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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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Thursday, 07 April 16
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KNOWLEDGE TO ELEVATE
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- Aboitiz Power Corporation - Philippines
- Heidelberg Cement - Germany
- Central Electricity Authority - India
- Antam Resourcindo - Indonesia
- GVK Power & Infra Limited - India
- Eastern Energy - Thailand
- Bukit Asam (Persero) Tbk - Indonesia
- Jindal Steel & Power Ltd - India
- Mercator Lines Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Chamber of Mines of South Africa
- Siam City Cement - Thailand
- Bukit Baiduri Energy - Indonesia
- Grasim Industreis Ltd - India
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Uttam Galva Steels Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Bukit Makmur.PT - Indonesia
- Kapuas Tunggal Persada - Indonesia
- CNBM International Corporation - China
- Kepco SPC Power Corporation, Philippines
- Bharathi Cement Corporation - India
- SMG Consultants - Indonesia
- Sree Jayajothi Cements Limited - India
- The University of Queensland
- Asmin Koalindo Tuhup - Indonesia
- ICICI Bank Limited - India
- India Bulls Power Limited - India
- Energy Link Ltd, New Zealand
- Maharashtra Electricity Regulatory Commission - India
- Vijayanagar Sugar Pvt Ltd - India
- Orica Mining Services - Indonesia
- Riau Bara Harum - Indonesia
- Gujarat Sidhee Cement - India
- Mjunction Services Limited - India
- Latin American Coal - Colombia
- LBH Netherlands Bv - Netherlands
- Commonwealth Bank - Australia
- Ministry of Finance - Indonesia
- Bulk Trading Sa - Switzerland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ambuja Cements Ltd - India
- Kumho Petrochemical, South Korea
- Banpu Public Company Limited - Thailand
- Cigading International Bulk Terminal - Indonesia
- Merrill Lynch Commodities Europe
- Indo Tambangraya Megah - Indonesia
- SN Aboitiz Power Inc, Philippines
- GMR Energy Limited - India
- Posco Energy - South Korea
- Formosa Plastics Group - Taiwan
- Sinarmas Energy and Mining - Indonesia
- Sical Logistics Limited - India
- IHS Mccloskey Coal Group - USA
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Deloitte Consulting - India
- Electricity Authority, New Zealand
- Rio Tinto Coal - Australia
- Pendopo Energi Batubara - Indonesia
- Africa Commodities Group - South Africa
- ASAPP Information Group - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bhushan Steel Limited - India
- Coalindo Energy - Indonesia
- New Zealand Coal & Carbon
- Wood Mackenzie - Singapore
- Tata Chemicals Ltd - India
- Metalloyd Limited - United Kingdom
- Binh Thuan Hamico - Vietnam
- Kobexindo Tractors - Indoneisa
- Kartika Selabumi Mining - Indonesia
- Sindya Power Generating Company Private Ltd
- Anglo American - United Kingdom
- Salva Resources Pvt Ltd - India
- Indogreen Group - Indonesia
- London Commodity Brokers - England
- Singapore Mercantile Exchange
- Siam City Cement PLC, Thailand
- Wilmar Investment Holdings
- European Bulk Services B.V. - Netherlands
- Bahari Cakrawala Sebuku - Indonesia
- Madhucon Powers Ltd - India
- Edison Trading Spa - Italy
- Meenaskhi Energy Private Limited - India
- Price Waterhouse Coopers - Russia
- Larsen & Toubro Limited - India
- SMC Global Power, Philippines
- Krishnapatnam Port Company Ltd. - India
- Therma Luzon, Inc, Philippines
- Agrawal Coal Company - India
- Oldendorff Carriers - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Global Green Power PLC Corporation, Philippines
- Miang Besar Coal Terminal - Indonesia
- Savvy Resources Ltd - HongKong
- Karbindo Abesyapradhi - Indoneisa
- OPG Power Generation Pvt Ltd - India
- Gujarat Electricity Regulatory Commission - India
- White Energy Company Limited
- Meralco Power Generation, Philippines
- Romanian Commodities Exchange
- GN Power Mariveles Coal Plant, Philippines
- Directorate General of MIneral and Coal - Indonesia
- VISA Power Limited - India
- Medco Energi Mining Internasional
- Straits Asia Resources Limited - Singapore
- Neyveli Lignite Corporation Ltd, - India
- Renaissance Capital - South Africa
- Indian Energy Exchange, India
- Xindia Steels Limited - India
- Independent Power Producers Association of India
- Essar Steel Hazira Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Coal and Oil Company - UAE
- Ministry of Transport, Egypt
- Pipit Mutiara Jaya. PT, Indonesia
- Videocon Industries ltd - India
- Intertek Mineral Services - Indonesia
- Toyota Tsusho Corporation, Japan
- Marubeni Corporation - India
- Timah Investasi Mineral - Indoneisa
- Makarim & Taira - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Sarangani Energy Corporation, Philippines
- Semirara Mining Corp, Philippines
- Malabar Cements Ltd - India
- MS Steel International - UAE
- Trasteel International SA, Italy
- Sakthi Sugars Limited - India
- Ind-Barath Power Infra Limited - India
- Lanco Infratech Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Global Business Power Corporation, Philippines
- Sojitz Corporation - Japan
- Vizag Seaport Private Limited - India
- South Luzon Thermal Energy Corporation
- Kohat Cement Company Ltd. - Pakistan
- Petrochimia International Co. Ltd.- Taiwan
- Interocean Group of Companies - India
- PTC India Limited - India
- Attock Cement Pakistan Limited
- Jaiprakash Power Ventures ltd
- Holcim Trading Pte Ltd - Singapore
- Ministry of Mines - Canada
- Indika Energy - Indonesia
- Economic Council, Georgia
- San Jose City I Power Corp, Philippines
- Standard Chartered Bank - UAE
- AsiaOL BioFuels Corp., Philippines
- Altura Mining Limited, Indonesia
- Star Paper Mills Limited - India
- Maheswari Brothers Coal Limited - India
- Semirara Mining and Power Corporation, Philippines
- Coastal Gujarat Power Limited - India
- Port Waratah Coal Services - Australia
- The State Trading Corporation of India Ltd
- McConnell Dowell - Australia
- PowerSource Philippines DevCo
- Bhoruka Overseas - Indonesia
- Goldman Sachs - Singapore
- Chettinad Cement Corporation Ltd - India
- Petron Corporation, Philippines
- Vedanta Resources Plc - India
- Carbofer General Trading SA - India
- Power Finance Corporation Ltd., India
- Ceylon Electricity Board - Sri Lanka
- PNOC Exploration Corporation - Philippines
- Indonesian Coal Mining Association
- Leighton Contractors Pty Ltd - Australia
- CIMB Investment Bank - Malaysia
- Australian Coal Association
- Bangladesh Power Developement Board
- Kaltim Prima Coal - Indonesia
- Bhatia International Limited - India
- Energy Development Corp, Philippines
- Borneo Indobara - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Dalmia Cement Bharat India
- TNB Fuel Sdn Bhd - Malaysia
- Alfred C Toepfer International GmbH - Germany
- Australian Commodity Traders Exchange
- Planning Commission, India
- Mercuria Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Georgia Ports Authority, United States
- Cement Manufacturers Association - India
- International Coal Ventures Pvt Ltd - India
- Indian Oil Corporation Limited
- TeaM Sual Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Iligan Light & Power Inc, Philippines
- Directorate Of Revenue Intelligence - India
- Thai Mozambique Logistica
- Barasentosa Lestari - Indonesia
- Samtan Co., Ltd - South Korea
- Central Java Power - Indonesia
- GAC Shipping (India) Pvt Ltd
- Eastern Coal Council - USA
- Karaikal Port Pvt Ltd - India
- Parry Sugars Refinery, India
- Manunggal Multi Energi - Indonesia
- Mintek Dendrill Indonesia
- Orica Australia Pty. Ltd.
- IEA Clean Coal Centre - UK
- Thiess Contractors Indonesia
- Aditya Birla Group - India
- Simpson Spence & Young - Indonesia
- Parliament of New Zealand
- Tamil Nadu electricity Board
- The Treasury - Australian Government
- Baramulti Group, Indonesia
- Minerals Council of Australia
- Kalimantan Lumbung Energi - Indonesia
- Electricity Generating Authority of Thailand
- Bayan Resources Tbk. - Indonesia
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