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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, 28 January 16
WHAT ARE THE PROSPECTS FOR COAL IN LIGHT OF THE PARIS CLIMATE AGREEMENT? - GERMAN COAL IMPORTERS ASSOCIATION
This depends – says the VDKi – to a very great extent on who you want to believe more, the United Nations or the International Energy A ...
Thursday, 28 January 16
RICHARDS BAY COAL SWAPS FOR Q1,Q2 AND Q3 DELIVERIES FIRM THIS PAST WEEK
COALspot.com: Q1’ 2016 API4 FOB Richards Bay Coal swap rose month over month and week over week.
The Q1’ 2016 FOB Richards Bay Coa ...
Wednesday, 27 January 16
API 5 FOB NEWCASTLE COAL SWAPS CLOSE MIXED
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery rose another $1.17 per ton (3.13%) this past week compared to the sam ...
Wednesday, 27 January 16
CHINA'S STALLING ECONOMY HAS HAD A GREAT EFFECT ON VARIOUS COMMODITIES; DECREASED DEMAND DRIVING COMMODITY PRICES LOWER AND LOWER - LINOS ALEXANDROS KOGEVINAS
Having gone through the first few weeks of 2016, it’s starting to look like another challenging year is ahead of us. Hopes for a recovery in ...
Wednesday, 27 January 16
WORLD HARD COAL PRODUCTION AND CONSUMPTION DECLINE IN 2015 FOR THE FIRST TIME IN OVER A DECADE - VDKI
COALspot.com: Seaborne hard coal trade and the changes in this area were decisively affected by China and India - VDKi.
China bears the g ...
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- Latin American Coal - Colombia
- Billiton Holdings Pty Ltd - Australia
- TeaM Sual Corporation - Philippines
- India Bulls Power Limited - India
- Madhucon Powers Ltd - India
- MS Steel International - UAE
- Orica Mining Services - Indonesia
- Indian Oil Corporation Limited
- The State Trading Corporation of India Ltd
- Ind-Barath Power Infra Limited - India
- Trasteel International SA, Italy
- Bhoruka Overseas - Indonesia
- Africa Commodities Group - South Africa
- PowerSource Philippines DevCo
- Energy Link Ltd, New Zealand
- Anglo American - United Kingdom
- Indo Tambangraya Megah - Indonesia
- IHS Mccloskey Coal Group - USA
- Attock Cement Pakistan Limited
- Deloitte Consulting - India
- Thai Mozambique Logistica
- SMC Global Power, Philippines
- Chettinad Cement Corporation Ltd - India
- Australian Coal Association
- Timah Investasi Mineral - Indoneisa
- Vedanta Resources Plc - India
- Siam City Cement PLC, Thailand
- Ministry of Mines - Canada
- Kaltim Prima Coal - Indonesia
- ASAPP Information Group - India
- Global Green Power PLC Corporation, Philippines
- Posco Energy - South Korea
- LBH Netherlands Bv - Netherlands
- Bank of Tokyo Mitsubishi UFJ Ltd
- Dalmia Cement Bharat India
- Australian Commodity Traders Exchange
- South Luzon Thermal Energy Corporation
- Bharathi Cement Corporation - India
- Holcim Trading Pte Ltd - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Makarim & Taira - Indonesia
- Orica Australia Pty. Ltd.
- Singapore Mercantile Exchange
- Renaissance Capital - South Africa
- Meralco Power Generation, Philippines
- Salva Resources Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Leighton Contractors Pty Ltd - Australia
- Central Electricity Authority - India
- Sindya Power Generating Company Private Ltd
- Pendopo Energi Batubara - Indonesia
- Thiess Contractors Indonesia
- Kumho Petrochemical, South Korea
- Mjunction Services Limited - India
- Parry Sugars Refinery, India
- Medco Energi Mining Internasional
- Borneo Indobara - Indonesia
- Standard Chartered Bank - UAE
- International Coal Ventures Pvt Ltd - India
- Grasim Industreis Ltd - India
- Interocean Group of Companies - India
- Samtan Co., Ltd - South Korea
- Planning Commission, India
- Kepco SPC Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Rio Tinto Coal - Australia
- Sinarmas Energy and Mining - Indonesia
- Eastern Coal Council - USA
- AsiaOL BioFuels Corp., Philippines
- Toyota Tsusho Corporation, Japan
- Uttam Galva Steels Limited - India
- CNBM International Corporation - China
- Electricity Generating Authority of Thailand
- Coal and Oil Company - UAE
- Aboitiz Power Corporation - Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Commonwealth Bank - Australia
- Semirara Mining Corp, Philippines
- Riau Bara Harum - Indonesia
- New Zealand Coal & Carbon
- Karaikal Port Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Economic Council, Georgia
- Port Waratah Coal Services - Australia
- VISA Power Limited - India
- Petron Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- GVK Power & Infra Limited - India
- Directorate Of Revenue Intelligence - India
- Petrochimia International Co. Ltd.- Taiwan
- Sical Logistics Limited - India
- Miang Besar Coal Terminal - Indonesia
- CIMB Investment Bank - Malaysia
- Indian Energy Exchange, India
- Aditya Birla Group - India
- Star Paper Mills Limited - India
- Semirara Mining and Power Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bayan Resources Tbk. - Indonesia
- Oldendorff Carriers - Singapore
- The University of Queensland
- Vizag Seaport Private Limited - India
- SN Aboitiz Power Inc, Philippines
- Carbofer General Trading SA - India
- Bukit Asam (Persero) Tbk - Indonesia
- GAC Shipping (India) Pvt Ltd
- Bhushan Steel Limited - India
- SMG Consultants - Indonesia
- OPG Power Generation Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Videocon Industries ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Metalloyd Limited - United Kingdom
- Gujarat Mineral Development Corp Ltd - India
- Therma Luzon, Inc, Philippines
- Jaiprakash Power Ventures ltd
- Chamber of Mines of South Africa
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sakthi Sugars Limited - India
- Essar Steel Hazira Ltd - India
- Altura Mining Limited, Indonesia
- Intertek Mineral Services - Indonesia
- Kartika Selabumi Mining - Indonesia
- Simpson Spence & Young - Indonesia
- Manunggal Multi Energi - Indonesia
- McConnell Dowell - Australia
- Power Finance Corporation Ltd., India
- Energy Development Corp, Philippines
- Central Java Power - Indonesia
- Independent Power Producers Association of India
- Price Waterhouse Coopers - Russia
- Iligan Light & Power Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Ministry of Finance - Indonesia
- White Energy Company Limited
- Bahari Cakrawala Sebuku - Indonesia
- Bangladesh Power Developement Board
- Straits Asia Resources Limited - Singapore
- Globalindo Alam Lestari - Indonesia
- Indika Energy - Indonesia
- The Treasury - Australian Government
- Maheswari Brothers Coal Limited - India
- London Commodity Brokers - England
- Kobexindo Tractors - Indoneisa
- San Jose City I Power Corp, Philippines
- Coastal Gujarat Power Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Bukit Baiduri Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Georgia Ports Authority, United States
- Wilmar Investment Holdings
- Banpu Public Company Limited - Thailand
- Meenaskhi Energy Private Limited - India
- Barasentosa Lestari - Indonesia
- Indonesian Coal Mining Association
- Marubeni Corporation - India
- Lanco Infratech Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Rashtriya Ispat Nigam Limited - India
- Cigading International Bulk Terminal - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Asmin Koalindo Tuhup - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Eastern Energy - Thailand
- Cement Manufacturers Association - India
- IEA Clean Coal Centre - UK
- Sree Jayajothi Cements Limited - India
- Baramulti Group, Indonesia
- Krishnapatnam Port Company Ltd. - India
- Vijayanagar Sugar Pvt Ltd - India
- Tamil Nadu electricity Board
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bukit Makmur.PT - Indonesia
- Agrawal Coal Company - India
- Edison Trading Spa - Italy
- Formosa Plastics Group - Taiwan
- Directorate General of MIneral and Coal - Indonesia
- Jindal Steel & Power Ltd - India
- Ministry of Transport, Egypt
- TNB Fuel Sdn Bhd - Malaysia
- ICICI Bank Limited - India
- PNOC Exploration Corporation - Philippines
- Merrill Lynch Commodities Europe
- Romanian Commodities Exchange
- Mintek Dendrill Indonesia
- Wood Mackenzie - Singapore
- Larsen & Toubro Limited - India
- Tata Chemicals Ltd - India
- Electricity Authority, New Zealand
- Coalindo Energy - Indonesia
- PTC India Limited - India
- Savvy Resources Ltd - HongKong
- Heidelberg Cement - Germany
- Antam Resourcindo - Indonesia
- GMR Energy Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Minerals Council of Australia
- Bhatia International Limited - India
- Ambuja Cements Ltd - India
- Xindia Steels Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Bulk Trading Sa - Switzerland
- Global Coal Blending Company Limited - Australia
- Siam City Cement - Thailand
- Indogreen Group - Indonesia
- Mercuria Energy - Indonesia
- Gujarat Sidhee Cement - India
- Mercator Lines Limited - India
- Parliament of New Zealand
- Global Business Power Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Goldman Sachs - Singapore
- Malabar Cements Ltd - India
- Sojitz Corporation - Japan
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