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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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Monday, 01 February 16
INDONESIA'S SECOND LARGEST COAL MINER ADARO ENERGY HAS PRODUCED 51.46 MT IN 2015; 8% LOWER COMPARED TO FY14
COALspot.com: Adaro Energy, the Indonesia’s second largest coal producer by volume has produced 51.46 Mt in 2015, 8% lower compared to ...
Sunday, 31 January 16
BDI CONTINUED ITS FALL AND CLOSE AT A FRESH RECORD LOW ON FRIDAY
COALspot.com: The Baltic Dry Index, which gauges the cost of shipping dry bulk including iron ore, cement, grain, coal and fertilizer, continued it ...
Friday, 29 January 16
INDONESIAN BENCHMARK COAL PRICE SETTLES DOWN $ 0.31, OR 0.58%, AT $ 53.20 A TON
COALspot.com: Low coal demand and excess supplies sent Indonesian benchmark coal price further down in January 2016. HBA has slumped by 0.58 ...
Friday, 29 January 16
U.S. COAL PRODUCTION OFF 2 PERCENT FROM LAST WEEK - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.1 milli ...
Thursday, 28 January 16
COAL REMAINS THE NO.1 FUEL FOR POWER GENERATION - EXXONMOBIL
COALspot.com: Energy demand trends from 2010 to 2040 are expected to vary significantly around the world, as countries move along very different tr ...
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- Dalmia Cement Bharat India
- Meralco Power Generation, Philippines
- Kartika Selabumi Mining - Indonesia
- Iligan Light & Power Inc, Philippines
- Ambuja Cements Ltd - India
- Toyota Tsusho Corporation, Japan
- Eastern Coal Council - USA
- Singapore Mercantile Exchange
- Cement Manufacturers Association - India
- TNB Fuel Sdn Bhd - Malaysia
- Indian Energy Exchange, India
- Vedanta Resources Plc - India
- McConnell Dowell - Australia
- Antam Resourcindo - Indonesia
- Interocean Group of Companies - India
- Pendopo Energi Batubara - Indonesia
- Sakthi Sugars Limited - India
- Sical Logistics Limited - India
- The Treasury - Australian Government
- Port Waratah Coal Services - Australia
- Riau Bara Harum - Indonesia
- SMC Global Power, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Vizag Seaport Private Limited - India
- Videocon Industries ltd - India
- Malabar Cements Ltd - India
- Carbofer General Trading SA - India
- Formosa Plastics Group - Taiwan
- Madhucon Powers Ltd - India
- Edison Trading Spa - Italy
- Medco Energi Mining Internasional
- Thai Mozambique Logistica
- Banpu Public Company Limited - Thailand
- White Energy Company Limited
- Ceylon Electricity Board - Sri Lanka
- Metalloyd Limited - United Kingdom
- Orica Mining Services - Indonesia
- Coalindo Energy - Indonesia
- ICICI Bank Limited - India
- Global Coal Blending Company Limited - Australia
- Semirara Mining Corp, Philippines
- Kumho Petrochemical, South Korea
- Grasim Industreis Ltd - India
- Planning Commission, India
- Siam City Cement - Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Neyveli Lignite Corporation Ltd, - India
- Samtan Co., Ltd - South Korea
- San Jose City I Power Corp, Philippines
- Krishnapatnam Port Company Ltd. - India
- Alfred C Toepfer International GmbH - Germany
- Minerals Council of Australia
- Maharashtra Electricity Regulatory Commission - India
- Kaltim Prima Coal - Indonesia
- Mjunction Services Limited - India
- South Luzon Thermal Energy Corporation
- Kepco SPC Power Corporation, Philippines
- GMR Energy Limited - India
- Intertek Mineral Services - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Aditya Birla Group - India
- Gujarat Mineral Development Corp Ltd - India
- Mercuria Energy - Indonesia
- Indian Oil Corporation Limited
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- Siam City Cement PLC, Thailand
- Parry Sugars Refinery, India
- New Zealand Coal & Carbon
- Salva Resources Pvt Ltd - India
- Central Electricity Authority - India
- Oldendorff Carriers - Singapore
- PowerSource Philippines DevCo
- Tata Chemicals Ltd - India
- Chettinad Cement Corporation Ltd - India
- Bhatia International Limited - India
- Rio Tinto Coal - Australia
- Indo Tambangraya Megah - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Ind-Barath Power Infra Limited - India
- Essar Steel Hazira Ltd - India
- Kideco Jaya Agung - Indonesia
- SN Aboitiz Power Inc, Philippines
- Meenaskhi Energy Private Limited - India
- International Coal Ventures Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- Parliament of New Zealand
- Renaissance Capital - South Africa
- MS Steel International - UAE
- Heidelberg Cement - Germany
- Lanco Infratech Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Petrochimia International Co. Ltd.- Taiwan
- Eastern Energy - Thailand
- Anglo American - United Kingdom
- Larsen & Toubro Limited - India
- Holcim Trading Pte Ltd - Singapore
- Bayan Resources Tbk. - Indonesia
- Bukit Baiduri Energy - Indonesia
- Deloitte Consulting - India
- Australian Commodity Traders Exchange
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Mintek Dendrill Indonesia
- Electricity Authority, New Zealand
- VISA Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- Commonwealth Bank - Australia
- Bulk Trading Sa - Switzerland
- Ministry of Transport, Egypt
- Sojitz Corporation - Japan
- Kapuas Tunggal Persada - Indonesia
- Bhushan Steel Limited - India
- Global Business Power Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Merrill Lynch Commodities Europe
- Indogreen Group - Indonesia
- SMG Consultants - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Baramulti Group, Indonesia
- OPG Power Generation Pvt Ltd - India
- Petron Corporation, Philippines
- Economic Council, Georgia
- Jaiprakash Power Ventures ltd
- Bharathi Cement Corporation - India
- Cigading International Bulk Terminal - Indonesia
- Wood Mackenzie - Singapore
- Bukit Makmur.PT - Indonesia
- Ministry of Finance - Indonesia
- London Commodity Brokers - England
- Marubeni Corporation - India
- Chamber of Mines of South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- Bangladesh Power Developement Board
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- PNOC Exploration Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- TeaM Sual Corporation - Philippines
- Kohat Cement Company Ltd. - Pakistan
- Price Waterhouse Coopers - Russia
- IHS Mccloskey Coal Group - USA
- Tamil Nadu electricity Board
- AsiaOL BioFuels Corp., Philippines
- Global Green Power PLC Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Sree Jayajothi Cements Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- IEA Clean Coal Centre - UK
- Latin American Coal - Colombia
- Uttam Galva Steels Limited - India
- Karbindo Abesyapradhi - Indoneisa
- GAC Shipping (India) Pvt Ltd
- Directorate General of MIneral and Coal - Indonesia
- Globalindo Alam Lestari - Indonesia
- Australian Coal Association
- Therma Luzon, Inc, Philippines
- Sindya Power Generating Company Private Ltd
- Gujarat Sidhee Cement - India
- Sinarmas Energy and Mining - Indonesia
- Coastal Gujarat Power Limited - India
- The State Trading Corporation of India Ltd
- Aboitiz Power Corporation - Philippines
- ASAPP Information Group - India
- European Bulk Services B.V. - Netherlands
- Simpson Spence & Young - Indonesia
- Maheswari Brothers Coal Limited - India
- Attock Cement Pakistan Limited
- Thiess Contractors Indonesia
- Electricity Generating Authority of Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- India Bulls Power Limited - India
- Directorate Of Revenue Intelligence - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Central Java Power - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Romanian Commodities Exchange
- Posco Energy - South Korea
- Indika Energy - Indonesia
- Karaikal Port Pvt Ltd - India
- Jindal Steel & Power Ltd - India
- Sarangani Energy Corporation, Philippines
- Indonesian Coal Mining Association
- GN Power Mariveles Coal Plant, Philippines
- Xindia Steels Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Standard Chartered Bank - UAE
- Miang Besar Coal Terminal - Indonesia
- Power Finance Corporation Ltd., India
- Energy Link Ltd, New Zealand
- Semirara Mining and Power Corporation, Philippines
- Georgia Ports Authority, United States
- Bhoruka Overseas - Indonesia
- Independent Power Producers Association of India
- Borneo Indobara - Indonesia
- Straits Asia Resources Limited - Singapore
- PTC India Limited - India
- The University of Queensland
- Star Paper Mills Limited - India
- Goldman Sachs - Singapore
- Coal and Oil Company - UAE
- Kobexindo Tractors - Indoneisa
- Mercator Lines Limited - India
- CIMB Investment Bank - Malaysia
- Energy Development Corp, Philippines
- Orica Australia Pty. Ltd.
- Africa Commodities Group - South Africa
- Savvy Resources Ltd - HongKong
- CNBM International Corporation - China
- Pipit Mutiara Jaya. PT, Indonesia
- Binh Thuan Hamico - Vietnam
- LBH Netherlands Bv - Netherlands
- Altura Mining Limited, Indonesia
- Agrawal Coal Company - India
- Wilmar Investment Holdings
- Ministry of Mines - Canada
- Trasteel International SA, Italy
- GVK Power & Infra Limited - India
- Rashtriya Ispat Nigam Limited - India
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