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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, 01 March 16
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Thursday, 25 February 16
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- MS Steel International - UAE
- McConnell Dowell - Australia
- Singapore Mercantile Exchange
- Jorong Barutama Greston.PT - Indonesia
- Tata Chemicals Ltd - India
- Economic Council, Georgia
- Heidelberg Cement - Germany
- Electricity Generating Authority of Thailand
- Jaiprakash Power Ventures ltd
- Mercator Lines Limited - India
- Indian Energy Exchange, India
- Rio Tinto Coal - Australia
- Trasteel International SA, Italy
- PetroVietnam Power Coal Import and Supply Company
- Ambuja Cements Ltd - India
- Timah Investasi Mineral - Indoneisa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kapuas Tunggal Persada - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Bayan Resources Tbk. - Indonesia
- Malabar Cements Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Bhatia International Limited - India
- Tamil Nadu electricity Board
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kalimantan Lumbung Energi - Indonesia
- Kepco SPC Power Corporation, Philippines
- Larsen & Toubro Limited - India
- Maheswari Brothers Coal Limited - India
- Medco Energi Mining Internasional
- Agrawal Coal Company - India
- Xindia Steels Limited - India
- Thiess Contractors Indonesia
- Coastal Gujarat Power Limited - India
- The University of Queensland
- Petron Corporation, Philippines
- Simpson Spence & Young - Indonesia
- IHS Mccloskey Coal Group - USA
- Sindya Power Generating Company Private Ltd
- Semirara Mining and Power Corporation, Philippines
- Indika Energy - Indonesia
- Sakthi Sugars Limited - India
- Romanian Commodities Exchange
- Gujarat Electricity Regulatory Commission - India
- Straits Asia Resources Limited - Singapore
- Ministry of Mines - Canada
- Electricity Authority, New Zealand
- Miang Besar Coal Terminal - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Independent Power Producers Association of India
- Anglo American - United Kingdom
- Mjunction Services Limited - India
- The Treasury - Australian Government
- Commonwealth Bank - Australia
- Alfred C Toepfer International GmbH - Germany
- Georgia Ports Authority, United States
- Energy Development Corp, Philippines
- Goldman Sachs - Singapore
- Ministry of Transport, Egypt
- Videocon Industries ltd - India
- Vedanta Resources Plc - India
- Semirara Mining Corp, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Binh Thuan Hamico - Vietnam
- Carbofer General Trading SA - India
- SN Aboitiz Power Inc, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Chettinad Cement Corporation Ltd - India
- Mintek Dendrill Indonesia
- Coalindo Energy - Indonesia
- Sojitz Corporation - Japan
- Directorate General of MIneral and Coal - Indonesia
- Parry Sugars Refinery, India
- AsiaOL BioFuels Corp., Philippines
- Barasentosa Lestari - Indonesia
- San Jose City I Power Corp, Philippines
- Bharathi Cement Corporation - India
- Oldendorff Carriers - Singapore
- GMR Energy Limited - India
- Uttam Galva Steels Limited - India
- Holcim Trading Pte Ltd - Singapore
- Kartika Selabumi Mining - Indonesia
- Central Java Power - Indonesia
- CIMB Investment Bank - Malaysia
- New Zealand Coal & Carbon
- International Coal Ventures Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Bangladesh Power Developement Board
- Karaikal Port Pvt Ltd - India
- Attock Cement Pakistan Limited
- Metalloyd Limited - United Kingdom
- Therma Luzon, Inc, Philippines
- Ind-Barath Power Infra Limited - India
- SMC Global Power, Philippines
- Star Paper Mills Limited - India
- LBH Netherlands Bv - Netherlands
- Kohat Cement Company Ltd. - Pakistan
- GAC Shipping (India) Pvt Ltd
- Indo Tambangraya Megah - Indonesia
- Price Waterhouse Coopers - Russia
- PowerSource Philippines DevCo
- PTC India Limited - India
- Aboitiz Power Corporation - Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- ASAPP Information Group - India
- Grasim Industreis Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- VISA Power Limited - India
- Banpu Public Company Limited - Thailand
- Global Business Power Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Baramulti Group, Indonesia
- Siam City Cement - Thailand
- Renaissance Capital - South Africa
- Gujarat Sidhee Cement - India
- CNBM International Corporation - China
- Bhushan Steel Limited - India
- The State Trading Corporation of India Ltd
- Formosa Plastics Group - Taiwan
- Africa Commodities Group - South Africa
- PNOC Exploration Corporation - Philippines
- Salva Resources Pvt Ltd - India
- Wilmar Investment Holdings
- Bhoruka Overseas - Indonesia
- Sree Jayajothi Cements Limited - India
- Parliament of New Zealand
- Thai Mozambique Logistica
- Wood Mackenzie - Singapore
- Borneo Indobara - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- India Bulls Power Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Eastern Coal Council - USA
- IEA Clean Coal Centre - UK
- Port Waratah Coal Services - Australia
- Indian Oil Corporation Limited
- Kideco Jaya Agung - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Rashtriya Ispat Nigam Limited - India
- Pendopo Energi Batubara - Indonesia
- Australian Commodity Traders Exchange
- Intertek Mineral Services - Indonesia
- Standard Chartered Bank - UAE
- Central Electricity Authority - India
- Maharashtra Electricity Regulatory Commission - India
- Indonesian Coal Mining Association
- Edison Trading Spa - Italy
- Kaltim Prima Coal - Indonesia
- European Bulk Services B.V. - Netherlands
- Kobexindo Tractors - Indoneisa
- Karbindo Abesyapradhi - Indoneisa
- Chamber of Mines of South Africa
- Eastern Energy - Thailand
- Petrochimia International Co. Ltd.- Taiwan
- Global Coal Blending Company Limited - Australia
- Sarangani Energy Corporation, Philippines
- ICICI Bank Limited - India
- Riau Bara Harum - Indonesia
- London Commodity Brokers - England
- Lanco Infratech Ltd - India
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Bukit Makmur.PT - Indonesia
- Cement Manufacturers Association - India
- South Luzon Thermal Energy Corporation
- Iligan Light & Power Inc, Philippines
- OPG Power Generation Pvt Ltd - India
- Madhucon Powers Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Planning Commission, India
- Energy Link Ltd, New Zealand
- Samtan Co., Ltd - South Korea
- Meralco Power Generation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Power Finance Corporation Ltd., India
- Mercuria Energy - Indonesia
- Deloitte Consulting - India
- Meenaskhi Energy Private Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Globalindo Alam Lestari - Indonesia
- Vizag Seaport Private Limited - India
- Orica Mining Services - Indonesia
- GVK Power & Infra Limited - India
- Cigading International Bulk Terminal - Indonesia
- Interocean Group of Companies - India
- Siam City Cement PLC, Thailand
- Minerals Council of Australia
- Altura Mining Limited, Indonesia
- TeaM Sual Corporation - Philippines
- Manunggal Multi Energi - Indonesia
- Bukit Baiduri Energy - Indonesia
- Aditya Birla Group - India
- Orica Australia Pty. Ltd.
- GN Power Mariveles Coal Plant, Philippines
- Savvy Resources Ltd - HongKong
- Makarim & Taira - Indonesia
- Antam Resourcindo - Indonesia
- Global Green Power PLC Corporation, Philippines
- Merrill Lynch Commodities Europe
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indogreen Group - Indonesia
- Ministry of Finance - Indonesia
- Marubeni Corporation - India
- Latin American Coal - Colombia
- Posco Energy - South Korea
- Sical Logistics Limited - India
- SMG Consultants - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- White Energy Company Limited
- Jindal Steel & Power Ltd - India
- Australian Coal Association
- Toyota Tsusho Corporation, Japan
- Dalmia Cement Bharat India
- Bulk Trading Sa - Switzerland
- Directorate Of Revenue Intelligence - India
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