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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, 05 January 16
THE SHIPPING MARKET IN 2015 AND LOOKING FORWARD - BIMCO
Global economy: menacing clouds in the sky cast a shadow on global economic developments 2015 never really took off, even though the global economi ...
Tuesday, 05 January 16
4200 GAR COAL INDEX FALL TOWARD $27;SLIPPED 28.05% YEAR-TO-DATE
COALspot.com: Average 5000 GAR coal index has not moved in the past week, averaging $40.12 per ton on last Thursday, according to CS (i) Coal Index ...
Monday, 04 January 16
CFR SOUTH CHINA COAL SWAP REMAIN FLAT OVER CHRISTMAS & NEW YEAR HOLIDAYS
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery rose US$ 0.68 (1.64%) per ton month over month.
A commodity swap is ...
Friday, 01 January 16
FOB INDONESIA COAL SWAP FOR Q1'16 DELIVERY CLOSED AT $36.75 PER TON
COALspot.com: Indonesian coal swap delivery Q1 2016 declined month on month but flat week over week.
According to AsiaClear OTC coal swap' ...
Thursday, 31 December 15
COAL PRICES FELL ON WEAK DEMAND
COALspot.com: Q1’ 2016 API4 FOB Richards Bay Coal swap decline month over month and slightly up week over week.
The Q1’ 2016 ...
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- New Zealand Coal & Carbon
- TNB Fuel Sdn Bhd - Malaysia
- The State Trading Corporation of India Ltd
- Australian Commodity Traders Exchange
- Chamber of Mines of South Africa
- India Bulls Power Limited - India
- GVK Power & Infra Limited - India
- Bhushan Steel Limited - India
- Energy Link Ltd, New Zealand
- OPG Power Generation Pvt Ltd - India
- Renaissance Capital - South Africa
- Latin American Coal - Colombia
- Larsen & Toubro Limited - India
- Krishnapatnam Port Company Ltd. - India
- Formosa Plastics Group - Taiwan
- Bhatia International Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Samtan Co., Ltd - South Korea
- Kalimantan Lumbung Energi - Indonesia
- Wilmar Investment Holdings
- Borneo Indobara - Indonesia
- Jindal Steel & Power Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Aditya Birla Group - India
- Holcim Trading Pte Ltd - Singapore
- San Jose City I Power Corp, Philippines
- Savvy Resources Ltd - HongKong
- South Luzon Thermal Energy Corporation
- Dalmia Cement Bharat India
- Thai Mozambique Logistica
- PTC India Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Indogreen Group - Indonesia
- Deloitte Consulting - India
- Kaltim Prima Coal - Indonesia
- IHS Mccloskey Coal Group - USA
- Mjunction Services Limited - India
- Star Paper Mills Limited - India
- Anglo American - United Kingdom
- Pipit Mutiara Jaya. PT, Indonesia
- Oldendorff Carriers - Singapore
- Electricity Generating Authority of Thailand
- Mintek Dendrill Indonesia
- Ministry of Finance - Indonesia
- Thiess Contractors Indonesia
- Power Finance Corporation Ltd., India
- Semirara Mining Corp, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Marubeni Corporation - India
- Global Coal Blending Company Limited - Australia
- Independent Power Producers Association of India
- Bhoruka Overseas - Indonesia
- London Commodity Brokers - England
- Gujarat Sidhee Cement - India
- Merrill Lynch Commodities Europe
- Antam Resourcindo - Indonesia
- Indonesian Coal Mining Association
- Petron Corporation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Kobexindo Tractors - Indoneisa
- Tata Chemicals Ltd - India
- Posco Energy - South Korea
- Ind-Barath Power Infra Limited - India
- SMG Consultants - Indonesia
- Agrawal Coal Company - India
- Baramulti Group, Indonesia
- Bangladesh Power Developement Board
- Goldman Sachs - Singapore
- Siam City Cement - Thailand
- Economic Council, Georgia
- Grasim Industreis Ltd - India
- Africa Commodities Group - South Africa
- Indo Tambangraya Megah - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Carbofer General Trading SA - India
- Romanian Commodities Exchange
- Georgia Ports Authority, United States
- Standard Chartered Bank - UAE
- Binh Thuan Hamico - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Sical Logistics Limited - India
- Edison Trading Spa - Italy
- Maheswari Brothers Coal Limited - India
- Riau Bara Harum - Indonesia
- Wood Mackenzie - Singapore
- Medco Energi Mining Internasional
- Sindya Power Generating Company Private Ltd
- PetroVietnam Power Coal Import and Supply Company
- Directorate General of MIneral and Coal - Indonesia
- Therma Luzon, Inc, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sinarmas Energy and Mining - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Eastern Energy - Thailand
- Manunggal Multi Energi - Indonesia
- Bukit Makmur.PT - Indonesia
- SN Aboitiz Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Uttam Galva Steels Limited - India
- Sarangani Energy Corporation, Philippines
- Australian Coal Association
- Cigading International Bulk Terminal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- GAC Shipping (India) Pvt Ltd
- SMC Global Power, Philippines
- Bayan Resources Tbk. - Indonesia
- Interocean Group of Companies - India
- Pendopo Energi Batubara - Indonesia
- Iligan Light & Power Inc, Philippines
- Sree Jayajothi Cements Limited - India
- Barasentosa Lestari - Indonesia
- Chettinad Cement Corporation Ltd - India
- Mercuria Energy - Indonesia
- Indian Energy Exchange, India
- Vijayanagar Sugar Pvt Ltd - India
- Sakthi Sugars Limited - India
- Lanco Infratech Ltd - India
- Aboitiz Power Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kohat Cement Company Ltd. - Pakistan
- Ambuja Cements Ltd - India
- Orica Mining Services - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Petrochimia International Co. Ltd.- Taiwan
- Global Green Power PLC Corporation, Philippines
- Heidelberg Cement - Germany
- The Treasury - Australian Government
- Energy Development Corp, Philippines
- Makarim & Taira - Indonesia
- Eastern Coal Council - USA
- Indika Energy - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Port Waratah Coal Services - Australia
- Billiton Holdings Pty Ltd - Australia
- Karbindo Abesyapradhi - Indoneisa
- CNBM International Corporation - China
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Metalloyd Limited - United Kingdom
- Neyveli Lignite Corporation Ltd, - India
- Parry Sugars Refinery, India
- Kartika Selabumi Mining - Indonesia
- Bukit Baiduri Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Videocon Industries ltd - India
- Coalindo Energy - Indonesia
- TeaM Sual Corporation - Philippines
- Gujarat Mineral Development Corp Ltd - India
- The University of Queensland
- Electricity Authority, New Zealand
- Malabar Cements Ltd - India
- PowerSource Philippines DevCo
- Madhucon Powers Ltd - India
- Bharathi Cement Corporation - India
- Globalindo Alam Lestari - Indonesia
- Salva Resources Pvt Ltd - India
- Kepco SPC Power Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Straits Asia Resources Limited - Singapore
- Rio Tinto Coal - Australia
- Mercator Lines Limited - India
- CIMB Investment Bank - Malaysia
- Orica Australia Pty. Ltd.
- McConnell Dowell - Australia
- Minerals Council of Australia
- Indian Oil Corporation Limited
- Attock Cement Pakistan Limited
- Ministry of Mines - Canada
- European Bulk Services B.V. - Netherlands
- Intertek Mineral Services - Indonesia
- VISA Power Limited - India
- Price Waterhouse Coopers - Russia
- Karaikal Port Pvt Ltd - India
- Vedanta Resources Plc - India
- Siam City Cement PLC, Thailand
- White Energy Company Limited
- International Coal Ventures Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Xindia Steels Limited - India
- Miang Besar Coal Terminal - Indonesia
- LBH Netherlands Bv - Netherlands
- Bulk Trading Sa - Switzerland
- Jaiprakash Power Ventures ltd
- Sojitz Corporation - Japan
- Rashtriya Ispat Nigam Limited - India
- Toyota Tsusho Corporation, Japan
- Alfred C Toepfer International GmbH - Germany
- Coastal Gujarat Power Limited - India
- Simpson Spence & Young - Indonesia
- IEA Clean Coal Centre - UK
- MS Steel International - UAE
- Coal and Oil Company - UAE
- Commonwealth Bank - Australia
- Central Electricity Authority - India
- GMR Energy Limited - India
- Essar Steel Hazira Ltd - India
- Timah Investasi Mineral - Indoneisa
- Parliament of New Zealand
- Central Java Power - Indonesia
- Meralco Power Generation, Philippines
- Kideco Jaya Agung - Indonesia
- Kumho Petrochemical, South Korea
- Singapore Mercantile Exchange
- Trasteel International SA, Italy
- Tamil Nadu electricity Board
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Directorate Of Revenue Intelligence - India
- Leighton Contractors Pty Ltd - Australia
- Vizag Seaport Private Limited - India
- ICICI Bank Limited - India
- Ministry of Transport, Egypt
- Global Business Power Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Cement Manufacturers Association - India
- ASAPP Information Group - India
- Planning Commission, India
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