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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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Sunday, 24 January 16
PANAMAX MARKET WEAKENS ACROSS THE BOARD
COALspot.com: The Baltic Dry Index, which gauges the cost of shipping dry bulk including iron ore, cement, grain, coal and fertiliser, fell ninetee ...
Friday, 22 January 16
WEEKLY US COAL PRODUCTION ESTIMATES ALMOST FLAT
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.3 million shor ...
Friday, 22 January 16
COAL PRICES TO REMAIN UNDER PRESSURE THIS YEAR
COALspot.com: Indonesian coal swap delivery Q1 2016 declined month on month and week over week. The falling trend of prices for coal was continuing ...
Friday, 22 January 16
Q3' 16 FOB RICHARDS BAY COAL SWAP CLOSED AT $ 40.80; DECLINE $ 2.80 M-O-M
COALspot.com: Q1’ 2016 API4 FOB Richards Bay Coal swap up month over month and decline week over week.
The Q1’ 2016 FOB Richards B ...
Wednesday, 20 January 16
Q3'16 FOB NEWCASTLE COAL SWAP CLOSED $ 2.40 LESSER THAN Q1'16 CLOSING PRICE OF $ 38.10
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery rose another $0.77 per ton (2.06%) this past week compared to the sam ...
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- Pipit Mutiara Jaya. PT, Indonesia
- Global Green Power PLC Corporation, Philippines
- ASAPP Information Group - India
- IEA Clean Coal Centre - UK
- Alfred C Toepfer International GmbH - Germany
- Deloitte Consulting - India
- Sree Jayajothi Cements Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Ministry of Transport, Egypt
- CIMB Investment Bank - Malaysia
- Rio Tinto Coal - Australia
- Binh Thuan Hamico - Vietnam
- Parliament of New Zealand
- Sical Logistics Limited - India
- Manunggal Multi Energi - Indonesia
- Vedanta Resources Plc - India
- Meralco Power Generation, Philippines
- Merrill Lynch Commodities Europe
- Siam City Cement PLC, Thailand
- Baramulti Group, Indonesia
- Holcim Trading Pte Ltd - Singapore
- Chamber of Mines of South Africa
- Power Finance Corporation Ltd., India
- Parry Sugars Refinery, India
- The Treasury - Australian Government
- Straits Asia Resources Limited - Singapore
- SMC Global Power, Philippines
- South Luzon Thermal Energy Corporation
- LBH Netherlands Bv - Netherlands
- Sojitz Corporation - Japan
- Riau Bara Harum - Indonesia
- Ministry of Mines - Canada
- Interocean Group of Companies - India
- European Bulk Services B.V. - Netherlands
- Africa Commodities Group - South Africa
- Wilmar Investment Holdings
- Wood Mackenzie - Singapore
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Leighton Contractors Pty Ltd - Australia
- Barasentosa Lestari - Indonesia
- CNBM International Corporation - China
- Directorate Of Revenue Intelligence - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- PNOC Exploration Corporation - Philippines
- Energy Development Corp, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Central Java Power - Indonesia
- Agrawal Coal Company - India
- Sakthi Sugars Limited - India
- Electricity Authority, New Zealand
- Bayan Resources Tbk. - Indonesia
- MS Steel International - UAE
- Cigading International Bulk Terminal - Indonesia
- Coalindo Energy - Indonesia
- Malabar Cements Ltd - India
- GVK Power & Infra Limited - India
- Australian Commodity Traders Exchange
- Asmin Koalindo Tuhup - Indonesia
- Georgia Ports Authority, United States
- PetroVietnam Power Coal Import and Supply Company
- Rashtriya Ispat Nigam Limited - India
- Bukit Baiduri Energy - Indonesia
- Videocon Industries ltd - India
- Eastern Energy - Thailand
- Commonwealth Bank - Australia
- Bhushan Steel Limited - India
- Uttam Galva Steels Limited - India
- Tata Chemicals Ltd - India
- Energy Link Ltd, New Zealand
- Directorate General of MIneral and Coal - Indonesia
- Semirara Mining Corp, Philippines
- Indonesian Coal Mining Association
- Star Paper Mills Limited - India
- Indian Oil Corporation Limited
- Bulk Trading Sa - Switzerland
- Bukit Makmur.PT - Indonesia
- Globalindo Alam Lestari - Indonesia
- VISA Power Limited - India
- Sinarmas Energy and Mining - Indonesia
- Eastern Coal Council - USA
- Bukit Asam (Persero) Tbk - Indonesia
- Price Waterhouse Coopers - Russia
- New Zealand Coal & Carbon
- Antam Resourcindo - Indonesia
- Lanco Infratech Ltd - India
- Altura Mining Limited, Indonesia
- Dalmia Cement Bharat India
- Edison Trading Spa - Italy
- Jaiprakash Power Ventures ltd
- Formosa Plastics Group - Taiwan
- Madhucon Powers Ltd - India
- Planning Commission, India
- Indogreen Group - Indonesia
- Thai Mozambique Logistica
- Jorong Barutama Greston.PT - Indonesia
- Larsen & Toubro Limited - India
- Meenaskhi Energy Private Limited - India
- Medco Energi Mining Internasional
- Global Business Power Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Orica Australia Pty. Ltd.
- Iligan Light & Power Inc, Philippines
- Metalloyd Limited - United Kingdom
- Siam City Cement - Thailand
- Sarangani Energy Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Aditya Birla Group - India
- Therma Luzon, Inc, Philippines
- Global Coal Blending Company Limited - Australia
- Kumho Petrochemical, South Korea
- Kobexindo Tractors - Indoneisa
- Minerals Council of Australia
- AsiaOL BioFuels Corp., Philippines
- Essar Steel Hazira Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Thiess Contractors Indonesia
- Bangladesh Power Developement Board
- Standard Chartered Bank - UAE
- Maheswari Brothers Coal Limited - India
- Kapuas Tunggal Persada - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Coal and Oil Company - UAE
- Central Electricity Authority - India
- Cement Manufacturers Association - India
- London Commodity Brokers - England
- Banpu Public Company Limited - Thailand
- Orica Mining Services - Indonesia
- Electricity Generating Authority of Thailand
- TeaM Sual Corporation - Philippines
- Mercuria Energy - Indonesia
- Xindia Steels Limited - India
- Ministry of Finance - Indonesia
- PTC India Limited - India
- Mintek Dendrill Indonesia
- Indian Energy Exchange, India
- Trasteel International SA, Italy
- Pendopo Energi Batubara - Indonesia
- Savvy Resources Ltd - HongKong
- Independent Power Producers Association of India
- Mercator Lines Limited - India
- Kaltim Prima Coal - Indonesia
- White Energy Company Limited
- Bhatia International Limited - India
- Mjunction Services Limited - India
- Miang Besar Coal Terminal - Indonesia
- Kartika Selabumi Mining - Indonesia
- Salva Resources Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Latin American Coal - Colombia
- The State Trading Corporation of India Ltd
- ICICI Bank Limited - India
- San Jose City I Power Corp, Philippines
- Indo Tambangraya Megah - Indonesia
- Indika Energy - Indonesia
- Heidelberg Cement - Germany
- Oldendorff Carriers - Singapore
- SMG Consultants - Indonesia
- PowerSource Philippines DevCo
- Marubeni Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Grasim Industreis Ltd - India
- Timah Investasi Mineral - Indoneisa
- IHS Mccloskey Coal Group - USA
- Bharathi Cement Corporation - India
- Chettinad Cement Corporation Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Anglo American - United Kingdom
- Economic Council, Georgia
- Ambuja Cements Ltd - India
- GMR Energy Limited - India
- Simpson Spence & Young - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Intertek Mineral Services - Indonesia
- GAC Shipping (India) Pvt Ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Borneo Indobara - Indonesia
- Port Waratah Coal Services - Australia
- Attock Cement Pakistan Limited
- Carbofer General Trading SA - India
- Neyveli Lignite Corporation Ltd, - India
- Gujarat Sidhee Cement - India
- Posco Energy - South Korea
- Kepco SPC Power Corporation, Philippines
- Bhoruka Overseas - Indonesia
- McConnell Dowell - Australia
- Aboitiz Power Corporation - Philippines
- Renaissance Capital - South Africa
- Karbindo Abesyapradhi - Indoneisa
- Bahari Cakrawala Sebuku - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Australian Coal Association
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Romanian Commodities Exchange
- Karaikal Port Pvt Ltd - India
- International Coal Ventures Pvt Ltd - India
- Sindya Power Generating Company Private Ltd
- OPG Power Generation Pvt Ltd - India
- Kideco Jaya Agung - Indonesia
- Toyota Tsusho Corporation, Japan
- Goldman Sachs - Singapore
- The University of Queensland
- Singapore Mercantile Exchange
- Tamil Nadu electricity Board
- Ceylon Electricity Board - Sri Lanka
- Samtan Co., Ltd - South Korea
- Jindal Steel & Power Ltd - India
- Gujarat Electricity Regulatory Commission - India
- India Bulls Power Limited - India
- Petron Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- Makarim & Taira - Indonesia
- Coastal Gujarat Power Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Petrochimia International Co. Ltd.- Taiwan
- Vizag Seaport Private Limited - India
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