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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, 11 March 16
ADANI GLOBAL BAGS 0.26 MILLION TONS OF COAL CONTRACT FROM LANKA COAL COMPANY
COALspot.com: Lanka Coal Company (Private) Limited, Sri Lanka has awarded 260,000 +/- 10% tons of Power plant 6300 GAR calorific value coal to Adan ...
Friday, 11 March 16
US WEEKLY COAL PRODUCTION DOWN BY 0.5 MMST
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 12.6 million shor ...
Friday, 11 March 16
FORTESCUE'S MOU WITH VALE COULD STRENGTHEN ITS BUSINESS PROFILE - FITCH
COALspot.com: Fitch Ratings says that Australia-based Fortescue Metals Group Limited's (BB+/Negative) memorandum of understanding (MOU) with Br ...
Thursday, 10 March 16
CHINA'S NEW POLICY PLAN COULD BE POSITIVE FOR SHIPPING, BUT TARGETS SEEM RATHER AMBITIOUS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
China set out its new policy plan during the course of the past weekend, but it seems to have set some very ambitious goals, which could be difficu ...
Thursday, 10 March 16
U.S. COAL EXPORTS DECLINED 23% IN 2015, AS COAL IMPORTS REMAINED STEADY
COALspot.com: The United States remains a net exporter of coal, exporting 74.0 million short tons (MMst) and importing 11 MMst in 2015.
Accord ...
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- Minerals Council of Australia
- Planning Commission, India
- Electricity Generating Authority of Thailand
- Baramulti Group, Indonesia
- Parliament of New Zealand
- Orica Australia Pty. Ltd.
- Global Green Power PLC Corporation, Philippines
- Bukit Makmur.PT - Indonesia
- Indonesian Coal Mining Association
- Metalloyd Limited - United Kingdom
- PetroVietnam Power Coal Import and Supply Company
- VISA Power Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Madhucon Powers Ltd - India
- Oldendorff Carriers - Singapore
- Sree Jayajothi Cements Limited - India
- The Treasury - Australian Government
- Salva Resources Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- Meralco Power Generation, Philippines
- Energy Link Ltd, New Zealand
- Sarangani Energy Corporation, Philippines
- Ministry of Mines - Canada
- ASAPP Information Group - India
- Kideco Jaya Agung - Indonesia
- ICICI Bank Limited - India
- Ministry of Transport, Egypt
- Bharathi Cement Corporation - India
- Jaiprakash Power Ventures ltd
- Parry Sugars Refinery, India
- Power Finance Corporation Ltd., India
- International Coal Ventures Pvt Ltd - India
- Chamber of Mines of South Africa
- Grasim Industreis Ltd - India
- Borneo Indobara - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Mercator Lines Limited - India
- The State Trading Corporation of India Ltd
- Anglo American - United Kingdom
- McConnell Dowell - Australia
- Aboitiz Power Corporation - Philippines
- Merrill Lynch Commodities Europe
- Georgia Ports Authority, United States
- Vizag Seaport Private Limited - India
- Indogreen Group - Indonesia
- Posco Energy - South Korea
- Karbindo Abesyapradhi - Indoneisa
- Intertek Mineral Services - Indonesia
- Energy Development Corp, Philippines
- Singapore Mercantile Exchange
- Carbofer General Trading SA - India
- SMG Consultants - Indonesia
- GMR Energy Limited - India
- Electricity Authority, New Zealand
- Goldman Sachs - Singapore
- PNOC Exploration Corporation - Philippines
- Latin American Coal - Colombia
- GAC Shipping (India) Pvt Ltd
- Indian Oil Corporation Limited
- Larsen & Toubro Limited - India
- Kartika Selabumi Mining - Indonesia
- Eastern Energy - Thailand
- Indo Tambangraya Megah - Indonesia
- Australian Coal Association
- Deloitte Consulting - India
- Jorong Barutama Greston.PT - Indonesia
- Interocean Group of Companies - India
- Eastern Coal Council - USA
- Globalindo Alam Lestari - Indonesia
- India Bulls Power Limited - India
- Heidelberg Cement - Germany
- Marubeni Corporation - India
- Global Coal Blending Company Limited - Australia
- Directorate General of MIneral and Coal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Australian Commodity Traders Exchange
- Attock Cement Pakistan Limited
- Standard Chartered Bank - UAE
- Videocon Industries ltd - India
- SMC Global Power, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Bayan Resources Tbk. - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Offshore Bulk Terminal Pte Ltd, Singapore
- Altura Mining Limited, Indonesia
- Leighton Contractors Pty Ltd - Australia
- Krishnapatnam Port Company Ltd. - India
- Sojitz Corporation - Japan
- Coalindo Energy - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Xindia Steels Limited - India
- Orica Mining Services - Indonesia
- Semirara Mining Corp, Philippines
- TeaM Sual Corporation - Philippines
- Mintek Dendrill Indonesia
- Bhatia International Limited - India
- Cigading International Bulk Terminal - Indonesia
- Billiton Holdings Pty Ltd - Australia
- LBH Netherlands Bv - Netherlands
- The University of Queensland
- Kohat Cement Company Ltd. - Pakistan
- Riau Bara Harum - Indonesia
- Makarim & Taira - Indonesia
- GVK Power & Infra Limited - India
- Maheswari Brothers Coal Limited - India
- Siam City Cement - Thailand
- Bukit Asam (Persero) Tbk - Indonesia
- PowerSource Philippines DevCo
- Medco Energi Mining Internasional
- Ministry of Finance - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Thai Mozambique Logistica
- Formosa Plastics Group - Taiwan
- Renaissance Capital - South Africa
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- TNB Fuel Sdn Bhd - Malaysia
- Kepco SPC Power Corporation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Cement Manufacturers Association - India
- Romanian Commodities Exchange
- Mercuria Energy - Indonesia
- Bangladesh Power Developement Board
- Maharashtra Electricity Regulatory Commission - India
- Bhushan Steel Limited - India
- Star Paper Mills Limited - India
- New Zealand Coal & Carbon
- Antam Resourcindo - Indonesia
- Directorate Of Revenue Intelligence - India
- Edison Trading Spa - Italy
- Banpu Public Company Limited - Thailand
- Global Business Power Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Siam City Cement PLC, Thailand
- Trasteel International SA, Italy
- Economic Council, Georgia
- Karaikal Port Pvt Ltd - India
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Central Java Power - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Commonwealth Bank - Australia
- Wilmar Investment Holdings
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- PTC India Limited - India
- Lanco Infratech Ltd - India
- White Energy Company Limited
- Savvy Resources Ltd - HongKong
- Agrawal Coal Company - India
- Indika Energy - Indonesia
- Thiess Contractors Indonesia
- London Commodity Brokers - England
- AsiaOL BioFuels Corp., Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Meenaskhi Energy Private Limited - India
- Petron Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Central Electricity Authority - India
- Jindal Steel & Power Ltd - India
- Ind-Barath Power Infra Limited - India
- Coastal Gujarat Power Limited - India
- Therma Luzon, Inc, Philippines
- Mjunction Services Limited - India
- Manunggal Multi Energi - Indonesia
- Independent Power Producers Association of India
- Tata Chemicals Ltd - India
- Bhoruka Overseas - Indonesia
- Uttam Galva Steels Limited - India
- Dalmia Cement Bharat India
- Binh Thuan Hamico - Vietnam
- Semirara Mining and Power Corporation, Philippines
- Chettinad Cement Corporation Ltd - India
- IEA Clean Coal Centre - UK
- IHS Mccloskey Coal Group - USA
- Indian Energy Exchange, India
- Sinarmas Energy and Mining - Indonesia
- Straits Asia Resources Limited - Singapore
- Barasentosa Lestari - Indonesia
- Bukit Baiduri Energy - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Gujarat Sidhee Cement - India
- Rio Tinto Coal - Australia
- Ambuja Cements Ltd - India
- CIMB Investment Bank - Malaysia
- Petrochimia International Co. Ltd.- Taiwan
- Vijayanagar Sugar Pvt Ltd - India
- CNBM International Corporation - China
- European Bulk Services B.V. - Netherlands
- OPG Power Generation Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Toyota Tsusho Corporation, Japan
- Tamil Nadu electricity Board
- Kobexindo Tractors - Indoneisa
- Sical Logistics Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Africa Commodities Group - South Africa
- Sindya Power Generating Company Private Ltd
- Wood Mackenzie - Singapore
- Price Waterhouse Coopers - Russia
- Rashtriya Ispat Nigam Limited - India
- Aditya Birla Group - India
- Timah Investasi Mineral - Indoneisa
- Sakthi Sugars Limited - India
- Pendopo Energi Batubara - Indonesia
- South Luzon Thermal Energy Corporation
- Samtan Co., Ltd - South Korea
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Malabar Cements Ltd - India
- Vedanta Resources Plc - India
- Port Waratah Coal Services - Australia
- SN Aboitiz Power Inc, Philippines
- Gujarat Electricity Regulatory Commission - India
- MS Steel International - UAE
- Simpson Spence & Young - Indonesia
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