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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, 07 March 16
INDONESIAN 5700 GAR COAL INDEX DECLINE $0.05 A TON WEEK OVER WEEK
COALspot.com: Average 5000 GAR coal index of Indonesian origin decline 0.28 percent week over week to averaging $38.66 per ton on this past Friday, ...
Monday, 07 March 16
FREIGHT MARKET MOVING POSITIVE; ALL SEGMENTS EXCEPT CAPE SHOWING A FIRM TREND
COALspot.com: The freight market was steady this past week and showing a firm trend for all segments except for Cape index.
The Baltic Dry Ind ...
Friday, 04 March 16
GLOBAL ECONOMY'S JITTERS ARE SLOWING DOWN SHIPPING EVEN FURTHER - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The global economy’s shaky condition to say the least is now hampering growth and as a result demand for shipping is slowing down, something ...
Friday, 04 March 16
U.S. YEAR-TO-DATE COAL PRODUCTION TOTALED 109.3 MMST; 30.2% LOWER THAN THE COMPARABLE YEAR-TO-DATE COAL PRODUCTION IN 2015 - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.1 million shor ...
Thursday, 03 March 16
INDIA'S BUDGET NOT ENOUGH TO BOOST STEELMAKERS' PROFITABILITY - FITCH RATINGS
COALspot.com: Fitch Ratings says that increase in proposed infrastructure spending in India's latest government budget is unlikely to provide a ...
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- Energy Development Corp, Philippines
- Pendopo Energi Batubara - Indonesia
- Thiess Contractors Indonesia
- Global Coal Blending Company Limited - Australia
- Metalloyd Limited - United Kingdom
- Holcim Trading Pte Ltd - Singapore
- Xindia Steels Limited - India
- Jindal Steel & Power Ltd - India
- Grasim Industreis Ltd - India
- Aboitiz Power Corporation - Philippines
- The Treasury - Australian Government
- GN Power Mariveles Coal Plant, Philippines
- Eastern Energy - Thailand
- Leighton Contractors Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Mercator Lines Limited - India
- SMG Consultants - Indonesia
- Larsen & Toubro Limited - India
- Economic Council, Georgia
- PowerSource Philippines DevCo
- Indogreen Group - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bhatia International Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- PTC India Limited - India
- Mjunction Services Limited - India
- Electricity Authority, New Zealand
- Semirara Mining and Power Corporation, Philippines
- San Jose City I Power Corp, Philippines
- Simpson Spence & Young - Indonesia
- Electricity Generating Authority of Thailand
- McConnell Dowell - Australia
- Siam City Cement PLC, Thailand
- Billiton Holdings Pty Ltd - Australia
- Alfred C Toepfer International GmbH - Germany
- Meralco Power Generation, Philippines
- Independent Power Producers Association of India
- MS Steel International - UAE
- Trasteel International SA, Italy
- Chettinad Cement Corporation Ltd - India
- Renaissance Capital - South Africa
- Cement Manufacturers Association - India
- Kohat Cement Company Ltd. - Pakistan
- Kartika Selabumi Mining - Indonesia
- Ambuja Cements Ltd - India
- Sical Logistics Limited - India
- TeaM Sual Corporation - Philippines
- Karaikal Port Pvt Ltd - India
- Aditya Birla Group - India
- Attock Cement Pakistan Limited
- International Coal Ventures Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Indian Oil Corporation Limited
- Miang Besar Coal Terminal - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Posco Energy - South Korea
- London Commodity Brokers - England
- Gujarat Mineral Development Corp Ltd - India
- Formosa Plastics Group - Taiwan
- Jaiprakash Power Ventures ltd
- Thai Mozambique Logistica
- Ministry of Mines - Canada
- Madhucon Powers Ltd - India
- Banpu Public Company Limited - Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Chamber of Mines of South Africa
- Mintek Dendrill Indonesia
- Bukit Makmur.PT - Indonesia
- ICICI Bank Limited - India
- Timah Investasi Mineral - Indoneisa
- OPG Power Generation Pvt Ltd - India
- Wood Mackenzie - Singapore
- Sindya Power Generating Company Private Ltd
- Baramulti Group, Indonesia
- Kobexindo Tractors - Indoneisa
- Commonwealth Bank - Australia
- Price Waterhouse Coopers - Russia
- Essar Steel Hazira Ltd - India
- Sakthi Sugars Limited - India
- Indonesian Coal Mining Association
- Wilmar Investment Holdings
- Bhushan Steel Limited - India
- ASAPP Information Group - India
- Bangladesh Power Developement Board
- Tata Chemicals Ltd - India
- Sinarmas Energy and Mining - Indonesia
- The University of Queensland
- Deloitte Consulting - India
- Riau Bara Harum - Indonesia
- Therma Luzon, Inc, Philippines
- Interocean Group of Companies - India
- Straits Asia Resources Limited - Singapore
- Singapore Mercantile Exchange
- Gujarat Sidhee Cement - India
- IEA Clean Coal Centre - UK
- Edison Trading Spa - Italy
- Semirara Mining Corp, Philippines
- Latin American Coal - Colombia
- Kumho Petrochemical, South Korea
- Bayan Resources Tbk. - Indonesia
- Bukit Baiduri Energy - Indonesia
- Planning Commission, India
- Intertek Mineral Services - Indonesia
- SN Aboitiz Power Inc, Philippines
- Standard Chartered Bank - UAE
- Global Green Power PLC Corporation, Philippines
- Parliament of New Zealand
- Videocon Industries ltd - India
- The State Trading Corporation of India Ltd
- Iligan Light & Power Inc, Philippines
- Central Java Power - Indonesia
- Ceylon Electricity Board - Sri Lanka
- India Bulls Power Limited - India
- Mercuria Energy - Indonesia
- GVK Power & Infra Limited - India
- Georgia Ports Authority, United States
- New Zealand Coal & Carbon
- Ind-Barath Power Infra Limited - India
- Global Business Power Corporation, Philippines
- Makarim & Taira - Indonesia
- Anglo American - United Kingdom
- Bahari Cakrawala Sebuku - Indonesia
- Merrill Lynch Commodities Europe
- Goldman Sachs - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Port Waratah Coal Services - Australia
- Globalindo Alam Lestari - Indonesia
- Gujarat Electricity Regulatory Commission - India
- PetroVietnam Power Coal Import and Supply Company
- Maharashtra Electricity Regulatory Commission - India
- Binh Thuan Hamico - Vietnam
- Romanian Commodities Exchange
- Borneo Indobara - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- White Energy Company Limited
- Orica Australia Pty. Ltd.
- Bukit Asam (Persero) Tbk - Indonesia
- Bulk Trading Sa - Switzerland
- Energy Link Ltd, New Zealand
- Power Finance Corporation Ltd., India
- Vedanta Resources Plc - India
- LBH Netherlands Bv - Netherlands
- Samtan Co., Ltd - South Korea
- Salva Resources Pvt Ltd - India
- SMC Global Power, Philippines
- Ministry of Transport, Egypt
- Siam City Cement - Thailand
- Indika Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Australian Coal Association
- Indo Tambangraya Megah - Indonesia
- Indian Energy Exchange, India
- Maheswari Brothers Coal Limited - India
- Sree Jayajothi Cements Limited - India
- VISA Power Limited - India
- CNBM International Corporation - China
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Coastal Gujarat Power Limited - India
- Sarangani Energy Corporation, Philippines
- Parry Sugars Refinery, India
- Oldendorff Carriers - Singapore
- Central Electricity Authority - India
- Kaltim Prima Coal - Indonesia
- Rio Tinto Coal - Australia
- Bhoruka Overseas - Indonesia
- Kepco SPC Power Corporation, Philippines
- Carbofer General Trading SA - India
- GAC Shipping (India) Pvt Ltd
- IHS Mccloskey Coal Group - USA
- Pipit Mutiara Jaya. PT, Indonesia
- Malabar Cements Ltd - India
- Agrawal Coal Company - India
- Minerals Council of Australia
- Manunggal Multi Energi - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Star Paper Mills Limited - India
- European Bulk Services B.V. - Netherlands
- AsiaOL BioFuels Corp., Philippines
- Altura Mining Limited, Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Directorate Of Revenue Intelligence - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Savvy Resources Ltd - HongKong
- Directorate General of MIneral and Coal - Indonesia
- Australian Commodity Traders Exchange
- TNB Fuel Sdn Bhd - Malaysia
- PNOC Exploration Corporation - Philippines
- Dalmia Cement Bharat India
- Ministry of Finance - Indonesia
- GMR Energy Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Barasentosa Lestari - Indonesia
- South Luzon Thermal Energy Corporation
- Toyota Tsusho Corporation, Japan
- Antam Resourcindo - Indonesia
- Africa Commodities Group - South Africa
- CIMB Investment Bank - Malaysia
- Petron Corporation, Philippines
- Orica Mining Services - Indonesia
- Eastern Coal Council - USA
- Krishnapatnam Port Company Ltd. - India
- Medco Energi Mining Internasional
- Lanco Infratech Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Coal and Oil Company - UAE
- Tamil Nadu electricity Board
- Kalimantan Lumbung Energi - Indonesia
- Vizag Seaport Private Limited - India
- Sojitz Corporation - Japan
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bharathi Cement Corporation - India
- Marubeni Corporation - India
- Heidelberg Cement - Germany
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