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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, 18 January 16
Q1'16 CFR SOUTH CHINA COAL SWAP CLOSED AT $ 42.50 PER TON; UP 1% MONTH OVER MONTH
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery rose US$ 0.43 (1.02%) per ton month over month.
A commodity swap is ...
Friday, 15 January 16
FOB INDONESIA COAL SWAPS FIRM SLIGHTLY LAST WEEK
COALspot.com: Indonesian coal swap delivery Q1 2016 declined month over month and week over week.
According to AsiaClear OTC coal swap's r ...
Friday, 15 January 16
SHIPPING: 2016 STARTED WITH MISERY ACROSS THE BOARD FOR SHIP OWNERS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
As one would have expected, the dry bulk market starter the new year where it left off in 2015, plunging to never seen before depths, as the market ...
Friday, 15 January 16
U.S. WEEKLY COAL PRODUCTION ROSE ACROSS ALL BASINS: EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 13.4 million shor ...
Thursday, 14 January 16
FOB RICHARDS BAY COAL SWAP FOR Q3 DELIVERY CLOSED $5.90 LOWER THAN Q1 PRICE
COALspot.com: Q1’ 2016 API4 FOB Richards Bay Coal swap up month over month and week over week.
The Q1’ 2016 FOB Richards Bay Coal ...
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- IHS Mccloskey Coal Group - USA
- OPG Power Generation Pvt Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Timah Investasi Mineral - Indoneisa
- Antam Resourcindo - Indonesia
- VISA Power Limited - India
- Therma Luzon, Inc, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Malabar Cements Ltd - India
- Medco Energi Mining Internasional
- Dalmia Cement Bharat India
- Heidelberg Cement - Germany
- Gujarat Electricity Regulatory Commission - India
- Leighton Contractors Pty Ltd - Australia
- Tamil Nadu electricity Board
- Ceylon Electricity Board - Sri Lanka
- Metalloyd Limited - United Kingdom
- Semirara Mining Corp, Philippines
- Kaltim Prima Coal - Indonesia
- Price Waterhouse Coopers - Russia
- Sinarmas Energy and Mining - Indonesia
- Rio Tinto Coal - Australia
- Deloitte Consulting - India
- Standard Chartered Bank - UAE
- The University of Queensland
- TeaM Sual Corporation - Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Karaikal Port Pvt Ltd - India
- Agrawal Coal Company - India
- Interocean Group of Companies - India
- Indika Energy - Indonesia
- Grasim Industreis Ltd - India
- Parry Sugars Refinery, India
- Salva Resources Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- Holcim Trading Pte Ltd - Singapore
- Energy Link Ltd, New Zealand
- MS Steel International - UAE
- Borneo Indobara - Indonesia
- Essar Steel Hazira Ltd - India
- Eastern Coal Council - USA
- Straits Asia Resources Limited - Singapore
- Coastal Gujarat Power Limited - India
- Ministry of Finance - Indonesia
- Siam City Cement PLC, Thailand
- TNB Fuel Sdn Bhd - Malaysia
- CNBM International Corporation - China
- Georgia Ports Authority, United States
- Jorong Barutama Greston.PT - Indonesia
- Siam City Cement - Thailand
- The State Trading Corporation of India Ltd
- Indo Tambangraya Megah - Indonesia
- Madhucon Powers Ltd - India
- PTC India Limited - India
- Kapuas Tunggal Persada - Indonesia
- Lanco Infratech Ltd - India
- Videocon Industries ltd - India
- SMC Global Power, Philippines
- GVK Power & Infra Limited - India
- Formosa Plastics Group - Taiwan
- Krishnapatnam Port Company Ltd. - India
- Miang Besar Coal Terminal - Indonesia
- Posco Energy - South Korea
- New Zealand Coal & Carbon
- Vijayanagar Sugar Pvt Ltd - India
- Planning Commission, India
- Coal and Oil Company - UAE
- Vizag Seaport Private Limited - India
- Bulk Trading Sa - Switzerland
- Semirara Mining and Power Corporation, Philippines
- GMR Energy Limited - India
- Bukit Baiduri Energy - Indonesia
- Bhatia International Limited - India
- SN Aboitiz Power Inc, Philippines
- ICICI Bank Limited - India
- Jindal Steel & Power Ltd - India
- Port Waratah Coal Services - Australia
- GN Power Mariveles Coal Plant, Philippines
- The Treasury - Australian Government
- Aditya Birla Group - India
- ASAPP Information Group - India
- Petrochimia International Co. Ltd.- Taiwan
- Sakthi Sugars Limited - India
- Mercator Lines Limited - India
- International Coal Ventures Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Intertek Mineral Services - Indonesia
- Global Green Power PLC Corporation, Philippines
- Tata Chemicals Ltd - India
- Larsen & Toubro Limited - India
- Power Finance Corporation Ltd., India
- Bukit Asam (Persero) Tbk - Indonesia
- Independent Power Producers Association of India
- Eastern Energy - Thailand
- LBH Netherlands Bv - Netherlands
- Samtan Co., Ltd - South Korea
- Trasteel International SA, Italy
- Chamber of Mines of South Africa
- Savvy Resources Ltd - HongKong
- Barasentosa Lestari - Indonesia
- Marubeni Corporation - India
- Romanian Commodities Exchange
- Mjunction Services Limited - India
- Kumho Petrochemical, South Korea
- Wood Mackenzie - Singapore
- Globalindo Alam Lestari - Indonesia
- Banpu Public Company Limited - Thailand
- Baramulti Group, Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Uttam Galva Steels Limited - India
- Altura Mining Limited, Indonesia
- Bhushan Steel Limited - India
- Xindia Steels Limited - India
- Central Electricity Authority - India
- Indonesian Coal Mining Association
- Economic Council, Georgia
- Indogreen Group - Indonesia
- Anglo American - United Kingdom
- Sojitz Corporation - Japan
- Binh Thuan Hamico - Vietnam
- Makarim & Taira - Indonesia
- Renaissance Capital - South Africa
- Parliament of New Zealand
- PetroVietnam Power Coal Import and Supply Company
- Directorate General of MIneral and Coal - Indonesia
- Bangladesh Power Developement Board
- Pipit Mutiara Jaya. PT, Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Carbofer General Trading SA - India
- Neyveli Lignite Corporation Ltd, - India
- IEA Clean Coal Centre - UK
- Sindya Power Generating Company Private Ltd
- Merrill Lynch Commodities Europe
- Ministry of Transport, Egypt
- South Luzon Thermal Energy Corporation
- Central Java Power - Indonesia
- Kobexindo Tractors - Indoneisa
- Karbindo Abesyapradhi - Indoneisa
- Cigading International Bulk Terminal - Indonesia
- Australian Commodity Traders Exchange
- Star Paper Mills Limited - India
- Electricity Authority, New Zealand
- India Bulls Power Limited - India
- Ministry of Mines - Canada
- Goldman Sachs - Singapore
- Sarangani Energy Corporation, Philippines
- Simpson Spence & Young - Indonesia
- Orica Mining Services - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Iligan Light & Power Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Meenaskhi Energy Private Limited - India
- San Jose City I Power Corp, Philippines
- Orica Australia Pty. Ltd.
- Mintek Dendrill Indonesia
- Petron Corporation, Philippines
- White Energy Company Limited
- Oldendorff Carriers - Singapore
- GAC Shipping (India) Pvt Ltd
- Toyota Tsusho Corporation, Japan
- McConnell Dowell - Australia
- Global Coal Blending Company Limited - Australia
- Billiton Holdings Pty Ltd - Australia
- Vedanta Resources Plc - India
- Riau Bara Harum - Indonesia
- Kepco SPC Power Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Indian Energy Exchange, India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Sidhee Cement - India
- Electricity Generating Authority of Thailand
- Singapore Mercantile Exchange
- Cement Manufacturers Association - India
- Chettinad Cement Corporation Ltd - India
- Edison Trading Spa - Italy
- Bukit Makmur.PT - Indonesia
- Africa Commodities Group - South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- London Commodity Brokers - England
- AsiaOL BioFuels Corp., Philippines
- Sical Logistics Limited - India
- Latin American Coal - Colombia
- Commonwealth Bank - Australia
- Australian Coal Association
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Indian Oil Corporation Limited
- Coalindo Energy - Indonesia
- Attock Cement Pakistan Limited
- Minerals Council of Australia
- Global Business Power Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Bhoruka Overseas - Indonesia
- PowerSource Philippines DevCo
- CIMB Investment Bank - Malaysia
- PNOC Exploration Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
- Directorate Of Revenue Intelligence - India
- Sree Jayajothi Cements Limited - India
- Ind-Barath Power Infra Limited - India
- Energy Development Corp, Philippines
- SMG Consultants - Indonesia
- Thiess Contractors Indonesia
- Ambuja Cements Ltd - India
- Manunggal Multi Energi - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Bharathi Cement Corporation - India
- Thai Mozambique Logistica
- Alfred C Toepfer International GmbH - Germany
- Kideco Jaya Agung - Indonesia
- Mercuria Energy - Indonesia
- Wilmar Investment Holdings
- Maheswari Brothers Coal Limited - India
- Meralco Power Generation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Jaiprakash Power Ventures ltd
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