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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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Thursday, 04 February 16
CAPESIZE: WEST AUSTRALIAN TO CHINA HAS BEEN CONCLUDED AT US$ 2.85 PMT AND THE C3 MARKET REMAINS INACTIVE - FEARNLEYS
Capesize
As everyone is getting ready for the Chinese new year, already depressed rates are under further pressure.
According to Fearnleys, ...
Wednesday, 03 February 16
DRY BULK MARKET CONTINUES TO BE UNDER PRESSURE - INTERMODAL
The Dry Bulk market continues to be under pressure, with the BDI remaining in search of even the slightest support, which seems to be delaying more ...
Tuesday, 02 February 16
RECORD EXPORTS THROUGH SOUTH AFRICA'S RICHARDS BAY COAL TERMINAL MADE AT EXPENSE OF SMALLER RIVALS, IHS SAYS
Five percent increase in coal exports through South Africa’s dominant Richards Bay Coal Terminal in 2015 unlikely to accelerate country&rsquo ...
Tuesday, 02 February 16
SETTING ASIDE, STRIKING OUT AND APPEALS TO THE COURT OF APPEAL IN SHIP ARRESTS - RAJAH & TANN ASIA LLP
KNOWLEDGE TO ELEVATE
The Singapore Court of Appeal once again has had to grapple with ship arrest, setting aside and appeals to the Court unde ...
Monday, 01 February 16
DRY BULK SUFFERS FROM POSEIDON'S POTENT PRONGS - CLARKSONS
It has been a grim start to 2016 for the bulkcarrier market, with the Baltic Dry Index sliding to new record lows on almost every day of the year s ...
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- TNB Fuel Sdn Bhd - Malaysia
- India Bulls Power Limited - India
- Straits Asia Resources Limited - Singapore
- SMG Consultants - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Parliament of New Zealand
- Meenaskhi Energy Private Limited - India
- Coal and Oil Company - UAE
- The University of Queensland
- CIMB Investment Bank - Malaysia
- Maheswari Brothers Coal Limited - India
- Interocean Group of Companies - India
- McConnell Dowell - Australia
- Power Finance Corporation Ltd., India
- The Treasury - Australian Government
- Toyota Tsusho Corporation, Japan
- GN Power Mariveles Coal Plant, Philippines
- Thai Mozambique Logistica
- Global Business Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Latin American Coal - Colombia
- Alfred C Toepfer International GmbH - Germany
- Binh Thuan Hamico - Vietnam
- Eastern Coal Council - USA
- Kohat Cement Company Ltd. - Pakistan
- Larsen & Toubro Limited - India
- Port Waratah Coal Services - Australia
- Iligan Light & Power Inc, Philippines
- Ministry of Transport, Egypt
- Uttam Galva Steels Limited - India
- Cigading International Bulk Terminal - Indonesia
- Kartika Selabumi Mining - Indonesia
- Goldman Sachs - Singapore
- SMC Global Power, Philippines
- Heidelberg Cement - Germany
- Sojitz Corporation - Japan
- Vijayanagar Sugar Pvt Ltd - India
- Baramulti Group, Indonesia
- Tata Chemicals Ltd - India
- Videocon Industries ltd - India
- Billiton Holdings Pty Ltd - Australia
- Economic Council, Georgia
- Lanco Infratech Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Minerals Council of Australia
- TeaM Sual Corporation - Philippines
- International Coal Ventures Pvt Ltd - India
- Thiess Contractors Indonesia
- Mercuria Energy - Indonesia
- Edison Trading Spa - Italy
- PowerSource Philippines DevCo
- Trasteel International SA, Italy
- Formosa Plastics Group - Taiwan
- ICICI Bank Limited - India
- European Bulk Services B.V. - Netherlands
- Chettinad Cement Corporation Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indian Oil Corporation Limited
- Star Paper Mills Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Bhoruka Overseas - Indonesia
- Altura Mining Limited, Indonesia
- Krishnapatnam Port Company Ltd. - India
- PTC India Limited - India
- Indika Energy - Indonesia
- Madhucon Powers Ltd - India
- Rio Tinto Coal - Australia
- Chamber of Mines of South Africa
- Pendopo Energi Batubara - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Africa Commodities Group - South Africa
- Marubeni Corporation - India
- Eastern Energy - Thailand
- Ind-Barath Power Infra Limited - India
- Global Coal Blending Company Limited - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Kobexindo Tractors - Indoneisa
- Bhatia International Limited - India
- Vedanta Resources Plc - India
- Sarangani Energy Corporation, Philippines
- Orica Mining Services - Indonesia
- Bhushan Steel Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- SN Aboitiz Power Inc, Philippines
- Ceylon Electricity Board - Sri Lanka
- Makarim & Taira - Indonesia
- Kaltim Prima Coal - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Anglo American - United Kingdom
- Bayan Resources Tbk. - Indonesia
- Banpu Public Company Limited - Thailand
- Sical Logistics Limited - India
- PetroVietnam Power Coal Import and Supply Company
- ASAPP Information Group - India
- Aboitiz Power Corporation - Philippines
- Mercator Lines Limited - India
- MS Steel International - UAE
- Petrochimia International Co. Ltd.- Taiwan
- Ministry of Finance - Indonesia
- Sree Jayajothi Cements Limited - India
- Energy Link Ltd, New Zealand
- Tamil Nadu electricity Board
- Salva Resources Pvt Ltd - India
- Therma Luzon, Inc, Philippines
- Attock Cement Pakistan Limited
- Manunggal Multi Energi - Indonesia
- Borneo Indobara - Indonesia
- Siam City Cement PLC, Thailand
- Jindal Steel & Power Ltd - India
- New Zealand Coal & Carbon
- Dalmia Cement Bharat India
- Xindia Steels Limited - India
- Antam Resourcindo - Indonesia
- Bulk Trading Sa - Switzerland
- Mintek Dendrill Indonesia
- Kepco SPC Power Corporation, Philippines
- Agrawal Coal Company - India
- Gujarat Mineral Development Corp Ltd - India
- Global Green Power PLC Corporation, Philippines
- Sindya Power Generating Company Private Ltd
- Parry Sugars Refinery, India
- Indo Tambangraya Megah - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Mjunction Services Limited - India
- Ambuja Cements Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Globalindo Alam Lestari - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Posco Energy - South Korea
- Commonwealth Bank - Australia
- Intertek Mineral Services - Indonesia
- Coastal Gujarat Power Limited - India
- London Commodity Brokers - England
- Oldendorff Carriers - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Central Java Power - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Grasim Industreis Ltd - India
- Meralco Power Generation, Philippines
- GMR Energy Limited - India
- Wood Mackenzie - Singapore
- IEA Clean Coal Centre - UK
- Gujarat Sidhee Cement - India
- Simpson Spence & Young - Indonesia
- Electricity Generating Authority of Thailand
- Neyveli Lignite Corporation Ltd, - India
- CNBM International Corporation - China
- Bahari Cakrawala Sebuku - Indonesia
- Malabar Cements Ltd - India
- Central Electricity Authority - India
- Georgia Ports Authority, United States
- Sakthi Sugars Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- AsiaOL BioFuels Corp., Philippines
- Petron Corporation, Philippines
- Savvy Resources Ltd - HongKong
- Asmin Koalindo Tuhup - Indonesia
- Timah Investasi Mineral - Indoneisa
- Jaiprakash Power Ventures ltd
- Indian Energy Exchange, India
- Indonesian Coal Mining Association
- OPG Power Generation Pvt Ltd - India
- Energy Development Corp, Philippines
- Carbofer General Trading SA - India
- Standard Chartered Bank - UAE
- GVK Power & Infra Limited - India
- The State Trading Corporation of India Ltd
- Kumho Petrochemical, South Korea
- Siam City Cement - Thailand
- Bharathi Cement Corporation - India
- Indogreen Group - Indonesia
- Samtan Co., Ltd - South Korea
- Riau Bara Harum - Indonesia
- Coalindo Energy - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kideco Jaya Agung - Indonesia
- Wilmar Investment Holdings
- Planning Commission, India
- Karbindo Abesyapradhi - Indoneisa
- Australian Coal Association
- Merrill Lynch Commodities Europe
- Bangladesh Power Developement Board
- Ministry of Mines - Canada
- Cement Manufacturers Association - India
- IHS Mccloskey Coal Group - USA
- Bukit Makmur.PT - Indonesia
- Deloitte Consulting - India
- Bukit Baiduri Energy - Indonesia
- White Energy Company Limited
- Renaissance Capital - South Africa
- VISA Power Limited - India
- PNOC Exploration Corporation - Philippines
- Essar Steel Hazira Ltd - India
- Barasentosa Lestari - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Medco Energi Mining Internasional
- Price Waterhouse Coopers - Russia
- Electricity Authority, New Zealand
- Kalimantan Lumbung Energi - Indonesia
- Leighton Contractors Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- GAC Shipping (India) Pvt Ltd
- Vizag Seaport Private Limited - India
- Directorate Of Revenue Intelligence - India
- Orica Australia Pty. Ltd.
- Semirara Mining Corp, Philippines
- Sinarmas Energy and Mining - Indonesia
- Karaikal Port Pvt Ltd - India
- Aditya Birla Group - India
- Singapore Mercantile Exchange
- South Luzon Thermal Energy Corporation
- Romanian Commodities Exchange
- Australian Commodity Traders Exchange
- Rashtriya Ispat Nigam Limited - India
- Independent Power Producers Association of India
- Metalloyd Limited - United Kingdom
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