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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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Tuesday, 26 January 16
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- Billiton Holdings Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
- PowerSource Philippines DevCo
- Jindal Steel & Power Ltd - India
- Standard Chartered Bank - UAE
- AsiaOL BioFuels Corp., Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Orica Mining Services - Indonesia
- Malabar Cements Ltd - India
- CNBM International Corporation - China
- Kepco SPC Power Corporation, Philippines
- Essar Steel Hazira Ltd - India
- Attock Cement Pakistan Limited
- Uttam Galva Steels Limited - India
- Barasentosa Lestari - Indonesia
- White Energy Company Limited
- Meenaskhi Energy Private Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Binh Thuan Hamico - Vietnam
- Cement Manufacturers Association - India
- Jaiprakash Power Ventures ltd
- Kartika Selabumi Mining - Indonesia
- Gujarat Sidhee Cement - India
- Formosa Plastics Group - Taiwan
- Bukit Makmur.PT - Indonesia
- Makarim & Taira - Indonesia
- Electricity Authority, New Zealand
- Karaikal Port Pvt Ltd - India
- Coal and Oil Company - UAE
- Bhoruka Overseas - Indonesia
- Ministry of Mines - Canada
- Indian Energy Exchange, India
- MS Steel International - UAE
- Mercuria Energy - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Bukit Baiduri Energy - Indonesia
- Directorate Of Revenue Intelligence - India
- Coalindo Energy - Indonesia
- Minerals Council of Australia
- Australian Commodity Traders Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maheswari Brothers Coal Limited - India
- Mjunction Services Limited - India
- GMR Energy Limited - India
- Holcim Trading Pte Ltd - Singapore
- IHS Mccloskey Coal Group - USA
- Iligan Light & Power Inc, Philippines
- Chettinad Cement Corporation Ltd - India
- New Zealand Coal & Carbon
- Power Finance Corporation Ltd., India
- Star Paper Mills Limited - India
- Planning Commission, India
- Kumho Petrochemical, South Korea
- Eastern Energy - Thailand
- Metalloyd Limited - United Kingdom
- Xindia Steels Limited - India
- Dalmia Cement Bharat India
- Altura Mining Limited, Indonesia
- Global Business Power Corporation, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Edison Trading Spa - Italy
- Sree Jayajothi Cements Limited - India
- Sinarmas Energy and Mining - Indonesia
- Anglo American - United Kingdom
- London Commodity Brokers - England
- Petrochimia International Co. Ltd.- Taiwan
- Energy Link Ltd, New Zealand
- Mercator Lines Limited - India
- The State Trading Corporation of India Ltd
- Eastern Coal Council - USA
- Vijayanagar Sugar Pvt Ltd - India
- PTC India Limited - India
- Sojitz Corporation - Japan
- Agrawal Coal Company - India
- Bukit Asam (Persero) Tbk - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Miang Besar Coal Terminal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Vizag Seaport Private Limited - India
- Bhatia International Limited - India
- GN Power Mariveles Coal Plant, Philippines
- IEA Clean Coal Centre - UK
- Indian Oil Corporation Limited
- Singapore Mercantile Exchange
- Bank of Tokyo Mitsubishi UFJ Ltd
- Oldendorff Carriers - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Madhucon Powers Ltd - India
- Baramulti Group, Indonesia
- Wood Mackenzie - Singapore
- SMC Global Power, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Kobexindo Tractors - Indoneisa
- Kideco Jaya Agung - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Ind-Barath Power Infra Limited - India
- Deloitte Consulting - India
- Neyveli Lignite Corporation Ltd, - India
- Salva Resources Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Pendopo Energi Batubara - Indonesia
- The Treasury - Australian Government
- VISA Power Limited - India
- Central Electricity Authority - India
- Thiess Contractors Indonesia
- Manunggal Multi Energi - Indonesia
- Kaltim Prima Coal - Indonesia
- ASAPP Information Group - India
- Samtan Co., Ltd - South Korea
- International Coal Ventures Pvt Ltd - India
- CIMB Investment Bank - Malaysia
- LBH Netherlands Bv - Netherlands
- Posco Energy - South Korea
- Indika Energy - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Aditya Birla Group - India
- Ambuja Cements Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Grasim Industreis Ltd - India
- Siam City Cement PLC, Thailand
- Economic Council, Georgia
- TNB Fuel Sdn Bhd - Malaysia
- SN Aboitiz Power Inc, Philippines
- Leighton Contractors Pty Ltd - Australia
- Latin American Coal - Colombia
- Marubeni Corporation - India
- Indogreen Group - Indonesia
- Parliament of New Zealand
- Banpu Public Company Limited - Thailand
- Tata Chemicals Ltd - India
- Antam Resourcindo - Indonesia
- Timah Investasi Mineral - Indoneisa
- Parry Sugars Refinery, India
- Riau Bara Harum - Indonesia
- India Bulls Power Limited - India
- Sindya Power Generating Company Private Ltd
- Bahari Cakrawala Sebuku - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Aboitiz Power Corporation - Philippines
- Sical Logistics Limited - India
- PNOC Exploration Corporation - Philippines
- South Luzon Thermal Energy Corporation
- Semirara Mining Corp, Philippines
- Bayan Resources Tbk. - Indonesia
- The University of Queensland
- Krishnapatnam Port Company Ltd. - India
- ICICI Bank Limited - India
- Global Coal Blending Company Limited - Australia
- Indonesian Coal Mining Association
- Larsen & Toubro Limited - India
- Mintek Dendrill Indonesia
- European Bulk Services B.V. - Netherlands
- Kohat Cement Company Ltd. - Pakistan
- Karbindo Abesyapradhi - Indoneisa
- Kalimantan Lumbung Energi - Indonesia
- Siam City Cement - Thailand
- Ministry of Transport, Egypt
- Medco Energi Mining Internasional
- Romanian Commodities Exchange
- Bhushan Steel Limited - India
- Wilmar Investment Holdings
- McConnell Dowell - Australia
- Goldman Sachs - Singapore
- Bangladesh Power Developement Board
- San Jose City I Power Corp, Philippines
- Port Waratah Coal Services - Australia
- Interocean Group of Companies - India
- Renaissance Capital - South Africa
- Commonwealth Bank - Australia
- Rio Tinto Coal - Australia
- Sarangani Energy Corporation, Philippines
- Thai Mozambique Logistica
- Trasteel International SA, Italy
- Toyota Tsusho Corporation, Japan
- Central Java Power - Indonesia
- Coastal Gujarat Power Limited - India
- Georgia Ports Authority, United States
- SMG Consultants - Indonesia
- Carbofer General Trading SA - India
- Savvy Resources Ltd - HongKong
- Bharathi Cement Corporation - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Vedanta Resources Plc - India
- Global Green Power PLC Corporation, Philippines
- Intertek Mineral Services - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Sakthi Sugars Limited - India
- Bulk Trading Sa - Switzerland
- Ministry of Finance - Indonesia
- Electricity Generating Authority of Thailand
- Petron Corporation, Philippines
- Borneo Indobara - Indonesia
- Chamber of Mines of South Africa
- Independent Power Producers Association of India
- Indo Tambangraya Megah - Indonesia
- Therma Luzon, Inc, Philippines
- Price Waterhouse Coopers - Russia
- Australian Coal Association
- Simpson Spence & Young - Indonesia
- Globalindo Alam Lestari - Indonesia
- GVK Power & Infra Limited - India
- Straits Asia Resources Limited - Singapore
- Meralco Power Generation, Philippines
- GAC Shipping (India) Pvt Ltd
- Merrill Lynch Commodities Europe
- TeaM Sual Corporation - Philippines
- Energy Development Corp, Philippines
- Lanco Infratech Ltd - India
- Orica Australia Pty. Ltd.
- Tamil Nadu electricity Board
- Africa Commodities Group - South Africa
- Heidelberg Cement - Germany
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Videocon Industries ltd - India
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