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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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Wednesday, 17 February 16
TAP ON OPPORTUNITIES IN GROWING ELECTRICITY DEMAND AND NEW COAL POWER PROJECT DEVELOPMENTS IN THE PHILIPPINES - IBC
Tap on Opportunities in Growing Electricity Demand and New Coal Power Project Developments in the Philippines
Coal Power Generation 2016
19- ...
Wednesday, 17 February 16
THE OWNERS FACING HISTORICAL LOW DRY BULK RATES; COAL IMPORTS TO CHINA IS STILL POINTING TO A STRONG TREND OF DECLINING CONSUMPTION
The sharp fall in dry bulk rates that has been taking place since the end of last year and has left owners facing historical low rates for a substa ...
Monday, 15 February 16
CALL THE DOCTOR! SHIPPING'S MEDICAL DRAMA UNFOLDS......- CLARKSONS
The recycling market has started 2016 with a bang, with a huge volume of tonnage heading to demolition facilities. Many of the key shipping markets ...
Monday, 15 February 16
CS 42 COAL INDEX ROSE 0.07% WEEK OVER WEEK
COALspot.com: Average 5000 GAR coal index of Indonesian origin decline 0.15 percent week over week to averaging $38.96 per ton on this past Friday, ...
Monday, 15 February 16
BALTIC INDEX MARGINALLY ROSE BY A POINT D-D; CAPESIZE INDEX DOWN 13 POINTS W-W; PANAMAX INDEX UP 29 POINTS W-W
COALspot.com: The freight markets continued to fall this past week.
The BDI, The Baltic Dry Index (BDI) of dry-bulk shipping freights, a measu ...
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- Indian Oil Corporation Limited
- Kartika Selabumi Mining - Indonesia
- Miang Besar Coal Terminal - Indonesia
- MS Steel International - UAE
- Mercuria Energy - Indonesia
- CIMB Investment Bank - Malaysia
- Videocon Industries ltd - India
- Medco Energi Mining Internasional
- Mjunction Services Limited - India
- Indogreen Group - Indonesia
- Bhatia International Limited - India
- Coal and Oil Company - UAE
- Posco Energy - South Korea
- IHS Mccloskey Coal Group - USA
- Kaltim Prima Coal - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- ASAPP Information Group - India
- Global Green Power PLC Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Chamber of Mines of South Africa
- Siam City Cement PLC, Thailand
- Heidelberg Cement - Germany
- Cement Manufacturers Association - India
- Intertek Mineral Services - Indonesia
- Bulk Trading Sa - Switzerland
- Trasteel International SA, Italy
- Australian Coal Association
- AsiaOL BioFuels Corp., Philippines
- Commonwealth Bank - Australia
- PTC India Limited - India
- Edison Trading Spa - Italy
- Borneo Indobara - Indonesia
- Anglo American - United Kingdom
- Aditya Birla Group - India
- Power Finance Corporation Ltd., India
- Gujarat Electricity Regulatory Commission - India
- The State Trading Corporation of India Ltd
- Kumho Petrochemical, South Korea
- VISA Power Limited - India
- Independent Power Producers Association of India
- Energy Development Corp, Philippines
- Timah Investasi Mineral - Indoneisa
- McConnell Dowell - Australia
- Sakthi Sugars Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Simpson Spence & Young - Indonesia
- Krishnapatnam Port Company Ltd. - India
- SMG Consultants - Indonesia
- Meralco Power Generation, Philippines
- Toyota Tsusho Corporation, Japan
- ICICI Bank Limited - India
- White Energy Company Limited
- Ambuja Cements Ltd - India
- Straits Asia Resources Limited - Singapore
- San Jose City I Power Corp, Philippines
- Bharathi Cement Corporation - India
- Uttam Galva Steels Limited - India
- Ministry of Mines - Canada
- Chettinad Cement Corporation Ltd - India
- Jindal Steel & Power Ltd - India
- Siam City Cement - Thailand
- Mercator Lines Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Electricity Authority, New Zealand
- Ministry of Finance - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Planning Commission, India
- Bukit Makmur.PT - Indonesia
- Bukit Baiduri Energy - Indonesia
- Bangladesh Power Developement Board
- Therma Luzon, Inc, Philippines
- Central Electricity Authority - India
- The University of Queensland
- Rashtriya Ispat Nigam Limited - India
- Karaikal Port Pvt Ltd - India
- Savvy Resources Ltd - HongKong
- Standard Chartered Bank - UAE
- Attock Cement Pakistan Limited
- Coalindo Energy - Indonesia
- Electricity Generating Authority of Thailand
- Thiess Contractors Indonesia
- Vedanta Resources Plc - India
- Deloitte Consulting - India
- India Bulls Power Limited - India
- GMR Energy Limited - India
- Leighton Contractors Pty Ltd - Australia
- Lanco Infratech Ltd - India
- PowerSource Philippines DevCo
- Vijayanagar Sugar Pvt Ltd - India
- Orica Mining Services - Indonesia
- Sarangani Energy Corporation, Philippines
- Sojitz Corporation - Japan
- Tamil Nadu electricity Board
- Eastern Coal Council - USA
- Karbindo Abesyapradhi - Indoneisa
- Larsen & Toubro Limited - India
- Madhucon Powers Ltd - India
- Georgia Ports Authority, United States
- Merrill Lynch Commodities Europe
- Kohat Cement Company Ltd. - Pakistan
- Formosa Plastics Group - Taiwan
- Sree Jayajothi Cements Limited - India
- Interocean Group of Companies - India
- Star Paper Mills Limited - India
- Globalindo Alam Lestari - Indonesia
- Tata Chemicals Ltd - India
- The Treasury - Australian Government
- Indonesian Coal Mining Association
- Bank of Tokyo Mitsubishi UFJ Ltd
- Pendopo Energi Batubara - Indonesia
- Minerals Council of Australia
- Ceylon Electricity Board - Sri Lanka
- TeaM Sual Corporation - Philippines
- Antam Resourcindo - Indonesia
- Banpu Public Company Limited - Thailand
- Thai Mozambique Logistica
- GAC Shipping (India) Pvt Ltd
- Port Waratah Coal Services - Australia
- Ministry of Transport, Egypt
- Price Waterhouse Coopers - Russia
- Neyveli Lignite Corporation Ltd, - India
- Kalimantan Lumbung Energi - Indonesia
- Directorate Of Revenue Intelligence - India
- Asmin Koalindo Tuhup - Indonesia
- Gujarat Sidhee Cement - India
- Metalloyd Limited - United Kingdom
- CNBM International Corporation - China
- Renaissance Capital - South Africa
- Sical Logistics Limited - India
- Manunggal Multi Energi - Indonesia
- Bayan Resources Tbk. - Indonesia
- Bhoruka Overseas - Indonesia
- Wilmar Investment Holdings
- Salva Resources Pvt Ltd - India
- International Coal Ventures Pvt Ltd - India
- Kideco Jaya Agung - Indonesia
- Petron Corporation, Philippines
- Orica Australia Pty. Ltd.
- Barasentosa Lestari - Indonesia
- Energy Link Ltd, New Zealand
- Malabar Cements Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Sindya Power Generating Company Private Ltd
- Rio Tinto Coal - Australia
- Indian Energy Exchange, India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Eastern Energy - Thailand
- Parry Sugars Refinery, India
- Semirara Mining and Power Corporation, Philippines
- Dalmia Cement Bharat India
- Meenaskhi Energy Private Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Vizag Seaport Private Limited - India
- PNOC Exploration Corporation - Philippines
- Kapuas Tunggal Persada - Indonesia
- Ind-Barath Power Infra Limited - India
- Global Business Power Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PetroVietnam Power Coal Import and Supply Company
- Maheswari Brothers Coal Limited - India
- SN Aboitiz Power Inc, Philippines
- Billiton Holdings Pty Ltd - Australia
- Cigading International Bulk Terminal - Indonesia
- Parliament of New Zealand
- Coastal Gujarat Power Limited - India
- Agrawal Coal Company - India
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- Kepco SPC Power Corporation, Philippines
- Carbofer General Trading SA - India
- Makarim & Taira - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Jaiprakash Power Ventures ltd
- Singapore Mercantile Exchange
- Wood Mackenzie - Singapore
- Xindia Steels Limited - India
- Romanian Commodities Exchange
- SMC Global Power, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Bhushan Steel Limited - India
- Latin American Coal - Colombia
- South Luzon Thermal Energy Corporation
- Africa Commodities Group - South Africa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Iligan Light & Power Inc, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- OPG Power Generation Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Baramulti Group, Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Riau Bara Harum - Indonesia
- Aboitiz Power Corporation - Philippines
- Indo Tambangraya Megah - Indonesia
- Kobexindo Tractors - Indoneisa
- Oldendorff Carriers - Singapore
- Indika Energy - Indonesia
- LBH Netherlands Bv - Netherlands
- Binh Thuan Hamico - Vietnam
- Marubeni Corporation - India
- GVK Power & Infra Limited - India
- Economic Council, Georgia
- Australian Commodity Traders Exchange
- Essar Steel Hazira Ltd - India
- IEA Clean Coal Centre - UK
- Mintek Dendrill Indonesia
- Semirara Mining Corp, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Sinarmas Energy and Mining - Indonesia
- New Zealand Coal & Carbon
- Pipit Mutiara Jaya. PT, Indonesia
- Goldman Sachs - Singapore
- London Commodity Brokers - England
- Holcim Trading Pte Ltd - Singapore
- Central Java Power - Indonesia
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