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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, 31 March 16
CAPE: ANOTHER UNEVENTFUL WEEK WITH FIXTURES CONCLUDED AT LAST DONE LEVELS - FEARNLEYS
Cape
Another uneventful week with fixtures concluded at last done levels, CS levels remain around the USD 3 mark, whilst C3 is still just short o ...
Wednesday, 30 March 16
MINISTRY OF ENERGY AND MINERAL RESOURCES OF INDONESIA TO REVISE METHODOLOGY TO DETERMINE THE SELLING PRICE OF COAL TO MINE-MOUTH POWER PLANTS
COALspot.com: Ministry of Energy and Mineral Resources (ESDM) of Indonesia to review to revise methodology to determine the selling price of co ...
Wednesday, 30 March 16
VALEMAXES: THE BIGGEST NIGHTMARE OF TODAY'S DRY BULK MARKET - INTERMODAL
At a time that Europe is still dealing with the aftermath of the terrorist attacks in Brussels our society is daily bombarded with news of terroris ...
Tuesday, 29 March 16
BULK CARRIER VENTILATION - CAPTAIN PAUL R. WALTON
KNOWLEDGE TO ELEVATE
Moisture damage is a source of many cargo claims. Claimants allege that it is brought about by the ship’s failure t ...
Monday, 28 March 16
INDONESIAN WEEKLY CS50 COAL INDEX CLOSED SLIGHTLY FIRM; CS 57 INDEX CLOSED WEAK
COALspot.com: Average 5000 GAR coal index of Indonesian origin rose 0.03 percent week over week to averaging $38.91 per ton on this past Thursday, ...
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- Formosa Plastics Group - Taiwan
- Indian Oil Corporation Limited
- Timah Investasi Mineral - Indoneisa
- Ceylon Electricity Board - Sri Lanka
- Parliament of New Zealand
- Bayan Resources Tbk. - Indonesia
- PTC India Limited - India
- Ministry of Mines - Canada
- OPG Power Generation Pvt Ltd - India
- Marubeni Corporation - India
- Central Java Power - Indonesia
- Parry Sugars Refinery, India
- Maharashtra Electricity Regulatory Commission - India
- Goldman Sachs - Singapore
- Kobexindo Tractors - Indoneisa
- Therma Luzon, Inc, Philippines
- San Jose City I Power Corp, Philippines
- Singapore Mercantile Exchange
- Neyveli Lignite Corporation Ltd, - India
- Rashtriya Ispat Nigam Limited - India
- Savvy Resources Ltd - HongKong
- Australian Commodity Traders Exchange
- Bank of Tokyo Mitsubishi UFJ Ltd
- Siam City Cement PLC, Thailand
- Chamber of Mines of South Africa
- The State Trading Corporation of India Ltd
- Energy Link Ltd, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indonesian Coal Mining Association
- Edison Trading Spa - Italy
- Trasteel International SA, Italy
- CIMB Investment Bank - Malaysia
- Altura Mining Limited, Indonesia
- Bhoruka Overseas - Indonesia
- Wood Mackenzie - Singapore
- London Commodity Brokers - England
- Borneo Indobara - Indonesia
- Indo Tambangraya Megah - Indonesia
- Electricity Generating Authority of Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Orica Australia Pty. Ltd.
- Thai Mozambique Logistica
- Mercuria Energy - Indonesia
- Grasim Industreis Ltd - India
- ICICI Bank Limited - India
- IEA Clean Coal Centre - UK
- Semirara Mining Corp, Philippines
- AsiaOL BioFuels Corp., Philippines
- Samtan Co., Ltd - South Korea
- Vizag Seaport Private Limited - India
- Chettinad Cement Corporation Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Global Business Power Corporation, Philippines
- Romanian Commodities Exchange
- Vijayanagar Sugar Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- TeaM Sual Corporation - Philippines
- Vedanta Resources Plc - India
- Maheswari Brothers Coal Limited - India
- Aboitiz Power Corporation - Philippines
- Meralco Power Generation, Philippines
- International Coal Ventures Pvt Ltd - India
- Orica Mining Services - Indonesia
- Gujarat Sidhee Cement - India
- Bulk Trading Sa - Switzerland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Rio Tinto Coal - Australia
- Makarim & Taira - Indonesia
- Straits Asia Resources Limited - Singapore
- Simpson Spence & Young - Indonesia
- Ind-Barath Power Infra Limited - India
- Kartika Selabumi Mining - Indonesia
- Oldendorff Carriers - Singapore
- Sindya Power Generating Company Private Ltd
- Banpu Public Company Limited - Thailand
- ASAPP Information Group - India
- Coastal Gujarat Power Limited - India
- Georgia Ports Authority, United States
- Wilmar Investment Holdings
- Globalindo Alam Lestari - Indonesia
- Antam Resourcindo - Indonesia
- Carbofer General Trading SA - India
- Bukit Baiduri Energy - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Toyota Tsusho Corporation, Japan
- SMG Consultants - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Interocean Group of Companies - India
- Holcim Trading Pte Ltd - Singapore
- Global Green Power PLC Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
- Mjunction Services Limited - India
- Barasentosa Lestari - Indonesia
- Lanco Infratech Ltd - India
- Siam City Cement - Thailand
- Madhucon Powers Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Kaltim Prima Coal - Indonesia
- GMR Energy Limited - India
- Power Finance Corporation Ltd., India
- Merrill Lynch Commodities Europe
- Economic Council, Georgia
- PowerSource Philippines DevCo
- Eastern Energy - Thailand
- Bangladesh Power Developement Board
- Ministry of Finance - Indonesia
- Indian Energy Exchange, India
- Aditya Birla Group - India
- Jaiprakash Power Ventures ltd
- Medco Energi Mining Internasional
- Kohat Cement Company Ltd. - Pakistan
- Directorate Of Revenue Intelligence - India
- Gujarat Electricity Regulatory Commission - India
- Iligan Light & Power Inc, Philippines
- Leighton Contractors Pty Ltd - Australia
- Miang Besar Coal Terminal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Kideco Jaya Agung - Indonesia
- New Zealand Coal & Carbon
- Independent Power Producers Association of India
- GVK Power & Infra Limited - India
- Mercator Lines Limited - India
- Port Waratah Coal Services - Australia
- Posco Energy - South Korea
- Krishnapatnam Port Company Ltd. - India
- MS Steel International - UAE
- Bharathi Cement Corporation - India
- Australian Coal Association
- Central Electricity Authority - India
- Cement Manufacturers Association - India
- Commonwealth Bank - Australia
- Sakthi Sugars Limited - India
- VISA Power Limited - India
- Anglo American - United Kingdom
- PetroVietnam Power Coal Import and Supply Company
- Metalloyd Limited - United Kingdom
- The Treasury - Australian Government
- Global Coal Blending Company Limited - Australia
- IHS Mccloskey Coal Group - USA
- Sree Jayajothi Cements Limited - India
- Xindia Steels Limited - India
- Sarangani Energy Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Tata Chemicals Ltd - India
- Malabar Cements Ltd - India
- India Bulls Power Limited - India
- Africa Commodities Group - South Africa
- Bukit Makmur.PT - Indonesia
- Eastern Coal Council - USA
- Jorong Barutama Greston.PT - Indonesia
- SN Aboitiz Power Inc, Philippines
- Sical Logistics Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Price Waterhouse Coopers - Russia
- Intertek Mineral Services - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Baramulti Group, Indonesia
- Planning Commission, India
- Latin American Coal - Colombia
- Bahari Cakrawala Sebuku - Indonesia
- McConnell Dowell - Australia
- Renaissance Capital - South Africa
- White Energy Company Limited
- Indogreen Group - Indonesia
- Standard Chartered Bank - UAE
- Binh Thuan Hamico - Vietnam
- Billiton Holdings Pty Ltd - Australia
- LBH Netherlands Bv - Netherlands
- Gujarat Mineral Development Corp Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Tamil Nadu electricity Board
- Mintek Dendrill Indonesia
- CNBM International Corporation - China
- Petron Corporation, Philippines
- Larsen & Toubro Limited - India
- Ambuja Cements Ltd - India
- Electricity Authority, New Zealand
- Karbindo Abesyapradhi - Indoneisa
- Uttam Galva Steels Limited - India
- South Luzon Thermal Energy Corporation
- Bukit Asam (Persero) Tbk - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Ministry of Transport, Egypt
- Dalmia Cement Bharat India
- Meenaskhi Energy Private Limited - India
- Essar Steel Hazira Ltd - India
- European Bulk Services B.V. - Netherlands
- Coalindo Energy - Indonesia
- Deloitte Consulting - India
- Energy Development Corp, Philippines
- Kumho Petrochemical, South Korea
- Kalimantan Lumbung Energi - Indonesia
- Manunggal Multi Energi - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Videocon Industries ltd - India
- Heidelberg Cement - Germany
- Thiess Contractors Indonesia
- SMC Global Power, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Indika Energy - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Minerals Council of Australia
- Kepco SPC Power Corporation, Philippines
- Riau Bara Harum - Indonesia
- Star Paper Mills Limited - India
- Semirara Mining and Power Corporation, Philippines
- Bhushan Steel Limited - India
- Bhatia International Limited - India
- Pendopo Energi Batubara - Indonesia
- Agrawal Coal Company - India
- Attock Cement Pakistan Limited
- Jindal Steel & Power Ltd - India
- The University of Queensland
- Salva Resources Pvt Ltd - India
- Sojitz Corporation - Japan
- Coal and Oil Company - UAE
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