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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, 03 March 16
BDI FURTHER STRENGTHENING; THE INCREASE IN RATES WAS NOT SUBSTANTIAL
COALspot.com: The BDI closed off on a positive note for a second week in a row, further strengthening the belief that the market might be bottoming ...
Thursday, 03 March 16
RIO TINTO COMPLETES SALE OF INTEREST IN BENGALLA JOINT VENTURE FOR US$616.7 MILLION
COALspot.com: Rio Tinto has completed the sale of its 40 per cent interest in the Bengalla coal Joint Venture in Australia to New Hope Corporation ...
Wednesday, 02 March 16
RE-EVALUATION OF MINING LICENSES CLEAN AND CLEAR STATUS IN INDONESIA
COALspot.com: In connection with the transfer of mining authority from Regents/Mayors to Governors1 and from Regents/Mayors and Governors to t ...
Wednesday, 02 March 16
OIL MY GOD.....!!!!
OIL my GOD….!!!!
The oil price “crash” that started in 2014 was caused by a glut of practically unwanted oil. Producers had be ...
Tuesday, 01 March 16
CS 42 (4200 GAR) COAL INDEX CLOSED AT US$ 27.11 A TON ON 26 FEBRUARY
COALspot.com: Average 5000 GAR coal index of Indonesian origin decline 0.31 percent week over week to averaging $38.77 per ton on this past Friday, ...
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- Singapore Mercantile Exchange
- Globalindo Alam Lestari - Indonesia
- SMG Consultants - Indonesia
- Lanco Infratech Ltd - India
- MS Steel International - UAE
- Parliament of New Zealand
- CNBM International Corporation - China
- Billiton Holdings Pty Ltd - Australia
- Port Waratah Coal Services - Australia
- Central Java Power - Indonesia
- Heidelberg Cement - Germany
- European Bulk Services B.V. - Netherlands
- Parry Sugars Refinery, India
- Vizag Seaport Private Limited - India
- Global Green Power PLC Corporation, Philippines
- Miang Besar Coal Terminal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Goldman Sachs - Singapore
- Neyveli Lignite Corporation Ltd, - India
- Xindia Steels Limited - India
- Sakthi Sugars Limited - India
- New Zealand Coal & Carbon
- GMR Energy Limited - India
- Semirara Mining Corp, Philippines
- OPG Power Generation Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- LBH Netherlands Bv - Netherlands
- Indian Oil Corporation Limited
- Bhatia International Limited - India
- Samtan Co., Ltd - South Korea
- Malabar Cements Ltd - India
- Australian Coal Association
- Bhushan Steel Limited - India
- PNOC Exploration Corporation - Philippines
- Wood Mackenzie - Singapore
- Petrochimia International Co. Ltd.- Taiwan
- Renaissance Capital - South Africa
- Ministry of Finance - Indonesia
- Vedanta Resources Plc - India
- Bukit Asam (Persero) Tbk - Indonesia
- Eastern Coal Council - USA
- Krishnapatnam Port Company Ltd. - India
- Savvy Resources Ltd - HongKong
- Cement Manufacturers Association - India
- IEA Clean Coal Centre - UK
- Tata Chemicals Ltd - India
- Australian Commodity Traders Exchange
- Pipit Mutiara Jaya. PT, Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Medco Energi Mining Internasional
- Altura Mining Limited, Indonesia
- Semirara Mining and Power Corporation, Philippines
- Baramulti Group, Indonesia
- Borneo Indobara - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Star Paper Mills Limited - India
- The University of Queensland
- Salva Resources Pvt Ltd - India
- PowerSource Philippines DevCo
- Leighton Contractors Pty Ltd - Australia
- Madhucon Powers Ltd - India
- International Coal Ventures Pvt Ltd - India
- Bharathi Cement Corporation - India
- Electricity Authority, New Zealand
- Tamil Nadu electricity Board
- Jaiprakash Power Ventures ltd
- Asmin Koalindo Tuhup - Indonesia
- McConnell Dowell - Australia
- Mjunction Services Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Therma Luzon, Inc, Philippines
- Coastal Gujarat Power Limited - India
- Petron Corporation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Intertek Mineral Services - Indonesia
- India Bulls Power Limited - India
- Mercator Lines Limited - India
- Energy Link Ltd, New Zealand
- PetroVietnam Power Coal Import and Supply Company
- Energy Development Corp, Philippines
- Rio Tinto Coal - Australia
- The State Trading Corporation of India Ltd
- Grasim Industreis Ltd - India
- SN Aboitiz Power Inc, Philippines
- Sree Jayajothi Cements Limited - India
- Carbofer General Trading SA - India
- Sinarmas Energy and Mining - Indonesia
- Aditya Birla Group - India
- Orica Mining Services - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Maheswari Brothers Coal Limited - India
- Riau Bara Harum - Indonesia
- Oldendorff Carriers - Singapore
- The Treasury - Australian Government
- Electricity Generating Authority of Thailand
- Toyota Tsusho Corporation, Japan
- Meenaskhi Energy Private Limited - India
- Indika Energy - Indonesia
- Bangladesh Power Developement Board
- Indonesian Coal Mining Association
- Indogreen Group - Indonesia
- Jindal Steel & Power Ltd - India
- Latin American Coal - Colombia
- Standard Chartered Bank - UAE
- Planning Commission, India
- Makarim & Taira - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Metalloyd Limited - United Kingdom
- IHS Mccloskey Coal Group - USA
- Ambuja Cements Ltd - India
- Central Electricity Authority - India
- Trasteel International SA, Italy
- Commonwealth Bank - Australia
- Coalindo Energy - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Orica Australia Pty. Ltd.
- GAC Shipping (India) Pvt Ltd
- Bukit Makmur.PT - Indonesia
- GVK Power & Infra Limited - India
- Barasentosa Lestari - Indonesia
- Ind-Barath Power Infra Limited - India
- Merrill Lynch Commodities Europe
- Thiess Contractors Indonesia
- Anglo American - United Kingdom
- Price Waterhouse Coopers - Russia
- Deloitte Consulting - India
- Wilmar Investment Holdings
- Global Coal Blending Company Limited - Australia
- Indian Energy Exchange, India
- Africa Commodities Group - South Africa
- Gujarat Mineral Development Corp Ltd - India
- Ministry of Mines - Canada
- Binh Thuan Hamico - Vietnam
- Bayan Resources Tbk. - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Minerals Council of Australia
- Kartika Selabumi Mining - Indonesia
- CIMB Investment Bank - Malaysia
- Power Finance Corporation Ltd., India
- Siam City Cement PLC, Thailand
- Mintek Dendrill Indonesia
- Global Business Power Corporation, Philippines
- SMC Global Power, Philippines
- Kumho Petrochemical, South Korea
- Alfred C Toepfer International GmbH - Germany
- Bahari Cakrawala Sebuku - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Siam City Cement - Thailand
- Gujarat Electricity Regulatory Commission - India
- Timah Investasi Mineral - Indoneisa
- Sojitz Corporation - Japan
- San Jose City I Power Corp, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kepco SPC Power Corporation, Philippines
- Economic Council, Georgia
- Bukit Baiduri Energy - Indonesia
- Essar Steel Hazira Ltd - India
- Sarangani Energy Corporation, Philippines
- Marubeni Corporation - India
- Banpu Public Company Limited - Thailand
- Eastern Energy - Thailand
- South Luzon Thermal Energy Corporation
- Offshore Bulk Terminal Pte Ltd, Singapore
- Uttam Galva Steels Limited - India
- Manunggal Multi Energi - Indonesia
- Ministry of Transport, Egypt
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Pendopo Energi Batubara - Indonesia
- Kideco Jaya Agung - Indonesia
- Rashtriya Ispat Nigam Limited - India
- TeaM Sual Corporation - Philippines
- Simpson Spence & Young - Indonesia
- Aboitiz Power Corporation - Philippines
- Chamber of Mines of South Africa
- Romanian Commodities Exchange
- Karaikal Port Pvt Ltd - India
- Georgia Ports Authority, United States
- Dalmia Cement Bharat India
- TNB Fuel Sdn Bhd - Malaysia
- Holcim Trading Pte Ltd - Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sindya Power Generating Company Private Ltd
- White Energy Company Limited
- Kohat Cement Company Ltd. - Pakistan
- Directorate Of Revenue Intelligence - India
- Attock Cement Pakistan Limited
- ASAPP Information Group - India
- Ceylon Electricity Board - Sri Lanka
- GN Power Mariveles Coal Plant, Philippines
- Larsen & Toubro Limited - India
- Thai Mozambique Logistica
- Kapuas Tunggal Persada - Indonesia
- Indo Tambangraya Megah - Indonesia
- Agrawal Coal Company - India
- PTC India Limited - India
- ICICI Bank Limited - India
- Gujarat Sidhee Cement - India
- Chettinad Cement Corporation Ltd - India
- Bulk Trading Sa - Switzerland
- Mercuria Energy - Indonesia
- Straits Asia Resources Limited - Singapore
- Videocon Industries ltd - India
- Independent Power Producers Association of India
- Edison Trading Spa - Italy
- Bhoruka Overseas - Indonesia
- London Commodity Brokers - England
- Antam Resourcindo - Indonesia
- Kobexindo Tractors - Indoneisa
- Coal and Oil Company - UAE
- Iligan Light & Power Inc, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Formosa Plastics Group - Taiwan
- Sical Logistics Limited - India
- Meralco Power Generation, Philippines
- Interocean Group of Companies - India
- VISA Power Limited - India
- Posco Energy - South Korea
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