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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, 19 February 16
INDONESIAN HBA HITS A NEW LOWS BELOW $51 A TON AS OVERSUPPLY, LOW DEMAND WOES PERSIST
COALspot.com: Low coal demand and excess supplies sent Indonesian benchmark coal price further deep in February 2016. HBA has slumped second time t ...
Friday, 19 February 16
U.S. WEEKLY COAL PRODUCTION ROSE 2.6% FROM LAST WEEK - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.2 million shor ...
Thursday, 18 February 16
INDIA NEEDS INTERNATIONAL SUPPORT ON HIGH EFFICIENCY COAL - WORLD COAL ASSOCIATION
Speaking at a conference in New Delhi today, World Coal Association Chief Executive Benjamin Sporton said the critical role of coal in driving econ ...
Thursday, 18 February 16
CHINA COAL SECTOR - 2015 RESULTS BLEAK, 2016 UNLIKELY TO BE ANY BETTER - FITCH
COALspot.com: China Coal Sector’s Financial Woes to Worsen in 2016.
Fitch Ratings says that the 2015 full-year result previews issued by ...
Thursday, 18 February 16
PANAMAX RATES OUT OF ECSA WERE STILL GAINING A PREMIUM OVER THE REST OF THE MARKET - INTERMODAL
The BDI moved further down last week, fact that hardly took anyone by surprise as the lunar year holidays in Asia on top of the already depre ...
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- Coal and Oil Company - UAE
- Coalindo Energy - Indonesia
- Mjunction Services Limited - India
- Ambuja Cements Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Directorate Of Revenue Intelligence - India
- Independent Power Producers Association of India
- Grasim Industreis Ltd - India
- Global Coal Blending Company Limited - Australia
- New Zealand Coal & Carbon
- Aboitiz Power Corporation - Philippines
- Kapuas Tunggal Persada - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Bhoruka Overseas - Indonesia
- Singapore Mercantile Exchange
- ASAPP Information Group - India
- Australian Coal Association
- Coastal Gujarat Power Limited - India
- Meralco Power Generation, Philippines
- Formosa Plastics Group - Taiwan
- London Commodity Brokers - England
- Semirara Mining Corp, Philippines
- Sinarmas Energy and Mining - Indonesia
- Thiess Contractors Indonesia
- Orica Mining Services - Indonesia
- Indian Energy Exchange, India
- Price Waterhouse Coopers - Russia
- Mintek Dendrill Indonesia
- Cement Manufacturers Association - India
- Alfred C Toepfer International GmbH - Germany
- Gujarat Mineral Development Corp Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ministry of Mines - Canada
- Sree Jayajothi Cements Limited - India
- The University of Queensland
- Rashtriya Ispat Nigam Limited - India
- Iligan Light & Power Inc, Philippines
- Energy Link Ltd, New Zealand
- Indian Oil Corporation Limited
- Timah Investasi Mineral - Indoneisa
- GMR Energy Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Antam Resourcindo - Indonesia
- PowerSource Philippines DevCo
- Bukit Asam (Persero) Tbk - Indonesia
- South Luzon Thermal Energy Corporation
- Gujarat Electricity Regulatory Commission - India
- Planning Commission, India
- Global Green Power PLC Corporation, Philippines
- Star Paper Mills Limited - India
- Bukit Baiduri Energy - Indonesia
- PTC India Limited - India
- GVK Power & Infra Limited - India
- AsiaOL BioFuels Corp., Philippines
- Jaiprakash Power Ventures ltd
- Deloitte Consulting - India
- SMC Global Power, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Wood Mackenzie - Singapore
- India Bulls Power Limited - India
- Mercator Lines Limited - India
- Holcim Trading Pte Ltd - Singapore
- Latin American Coal - Colombia
- Bayan Resources Tbk. - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Wilmar Investment Holdings
- Ceylon Electricity Board - Sri Lanka
- Vizag Seaport Private Limited - India
- Bharathi Cement Corporation - India
- Savvy Resources Ltd - HongKong
- Parry Sugars Refinery, India
- Tata Chemicals Ltd - India
- Lanco Infratech Ltd - India
- Larsen & Toubro Limited - India
- VISA Power Limited - India
- Georgia Ports Authority, United States
- Goldman Sachs - Singapore
- Central Electricity Authority - India
- Kartika Selabumi Mining - Indonesia
- ICICI Bank Limited - India
- Uttam Galva Steels Limited - India
- Barasentosa Lestari - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Interocean Group of Companies - India
- Energy Development Corp, Philippines
- Ministry of Finance - Indonesia
- Parliament of New Zealand
- Romanian Commodities Exchange
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- CNBM International Corporation - China
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ministry of Transport, Egypt
- Bank of Tokyo Mitsubishi UFJ Ltd
- Chettinad Cement Corporation Ltd - India
- Globalindo Alam Lestari - Indonesia
- PNOC Exploration Corporation - Philippines
- Leighton Contractors Pty Ltd - Australia
- CIMB Investment Bank - Malaysia
- Billiton Holdings Pty Ltd - Australia
- Mercuria Energy - Indonesia
- Attock Cement Pakistan Limited
- Pipit Mutiara Jaya. PT, Indonesia
- Merrill Lynch Commodities Europe
- TNB Fuel Sdn Bhd - Malaysia
- Toyota Tsusho Corporation, Japan
- Port Waratah Coal Services - Australia
- Baramulti Group, Indonesia
- Essar Steel Hazira Ltd - India
- Agrawal Coal Company - India
- Bulk Trading Sa - Switzerland
- Marubeni Corporation - India
- Economic Council, Georgia
- Manunggal Multi Energi - Indonesia
- Edison Trading Spa - Italy
- Altura Mining Limited, Indonesia
- Petron Corporation, Philippines
- Dalmia Cement Bharat India
- Sindya Power Generating Company Private Ltd
- Power Finance Corporation Ltd., India
- McConnell Dowell - Australia
- Binh Thuan Hamico - Vietnam
- IHS Mccloskey Coal Group - USA
- Riau Bara Harum - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Minerals Council of Australia
- Vedanta Resources Plc - India
- Indo Tambangraya Megah - Indonesia
- Xindia Steels Limited - India
- Medco Energi Mining Internasional
- Commonwealth Bank - Australia
- Gujarat Sidhee Cement - India
- Sakthi Sugars Limited - India
- Heidelberg Cement - Germany
- MS Steel International - UAE
- Anglo American - United Kingdom
- Eastern Energy - Thailand
- Pendopo Energi Batubara - Indonesia
- Siam City Cement PLC, Thailand
- Tamil Nadu electricity Board
- TeaM Sual Corporation - Philippines
- Karbindo Abesyapradhi - Indoneisa
- Rio Tinto Coal - Australia
- Australian Commodity Traders Exchange
- European Bulk Services B.V. - Netherlands
- White Energy Company Limited
- IEA Clean Coal Centre - UK
- Standard Chartered Bank - UAE
- LBH Netherlands Bv - Netherlands
- Meenaskhi Energy Private Limited - India
- Kepco SPC Power Corporation, Philippines
- Samtan Co., Ltd - South Korea
- SN Aboitiz Power Inc, Philippines
- Kideco Jaya Agung - Indonesia
- Makarim & Taira - Indonesia
- Simpson Spence & Young - Indonesia
- Sojitz Corporation - Japan
- Renaissance Capital - South Africa
- The Treasury - Australian Government
- Central Java Power - Indonesia
- Trasteel International SA, Italy
- Kaltim Prima Coal - Indonesia
- Indogreen Group - Indonesia
- Electricity Authority, New Zealand
- Salva Resources Pvt Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Bhatia International Limited - India
- Bukit Makmur.PT - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Indika Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Africa Commodities Group - South Africa
- Thai Mozambique Logistica
- The State Trading Corporation of India Ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Global Business Power Corporation, Philippines
- Videocon Industries ltd - India
- Kobexindo Tractors - Indoneisa
- Indonesian Coal Mining Association
- Carbofer General Trading SA - India
- Aditya Birla Group - India
- Banpu Public Company Limited - Thailand
- Madhucon Powers Ltd - India
- Jindal Steel & Power Ltd - India
- Sical Logistics Limited - India
- Metalloyd Limited - United Kingdom
- Siam City Cement - Thailand
- International Coal Ventures Pvt Ltd - India
- Chamber of Mines of South Africa
- Malabar Cements Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Eastern Coal Council - USA
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maheswari Brothers Coal Limited - India
- Bangladesh Power Developement Board
- Electricity Generating Authority of Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Intertek Mineral Services - Indonesia
- Orica Australia Pty. Ltd.
- Kumho Petrochemical, South Korea
- Cigading International Bulk Terminal - Indonesia
- San Jose City I Power Corp, Philippines
- Bhushan Steel Limited - India
- Miang Besar Coal Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Karaikal Port Pvt Ltd - India
- SMG Consultants - Indonesia
- GAC Shipping (India) Pvt Ltd
- OPG Power Generation Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Borneo Indobara - Indonesia
- Posco Energy - South Korea
- Oldendorff Carriers - Singapore
- Sarangani Energy Corporation, Philippines
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