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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, 28 March 16
THE SUPRAMAX INDEX WAS UP TWENTY-FOUR POINTS TO 473 POINTS
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities continued to rose this week.
The freight market was ...
Friday, 25 March 16
DRY BULK SHIPPING FLEET WILL GROW BY 1.3% DURING 2016 - BIMCO | HELLENIC SHIPPING NEWS
The dry bulk market will keep on suffering, at least until the start of 2017 and possibly well after that, should the current balance of supply and ...
Friday, 25 March 16
U.S COAL PRODUCTION DECLINED 9.1% W/W - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 11.3 million shor ...
Thursday, 24 March 16
PERSISTENT OVERCAPACITY TO PROLONG CHINA'S COAL SECTOR DOWNTURN - FITCH
China's coal sector is likely to remain under pressure in the short to medium term as structural weaknesses in demand and overcapacity persist, ...
Thursday, 24 March 16
SEABORNE TRADE: CHECKING UP ON THE TRENDS - CLARKSON RESEARCH
Following a decline in 2009, seaborne trade grew on average by 4.9% p.a. in 2010-13, reflecting booming import demand in a number of key importing ...
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- Global Green Power PLC Corporation, Philippines
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- Global Business Power Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Indo Tambangraya Megah - Indonesia
- AsiaOL BioFuels Corp., Philippines
- IHS Mccloskey Coal Group - USA
- Posco Energy - South Korea
- Australian Coal Association
- Altura Mining Limited, Indonesia
- Billiton Holdings Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- Kapuas Tunggal Persada - Indonesia
- IEA Clean Coal Centre - UK
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- The University of Queensland
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- GAC Shipping (India) Pvt Ltd
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- Interocean Group of Companies - India
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- Baramulti Group, Indonesia
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- Sindya Power Generating Company Private Ltd
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- Power Finance Corporation Ltd., India
- Goldman Sachs - Singapore
- Ministry of Transport, Egypt
- Sical Logistics Limited - India
- Meenaskhi Energy Private Limited - India
- The Treasury - Australian Government
- Formosa Plastics Group - Taiwan
- Bhushan Steel Limited - India
- Economic Council, Georgia
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- Kohat Cement Company Ltd. - Pakistan
- Central Electricity Authority - India
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- Heidelberg Cement - Germany
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- Electricity Authority, New Zealand
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- Intertek Mineral Services - Indonesia
- Eastern Energy - Thailand
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- Kalimantan Lumbung Energi - Indonesia
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- Eastern Coal Council - USA
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- Cement Manufacturers Association - India
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- GVK Power & Infra Limited - India
- Minerals Council of Australia
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- PowerSource Philippines DevCo
- LBH Netherlands Bv - Netherlands
- Kobexindo Tractors - Indoneisa
- Samtan Co., Ltd - South Korea
- Marubeni Corporation - India
- Georgia Ports Authority, United States
- Ministry of Finance - Indonesia
- Tata Chemicals Ltd - India
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- Star Paper Mills Limited - India
- New Zealand Coal & Carbon
- Energy Development Corp, Philippines
- Indonesian Coal Mining Association
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- Coalindo Energy - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Miang Besar Coal Terminal - Indonesia
- Manunggal Multi Energi - Indonesia
- Mjunction Services Limited - India
- Uttam Galva Steels Limited - India
- Riau Bara Harum - Indonesia
- Siam City Cement - Thailand
- Salva Resources Pvt Ltd - India
- Pendopo Energi Batubara - Indonesia
- Semirara Mining Corp, Philippines
- Makarim & Taira - Indonesia
- Sojitz Corporation - Japan
- Siam City Cement PLC, Thailand
- Pipit Mutiara Jaya. PT, Indonesia
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- CNBM International Corporation - China
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- Karaikal Port Pvt Ltd - India
- Singapore Mercantile Exchange
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- Leighton Contractors Pty Ltd - Australia
- Edison Trading Spa - Italy
- Indian Energy Exchange, India
- Independent Power Producers Association of India
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- PTC India Limited - India
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- Commonwealth Bank - Australia
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- Vizag Seaport Private Limited - India
- Chamber of Mines of South Africa
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- The State Trading Corporation of India Ltd
- Aditya Birla Group - India
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- Timah Investasi Mineral - Indoneisa
- Indika Energy - Indonesia
- Essar Steel Hazira Ltd - India
- South Luzon Thermal Energy Corporation
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- Simpson Spence & Young - Indonesia
- Romanian Commodities Exchange
- Karbindo Abesyapradhi - Indoneisa
- Petron Corporation, Philippines
- CIMB Investment Bank - Malaysia
- Rashtriya Ispat Nigam Limited - India
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- Coal and Oil Company - UAE
- Gujarat Sidhee Cement - India
- Global Coal Blending Company Limited - Australia
- Indogreen Group - Indonesia
- Directorate Of Revenue Intelligence - India
- ASAPP Information Group - India
- Indian Oil Corporation Limited
- Australian Commodity Traders Exchange
- White Energy Company Limited
- Standard Chartered Bank - UAE
- Attock Cement Pakistan Limited
- Binh Thuan Hamico - Vietnam
- Larsen & Toubro Limited - India
- Oldendorff Carriers - Singapore
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- Antam Resourcindo - Indonesia
- Bangladesh Power Developement Board
- ICICI Bank Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- London Commodity Brokers - England
- Straits Asia Resources Limited - Singapore
- Mercuria Energy - Indonesia
- Holcim Trading Pte Ltd - Singapore
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- Bukit Makmur.PT - Indonesia
- OPG Power Generation Pvt Ltd - India
- Planning Commission, India
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- GN Power Mariveles Coal Plant, Philippines
- Aboitiz Power Corporation - Philippines
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- Ceylon Electricity Board - Sri Lanka
- Price Waterhouse Coopers - Russia
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- Tamil Nadu electricity Board
- Malabar Cements Ltd - India
- Africa Commodities Group - South Africa
- Krishnapatnam Port Company Ltd. - India
- Kartika Selabumi Mining - Indonesia
- Metalloyd Limited - United Kingdom
- Vijayanagar Sugar Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Electricity Generating Authority of Thailand
- Xindia Steels Limited - India
- Energy Link Ltd, New Zealand
- Ministry of Mines - Canada
- SMG Consultants - Indonesia
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- Wood Mackenzie - Singapore
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- Asia Pacific Energy Resources Ventures Inc, Philippines
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