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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, 12 February 16
DRY BULK MARKET'S FORTUNES STILL TIED WITH CHINA'S ECONOMY - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The inevitable slowdown of the Chinese economy was expected to hurt dry bulk shipping, but few expected the blow to be this hard, especially given ...
Friday, 12 February 16
COAL PRICES ARE EXPECTED TO DECLINE 13% IN 2016 TO $50 ATON, ON CONTINUED WEAK DEMAND AND OVERSUPPLY - WORLD BANK
COALspot.com: Thermal coal prices fell 9 percent in the fourth quarter on continued weak demand, high stocks, and surplus production, World Bank sa ...
Friday, 12 February 16
U.S. COAL PRODUCTION OFF 5.4% FROM LAST WEEK - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 12.9 million shor ...
Thursday, 11 February 16
GLOBAL NEWBUILDING ORDERBOOK IS SHRINKING ON A DAILY BASIS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
2016 has started right where 2015 left off when it comes to newbuilding ordering activity, i.e. there are slim pickings to be had from shipyards ar ...
Wednesday, 10 February 16
SOUTH AFRICA IS HOPING TO SHIP MORE COAL TO INDIA IN 2016
COALspot.com: South Africa is hoping to boost coal exports to India after shipping a record 75.4 million tonnes of coal in 2015, industry officials ...
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- Tata Chemicals Ltd - India
- India Bulls Power Limited - India
- Simpson Spence & Young - Indonesia
- Jindal Steel & Power Ltd - India
- Marubeni Corporation - India
- White Energy Company Limited
- Ceylon Electricity Board - Sri Lanka
- Bukit Makmur.PT - Indonesia
- Heidelberg Cement - Germany
- Ministry of Finance - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- London Commodity Brokers - England
- AsiaOL BioFuels Corp., Philippines
- Aboitiz Power Corporation - Philippines
- IHS Mccloskey Coal Group - USA
- Vijayanagar Sugar Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Ministry of Mines - Canada
- Bank of Tokyo Mitsubishi UFJ Ltd
- Romanian Commodities Exchange
- Chettinad Cement Corporation Ltd - India
- Chamber of Mines of South Africa
- Deloitte Consulting - India
- Bulk Trading Sa - Switzerland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bhatia International Limited - India
- Goldman Sachs - Singapore
- Kideco Jaya Agung - Indonesia
- Central Java Power - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Agrawal Coal Company - India
- Merrill Lynch Commodities Europe
- Thai Mozambique Logistica
- Georgia Ports Authority, United States
- Semirara Mining and Power Corporation, Philippines
- Kumho Petrochemical, South Korea
- Power Finance Corporation Ltd., India
- Central Electricity Authority - India
- Orica Australia Pty. Ltd.
- Kaltim Prima Coal - Indonesia
- International Coal Ventures Pvt Ltd - India
- Sree Jayajothi Cements Limited - India
- SN Aboitiz Power Inc, Philippines
- Larsen & Toubro Limited - India
- SMC Global Power, Philippines
- Madhucon Powers Ltd - India
- Rio Tinto Coal - Australia
- Coastal Gujarat Power Limited - India
- Meenaskhi Energy Private Limited - India
- Alfred C Toepfer International GmbH - Germany
- Kohat Cement Company Ltd. - Pakistan
- Interocean Group of Companies - India
- European Bulk Services B.V. - Netherlands
- Aditya Birla Group - India
- Australian Commodity Traders Exchange
- Indika Energy - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Mercuria Energy - Indonesia
- OPG Power Generation Pvt Ltd - India
- Parliament of New Zealand
- The State Trading Corporation of India Ltd
- Borneo Indobara - Indonesia
- Sindya Power Generating Company Private Ltd
- Bayan Resources Tbk. - Indonesia
- Renaissance Capital - South Africa
- Economic Council, Georgia
- Bahari Cakrawala Sebuku - Indonesia
- Mjunction Services Limited - India
- Salva Resources Pvt Ltd - India
- Dalmia Cement Bharat India
- Meralco Power Generation, Philippines
- Gujarat Electricity Regulatory Commission - India
- Maheswari Brothers Coal Limited - India
- Electricity Generating Authority of Thailand
- Bhushan Steel Limited - India
- PowerSource Philippines DevCo
- Metalloyd Limited - United Kingdom
- Siam City Cement - Thailand
- Kobexindo Tractors - Indoneisa
- VISA Power Limited - India
- ICICI Bank Limited - India
- Oldendorff Carriers - Singapore
- Sical Logistics Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Coalindo Energy - Indonesia
- Lanco Infratech Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Globalindo Alam Lestari - Indonesia
- Coal and Oil Company - UAE
- Indonesian Coal Mining Association
- Indogreen Group - Indonesia
- Cement Manufacturers Association - India
- Indian Energy Exchange, India
- South Luzon Thermal Energy Corporation
- CIMB Investment Bank - Malaysia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Jaiprakash Power Ventures ltd
- Port Waratah Coal Services - Australia
- Petrochimia International Co. Ltd.- Taiwan
- Anglo American - United Kingdom
- Star Paper Mills Limited - India
- IEA Clean Coal Centre - UK
- Posco Energy - South Korea
- Pendopo Energi Batubara - Indonesia
- Medco Energi Mining Internasional
- New Zealand Coal & Carbon
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Wood Mackenzie - Singapore
- Sojitz Corporation - Japan
- The University of Queensland
- Savvy Resources Ltd - HongKong
- Billiton Holdings Pty Ltd - Australia
- Trasteel International SA, Italy
- Independent Power Producers Association of India
- Edison Trading Spa - Italy
- Indo Tambangraya Megah - Indonesia
- Samtan Co., Ltd - South Korea
- Bangladesh Power Developement Board
- Eastern Coal Council - USA
- GMR Energy Limited - India
- Sarangani Energy Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Binh Thuan Hamico - Vietnam
- Barasentosa Lestari - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- ASAPP Information Group - India
- Standard Chartered Bank - UAE
- Manunggal Multi Energi - Indonesia
- Formosa Plastics Group - Taiwan
- McConnell Dowell - Australia
- Timah Investasi Mineral - Indoneisa
- Ministry of Transport, Egypt
- Commonwealth Bank - Australia
- Rashtriya Ispat Nigam Limited - India
- Parry Sugars Refinery, India
- Global Business Power Corporation, Philippines
- Toyota Tsusho Corporation, Japan
- Kepco SPC Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Straits Asia Resources Limited - Singapore
- Attock Cement Pakistan Limited
- Xindia Steels Limited - India
- LBH Netherlands Bv - Netherlands
- Mintek Dendrill Indonesia
- SMG Consultants - Indonesia
- Tamil Nadu electricity Board
- Neyveli Lignite Corporation Ltd, - India
- Planning Commission, India
- Kapuas Tunggal Persada - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Vizag Seaport Private Limited - India
- Electricity Authority, New Zealand
- PetroVietnam Power Coal Import and Supply Company
- Altura Mining Limited, Indonesia
- Mercator Lines Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Bukit Asam (Persero) Tbk - Indonesia
- Videocon Industries ltd - India
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Makarim & Taira - Indonesia
- Ambuja Cements Ltd - India
- GAC Shipping (India) Pvt Ltd
- Ind-Barath Power Infra Limited - India
- Leighton Contractors Pty Ltd - Australia
- Uttam Galva Steels Limited - India
- PTC India Limited - India
- Carbofer General Trading SA - India
- Grasim Industreis Ltd - India
- Global Coal Blending Company Limited - Australia
- San Jose City I Power Corp, Philippines
- Vedanta Resources Plc - India
- Iligan Light & Power Inc, Philippines
- Eastern Energy - Thailand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Price Waterhouse Coopers - Russia
- Energy Development Corp, Philippines
- Energy Link Ltd, New Zealand
- GVK Power & Infra Limited - India
- Bharathi Cement Corporation - India
- Siam City Cement PLC, Thailand
- TeaM Sual Corporation - Philippines
- Bukit Baiduri Energy - Indonesia
- Orica Mining Services - Indonesia
- Baramulti Group, Indonesia
- Australian Coal Association
- PNOC Exploration Corporation - Philippines
- Indian Oil Corporation Limited
- Gujarat Mineral Development Corp Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Latin American Coal - Colombia
- Thiess Contractors Indonesia
- Intertek Mineral Services - Indonesia
- MS Steel International - UAE
- Wilmar Investment Holdings
- Singapore Mercantile Exchange
- The Treasury - Australian Government
- Banpu Public Company Limited - Thailand
- Malabar Cements Ltd - India
- Sakthi Sugars Limited - India
- Bhoruka Overseas - Indonesia
- Directorate Of Revenue Intelligence - India
- CNBM International Corporation - China
- Kartika Selabumi Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Semirara Mining Corp, Philippines
- Global Green Power PLC Corporation, Philippines
- Minerals Council of Australia
- Gujarat Sidhee Cement - India
- Therma Luzon, Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Africa Commodities Group - South Africa
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