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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, 10 February 16
OWNERS APPEAR WILLING TO DISPOSE OF TONNAGE THE SOONEST IT HITS THE 10 YEAR MARK - TIMOS PAPADIMITRIOU
COALspot.com: The last two months of 2015 made a case for traditional shipowners to invest in the dry bulk sector, doing so though based purely on ...
Monday, 08 February 16
DRY-BULK SHIPPING DIVING DEEP
COALspot.com: The freight markets continued to fall this past week.
The Baltic Dry Index (BDI) of dry-bulk shipping freights, a measure of glo ...
Monday, 08 February 16
DRY BULK: SHIPBROKER SEES BDI MARKET REACHING LOW POINT OF 236 POINTS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The endless pit that is the dry bulk market over the past two months, has been the issue of debate among ship owners, shipbroker and analysts alike ...
Friday, 05 February 16
COAL INDIA EYES COAL MINES IN SOUTH AFRICA - PTI
“Coal India Ltd has plans of acquiring coal mines in South Africa,” an official said. It is looking at acquiring mines in partnership w ...
Friday, 05 February 16
U.S. WEEKLY COAL OUTPUT ROSE 4.2% TO 13.6 MMST
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.6 million shor ...
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- ICICI Bank Limited - India
- Leighton Contractors Pty Ltd - Australia
- Bhoruka Overseas - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Energy Link Ltd, New Zealand
- Renaissance Capital - South Africa
- Directorate General of MIneral and Coal - Indonesia
- Simpson Spence & Young - Indonesia
- Interocean Group of Companies - India
- Georgia Ports Authority, United States
- Coalindo Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Chamber of Mines of South Africa
- Star Paper Mills Limited - India
- Central Electricity Authority - India
- Thai Mozambique Logistica
- Pendopo Energi Batubara - Indonesia
- Chettinad Cement Corporation Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Global Coal Blending Company Limited - Australia
- Rio Tinto Coal - Australia
- Formosa Plastics Group - Taiwan
- GMR Energy Limited - India
- Indian Oil Corporation Limited
- Gujarat Sidhee Cement - India
- PetroVietnam Power Coal Import and Supply Company
- Karbindo Abesyapradhi - Indoneisa
- San Jose City I Power Corp, Philippines
- Krishnapatnam Port Company Ltd. - India
- Jindal Steel & Power Ltd - India
- Oldendorff Carriers - Singapore
- Marubeni Corporation - India
- SMC Global Power, Philippines
- Bukit Baiduri Energy - Indonesia
- Meralco Power Generation, Philippines
- Maheswari Brothers Coal Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- IEA Clean Coal Centre - UK
- Ind-Barath Power Infra Limited - India
- Therma Luzon, Inc, Philippines
- PTC India Limited - India
- Indogreen Group - Indonesia
- Tata Chemicals Ltd - India
- The University of Queensland
- Global Business Power Corporation, Philippines
- McConnell Dowell - Australia
- Ambuja Cements Ltd - India
- Orica Mining Services - Indonesia
- Bangladesh Power Developement Board
- Kapuas Tunggal Persada - Indonesia
- Sojitz Corporation - Japan
- Vizag Seaport Private Limited - India
- Vedanta Resources Plc - India
- Grasim Industreis Ltd - India
- Makarim & Taira - Indonesia
- Globalindo Alam Lestari - Indonesia
- Thiess Contractors Indonesia
- VISA Power Limited - India
- Iligan Light & Power Inc, Philippines
- Tamil Nadu electricity Board
- The State Trading Corporation of India Ltd
- Indika Energy - Indonesia
- Riau Bara Harum - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- London Commodity Brokers - England
- Billiton Holdings Pty Ltd - Australia
- Bukit Makmur.PT - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Latin American Coal - Colombia
- Sree Jayajothi Cements Limited - India
- Rashtriya Ispat Nigam Limited - India
- Economic Council, Georgia
- Bukit Asam (Persero) Tbk - Indonesia
- Metalloyd Limited - United Kingdom
- Offshore Bulk Terminal Pte Ltd, Singapore
- Wilmar Investment Holdings
- AsiaOL BioFuels Corp., Philippines
- Timah Investasi Mineral - Indoneisa
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Uttam Galva Steels Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Directorate Of Revenue Intelligence - India
- GVK Power & Infra Limited - India
- Aditya Birla Group - India
- Electricity Generating Authority of Thailand
- Dalmia Cement Bharat India
- Sakthi Sugars Limited - India
- Singapore Mercantile Exchange
- Kumho Petrochemical, South Korea
- Wood Mackenzie - Singapore
- Edison Trading Spa - Italy
- Goldman Sachs - Singapore
- CNBM International Corporation - China
- GN Power Mariveles Coal Plant, Philippines
- Medco Energi Mining Internasional
- Indo Tambangraya Megah - Indonesia
- Barasentosa Lestari - Indonesia
- Mercuria Energy - Indonesia
- MS Steel International - UAE
- Madhucon Powers Ltd - India
- SMG Consultants - Indonesia
- Bhushan Steel Limited - India
- Samtan Co., Ltd - South Korea
- PNOC Exploration Corporation - Philippines
- Intertek Mineral Services - Indonesia
- Australian Commodity Traders Exchange
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- Siam City Cement PLC, Thailand
- Mjunction Services Limited - India
- Salva Resources Pvt Ltd - India
- Parliament of New Zealand
- Xindia Steels Limited - India
- Aboitiz Power Corporation - Philippines
- Standard Chartered Bank - UAE
- Neyveli Lignite Corporation Ltd, - India
- Miang Besar Coal Terminal - Indonesia
- Malabar Cements Ltd - India
- Karaikal Port Pvt Ltd - India
- Bhatia International Limited - India
- Parry Sugars Refinery, India
- Coal and Oil Company - UAE
- Kepco SPC Power Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Ministry of Finance - Indonesia
- Larsen & Toubro Limited - India
- Sical Logistics Limited - India
- Kobexindo Tractors - Indoneisa
- Sindya Power Generating Company Private Ltd
- Ministry of Mines - Canada
- Electricity Authority, New Zealand
- Siam City Cement - Thailand
- Kideco Jaya Agung - Indonesia
- Anglo American - United Kingdom
- Antam Resourcindo - Indonesia
- Manunggal Multi Energi - Indonesia
- IHS Mccloskey Coal Group - USA
- Port Waratah Coal Services - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Bayan Resources Tbk. - Indonesia
- OPG Power Generation Pvt Ltd - India
- GAC Shipping (India) Pvt Ltd
- Semirara Mining and Power Corporation, Philippines
- Eastern Energy - Thailand
- Jorong Barutama Greston.PT - Indonesia
- CIMB Investment Bank - Malaysia
- PowerSource Philippines DevCo
- Power Finance Corporation Ltd., India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sinarmas Energy and Mining - Indonesia
- Straits Asia Resources Limited - Singapore
- Deloitte Consulting - India
- Romanian Commodities Exchange
- Attock Cement Pakistan Limited
- Commonwealth Bank - Australia
- Petron Corporation, Philippines
- Holcim Trading Pte Ltd - Singapore
- Baramulti Group, Indonesia
- Binh Thuan Hamico - Vietnam
- Indonesian Coal Mining Association
- Gujarat Mineral Development Corp Ltd - India
- Mercator Lines Limited - India
- Cement Manufacturers Association - India
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
- Essar Steel Hazira Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Borneo Indobara - Indonesia
- Semirara Mining Corp, Philippines
- Kaltim Prima Coal - Indonesia
- The Treasury - Australian Government
- Bulk Trading Sa - Switzerland
- Independent Power Producers Association of India
- Jaiprakash Power Ventures ltd
- Indian Energy Exchange, India
- European Bulk Services B.V. - Netherlands
- Africa Commodities Group - South Africa
- Toyota Tsusho Corporation, Japan
- Price Waterhouse Coopers - Russia
- South Luzon Thermal Energy Corporation
- Banpu Public Company Limited - Thailand
- Central Java Power - Indonesia
- Energy Development Corp, Philippines
- India Bulls Power Limited - India
- Minerals Council of Australia
- Posco Energy - South Korea
- Alfred C Toepfer International GmbH - Germany
- Gujarat Electricity Regulatory Commission - India
- ASAPP Information Group - India
- Trasteel International SA, Italy
- White Energy Company Limited
- Orica Australia Pty. Ltd.
- Bharathi Cement Corporation - India
- Kohat Cement Company Ltd. - Pakistan
- Coastal Gujarat Power Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Agrawal Coal Company - India
- Ministry of Transport, Egypt
- SN Aboitiz Power Inc, Philippines
- Savvy Resources Ltd - HongKong
- Ceylon Electricity Board - Sri Lanka
- Altura Mining Limited, Indonesia
- LBH Netherlands Bv - Netherlands
- Videocon Industries ltd - India
- Lanco Infratech Ltd - India
- Mintek Dendrill Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Heidelberg Cement - Germany
- Merrill Lynch Commodities Europe
- Cigading International Bulk Terminal - Indonesia
- Kartika Selabumi Mining - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- TeaM Sual Corporation - Philippines
- Eastern Coal Council - USA
- Australian Coal Association
- Planning Commission, India
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