury - Australian Government
- Bhushan Steel Limited - India
- Kideco Jaya Agung - Indonesia
- Thiess Contractors Indonesia
- Ind-Barath Power Infra Limited - India
- Renaissance Capital - South Africa
- Carbofer General Trading SA - India
- Global Business Power Corporation, Philippines
- New Zealand Coal & Carbon
- Indika Energy - Indonesia
- Deloitte Consulting - India
- Bahari Cakrawala Sebuku - Indonesia
- India Bulls Power Limited - India
- Power Finance Corporation Ltd., India
- Marubeni Corporation - India
- Petron Corporation, Philippines
- Australian Commodity Traders Exchange
- Wood Mackenzie - Singapore
- Star Paper Mills Limited - India
- Gujarat Sidhee Cement - India
- Formosa Plastics Group - Taiwan
- Sree Jayajothi Cements Limited - India
- Sical Logistics Limited - India
- VISA Power Limited - India
- Siam City Cement - Thailand
- Bayan Resources Tbk. - Indonesia
- Electricity Authority, New Zealand
- Aboitiz Power Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Siam City Cement PLC, Thailand
- Electricity Generating Authority of Thailand
- London Commodity Brokers - England
- Minerals Council of Australia
- Independent Power Producers Association of India
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Transport, Egypt
- Directorate General of MIneral and Coal - Indonesia
- Metalloyd Limited - United Kingdom
- Agrawal Coal Company - India
- Indian Energy Exchange, India
- Essar Steel Hazira Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Mjunction Services Limited - India
- Madhucon Powers Ltd - India
- Altura Mining Limited, Indonesia
- Jindal Steel & Power Ltd - India
- Medco Energi Mining Internasional
- Parry Sugars Refinery, India
- Semirara Mining Corp, Philippines
- Riau Bara Harum - Indonesia
- Kumho Petrochemical, South Korea
- South Luzon Thermal Energy Corporation
- Miang Besar Coal Terminal - Indonesia
- Oldendorff Carriers - Singapore
- OPG Power Generation Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- GMR Energy Limited - India
- Holcim Trading Pte Ltd - Singapore
- Edison Trading Spa - Italy
- Barasentosa Lestari - Indonesia
- GVK Power & Infra Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Intertek Mineral Services - Indonesia
- Gujarat Electricity Regulatory Commission - India
- San Jose City I Power Corp, Philippines
- Planning Commission, India
- Global Coal Blending Company Limited - Australia
- Heidelberg Cement - Germany
- Merrill Lynch Commodities Europe
- Central Java Power - Indonesia
- Vedanta Resources Plc - India
- Lanco Infratech Ltd - India
- Karaikal Port Pvt Ltd - India
- Baramulti Group, Indonesia
- CNBM International Corporation - China
- White Energy Company Limited
- Leighton Contractors Pty Ltd - Australia
- LBH Netherlands Bv - Netherlands
- Indian Oil Corporation Limited
- Sinarmas Energy and Mining - Indonesia
- Central Electricity Authority - India
- Bukit Makmur.PT - Indonesia
- Thai Mozambique Logistica
- Coalindo Energy - Indonesia
- Energy Link Ltd, New Zealand
- Coastal Gujarat Power Limited - India
- Trasteel International SA, Italy
- Indogreen Group - Indonesia
- Binh Thuan Hamico - Vietnam
- The University of Queensland
- Straits Asia Resources Limited - Singapore
- Globalindo Alam Lestari - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Kaltim Prima Coal - Indonesia
- Bulk Trading Sa - Switzerland
- PNOC Exploration Corporation - Philippines
- Cement Manufacturers Association - India
- ASAPP Information Group - India
- Tamil Nadu electricity Board
- Ministry of Mines - Canada
- Toyota Tsusho Corporation, Japan
- PTC India Limited - India
- Meenaskhi Energy Private Limited - India
- Indonesian Coal Mining Association
- Samtan Co., Ltd - South Korea
- Georgia Ports Authority, United States
- Global Green Power PLC Corporation, Philippines
- Billiton Holdings Pty Ltd - Australia
- Bhoruka Overseas - Indonesia
- Eastern Energy - Thailand
- Grasim Industreis Ltd - India
- Bangladesh Power Developement Board
- Pendopo Energi Batubara - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Asmin Koalindo Tuhup - Indonesia
- Price Waterhouse Coopers - Russia
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