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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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Tuesday, 15 March 16
PORT OF NEWCASTLE SHIPPED 12.78 MMT OF COAL IN FEBRUARY 2016
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port has shipped AU$1,110.5 mi ...
Tuesday, 15 March 16
ADARO ENERGY LOWERED ITS COAL CASH COST BY 16% TO US$ 27.98 PER TONE IN 2015
Difficult Coal Market Condition Persists in 2015, Adaro Lowers Costs, Reduces Capital Spending and Maintains Solid Liquidity.
PT Adaro E ...
Monday, 14 March 16
THE CS 50 INDEX ROSE $0.16 OR, 0.41% TO $38.82 A TON
COALspot.com: Average 5000 GAR coal index of Indonesian origin rose 0.41 percent week over week to averaging $38.82 per ton on this past Friday, ac ...
Monday, 14 March 16
THE BALTIC EXCHANGE CONTINUED TO ROSE THIS PAST WEEK
COALspot.com: The Baltic Exchange, tracking rates for ships carrying dry bulk commodities continued to rise this week helped by higher rates for pa ...
Saturday, 12 March 16
PLN, COAL COMPANIES IN TALKS ABOUT PRICES - THE JAKARTA POST
Following a study that predicted that Indonesia would struggle to provide coal for its power stations in the near future, the government will facil ...
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- Thai Mozambique Logistica
- Singapore Mercantile Exchange
- Africa Commodities Group - South Africa
- Riau Bara Harum - Indonesia
- Grasim Industreis Ltd - India
- Commonwealth Bank - Australia
- Power Finance Corporation Ltd., India
- Madhucon Powers Ltd - India
- Global Green Power PLC Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Tata Chemicals Ltd - India
- Anglo American - United Kingdom
- Indian Energy Exchange, India
- India Bulls Power Limited - India
- Kobexindo Tractors - Indoneisa
- Bahari Cakrawala Sebuku - Indonesia
- Indogreen Group - Indonesia
- Carbofer General Trading SA - India
- Antam Resourcindo - Indonesia
- GVK Power & Infra Limited - India
- Energy Development Corp, Philippines
- The Treasury - Australian Government
- Iligan Light & Power Inc, Philippines
- Bayan Resources Tbk. - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Globalindo Alam Lestari - Indonesia
- Sical Logistics Limited - India
- Meenaskhi Energy Private Limited - India
- Oldendorff Carriers - Singapore
- Sarangani Energy Corporation, Philippines
- Eastern Energy - Thailand
- Global Business Power Corporation, Philippines
- Eastern Coal Council - USA
- Trasteel International SA, Italy
- Alfred C Toepfer International GmbH - Germany
- White Energy Company Limited
- Mjunction Services Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bangladesh Power Developement Board
- Price Waterhouse Coopers - Russia
- Coalindo Energy - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Miang Besar Coal Terminal - Indonesia
- Manunggal Multi Energi - Indonesia
- Medco Energi Mining Internasional
- TeaM Sual Corporation - Philippines
- Port Waratah Coal Services - Australia
- Videocon Industries ltd - India
- South Luzon Thermal Energy Corporation
- Kepco SPC Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Latin American Coal - Colombia
- Standard Chartered Bank - UAE
- PowerSource Philippines DevCo
- The State Trading Corporation of India Ltd
- Edison Trading Spa - Italy
- McConnell Dowell - Australia
- Bhoruka Overseas - Indonesia
- Toyota Tsusho Corporation, Japan
- PTC India Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Leighton Contractors Pty Ltd - Australia
- PNOC Exploration Corporation - Philippines
- CNBM International Corporation - China
- Orica Mining Services - Indonesia
- Planning Commission, India
- Posco Energy - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- The University of Queensland
- Minerals Council of Australia
- Wilmar Investment Holdings
- Kideco Jaya Agung - Indonesia
- Merrill Lynch Commodities Europe
- Kumho Petrochemical, South Korea
- Parry Sugars Refinery, India
- Karaikal Port Pvt Ltd - India
- Central Java Power - Indonesia
- Meralco Power Generation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Intertek Mineral Services - Indonesia
- Electricity Generating Authority of Thailand
- Vijayanagar Sugar Pvt Ltd - India
- Attock Cement Pakistan Limited
- Semirara Mining Corp, Philippines
- Jindal Steel & Power Ltd - India
- Bukit Makmur.PT - Indonesia
- Altura Mining Limited, Indonesia
- Holcim Trading Pte Ltd - Singapore
- Sindya Power Generating Company Private Ltd
- Mercator Lines Limited - India
- Bhushan Steel Limited - India
- Coal and Oil Company - UAE
- Baramulti Group, Indonesia
- Gujarat Electricity Regulatory Commission - India
- ASAPP Information Group - India
- Ministry of Mines - Canada
- Bukit Baiduri Energy - Indonesia
- Timah Investasi Mineral - Indoneisa
- Directorate Of Revenue Intelligence - India
- Independent Power Producers Association of India
- Bank of Tokyo Mitsubishi UFJ Ltd
- OPG Power Generation Pvt Ltd - India
- Samtan Co., Ltd - South Korea
- Goldman Sachs - Singapore
- Uttam Galva Steels Limited - India
- Kapuas Tunggal Persada - Indonesia
- Gujarat Sidhee Cement - India
- Pipit Mutiara Jaya. PT, Indonesia
- Rio Tinto Coal - Australia
- SMC Global Power, Philippines
- LBH Netherlands Bv - Netherlands
- International Coal Ventures Pvt Ltd - India
- VISA Power Limited - India
- Heidelberg Cement - Germany
- Cement Manufacturers Association - India
- Jaiprakash Power Ventures ltd
- Electricity Authority, New Zealand
- Makarim & Taira - Indonesia
- Siam City Cement PLC, Thailand
- Mercuria Energy - Indonesia
- Petron Corporation, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Renaissance Capital - South Africa
- Metalloyd Limited - United Kingdom
- Vedanta Resources Plc - India
- SMG Consultants - Indonesia
- Binh Thuan Hamico - Vietnam
- Dalmia Cement Bharat India
- New Zealand Coal & Carbon
- Xindia Steels Limited - India
- Deloitte Consulting - India
- Sree Jayajothi Cements Limited - India
- CIMB Investment Bank - Malaysia
- Maharashtra Electricity Regulatory Commission - India
- Thiess Contractors Indonesia
- Aboitiz Power Corporation - Philippines
- Borneo Indobara - Indonesia
- Coastal Gujarat Power Limited - India
- Kaltim Prima Coal - Indonesia
- Barasentosa Lestari - Indonesia
- Indo Tambangraya Megah - Indonesia
- Economic Council, Georgia
- Indian Oil Corporation Limited
- Georgia Ports Authority, United States
- Krishnapatnam Port Company Ltd. - India
- Ambuja Cements Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Essar Steel Hazira Ltd - India
- Lanco Infratech Ltd - India
- Pendopo Energi Batubara - Indonesia
- Larsen & Toubro Limited - India
- Agrawal Coal Company - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Aditya Birla Group - India
- Sojitz Corporation - Japan
- Neyveli Lignite Corporation Ltd, - India
- Banpu Public Company Limited - Thailand
- Chamber of Mines of South Africa
- Kohat Cement Company Ltd. - Pakistan
- Bukit Asam (Persero) Tbk - Indonesia
- Chettinad Cement Corporation Ltd - India
- Energy Link Ltd, New Zealand
- Jorong Barutama Greston.PT - Indonesia
- Marubeni Corporation - India
- Ministry of Finance - Indonesia
- Formosa Plastics Group - Taiwan
- MS Steel International - UAE
- IEA Clean Coal Centre - UK
- Therma Luzon, Inc, Philippines
- Interocean Group of Companies - India
- GMR Energy Limited - India
- Central Electricity Authority - India
- IHS Mccloskey Coal Group - USA
- Rashtriya Ispat Nigam Limited - India
- Kartika Selabumi Mining - Indonesia
- Bharathi Cement Corporation - India
- Australian Commodity Traders Exchange
- Savvy Resources Ltd - HongKong
- Salva Resources Pvt Ltd - India
- Indonesian Coal Mining Association
- Siam City Cement - Thailand
- GN Power Mariveles Coal Plant, Philippines
- ICICI Bank Limited - India
- Tamil Nadu electricity Board
- Vizag Seaport Private Limited - India
- Maheswari Brothers Coal Limited - India
- Bulk Trading Sa - Switzerland
- Indika Energy - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Romanian Commodities Exchange
- Sinarmas Energy and Mining - Indonesia
- SN Aboitiz Power Inc, Philippines
- Ind-Barath Power Infra Limited - India
- Global Coal Blending Company Limited - Australia
- San Jose City I Power Corp, Philippines
- Australian Coal Association
- Billiton Holdings Pty Ltd - Australia
- Mintek Dendrill Indonesia
- European Bulk Services B.V. - Netherlands
- Star Paper Mills Limited - India
- Malabar Cements Ltd - India
- Ministry of Transport, Egypt
- Sakthi Sugars Limited - India
- Bhatia International Limited - India
- Parliament of New Zealand
- GAC Shipping (India) Pvt Ltd
- Orica Australia Pty. Ltd.
- London Commodity Brokers - England
- Straits Asia Resources Limited - Singapore
- Ceylon Electricity Board - Sri Lanka
- Simpson Spence & Young - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Cigading International Bulk Terminal - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- AsiaOL BioFuels Corp., Philippines
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