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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, 31 December 15
2016 FOB NEWCASTLE COAL SWAP RALLY TO CLOSE AT $37.98/TON
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery rose another $1.48 per ton (4.05%) this past week compared to the sam ...
Wednesday, 30 December 15
FINAL DEALS OF THE YEAR TAKING PLACE, AS SHIP OWNERS PREPARE FOR 2016 - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The Holidays’ investment lull has taken a grip over the newbuilding and S&P market for second hand vessels, as shipbrokers are reporting ...
Tuesday, 29 December 15
CFR SOUTH CHINA COAL SWAPS ROSE MONTH OVER MONTH
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery rose US$ 0.68 (1.64%) per ton month over month.
A commodity swap is ...
Monday, 28 December 15
Q2' 15 U.S. STEAM COAL EXPORTS TOTALED 7.0 MMST; DOWN 16.9% FROM Q1 2015 - EIA
COALspot.com: U.S. coal production during second quarter 2015 totaled 211.1 million short tons.
According to EIA’s preliminary quarterly ...
Monday, 28 December 15
NOVEMBER NEWCASTLE COAL EXPORTS DECLINED 11.87%; THE AVERAGE PRICE OF COAL EXPORTS ROSE 1.37%
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port has shipped $1.120 billio ...
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- Central Java Power - Indonesia
- Formosa Plastics Group - Taiwan
- Cement Manufacturers Association - India
- Jorong Barutama Greston.PT - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Kalimantan Lumbung Energi - Indonesia
- SN Aboitiz Power Inc, Philippines
- Eastern Energy - Thailand
- Australian Coal Association
- Uttam Galva Steels Limited - India
- Ministry of Mines - Canada
- Cigading International Bulk Terminal - Indonesia
- Sakthi Sugars Limited - India
- Bayan Resources Tbk. - Indonesia
- Toyota Tsusho Corporation, Japan
- IEA Clean Coal Centre - UK
- Bhushan Steel Limited - India
- Indogreen Group - Indonesia
- Borneo Indobara - Indonesia
- Baramulti Group, Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Petrochimia International Co. Ltd.- Taiwan
- Videocon Industries ltd - India
- Sree Jayajothi Cements Limited - India
- Holcim Trading Pte Ltd - Singapore
- Indian Oil Corporation Limited
- Coastal Gujarat Power Limited - India
- Iligan Light & Power Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Siam City Cement PLC, Thailand
- Pipit Mutiara Jaya. PT, Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Commonwealth Bank - Australia
- Star Paper Mills Limited - India
- Jindal Steel & Power Ltd - India
- PTC India Limited - India
- White Energy Company Limited
- Interocean Group of Companies - India
- Bhoruka Overseas - Indonesia
- Meralco Power Generation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ceylon Electricity Board - Sri Lanka
- Kideco Jaya Agung - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Mercator Lines Limited - India
- International Coal Ventures Pvt Ltd - India
- Binh Thuan Hamico - Vietnam
- Pendopo Energi Batubara - Indonesia
- Petron Corporation, Philippines
- Vedanta Resources Plc - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Romanian Commodities Exchange
- Edison Trading Spa - Italy
- India Bulls Power Limited - India
- TeaM Sual Corporation - Philippines
- GN Power Mariveles Coal Plant, Philippines
- GMR Energy Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bharathi Cement Corporation - India
- Gujarat Sidhee Cement - India
- GAC Shipping (India) Pvt Ltd
- Standard Chartered Bank - UAE
- Grasim Industreis Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- San Jose City I Power Corp, Philippines
- Coalindo Energy - Indonesia
- Directorate Of Revenue Intelligence - India
- Energy Development Corp, Philippines
- Leighton Contractors Pty Ltd - Australia
- Kapuas Tunggal Persada - Indonesia
- Renaissance Capital - South Africa
- Orica Mining Services - Indonesia
- LBH Netherlands Bv - Netherlands
- Lanco Infratech Ltd - India
- Malabar Cements Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Kumho Petrochemical, South Korea
- New Zealand Coal & Carbon
- Banpu Public Company Limited - Thailand
- Kartika Selabumi Mining - Indonesia
- Australian Commodity Traders Exchange
- McConnell Dowell - Australia
- Deloitte Consulting - India
- Billiton Holdings Pty Ltd - Australia
- European Bulk Services B.V. - Netherlands
- Essar Steel Hazira Ltd - India
- Jaiprakash Power Ventures ltd
- Global Business Power Corporation, Philippines
- Mercuria Energy - Indonesia
- Independent Power Producers Association of India
- Marubeni Corporation - India
- Manunggal Multi Energi - Indonesia
- Tata Chemicals Ltd - India
- Metalloyd Limited - United Kingdom
- Therma Luzon, Inc, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Sojitz Corporation - Japan
- Altura Mining Limited, Indonesia
- Central Electricity Authority - India
- Ambuja Cements Ltd - India
- Power Finance Corporation Ltd., India
- Sindya Power Generating Company Private Ltd
- Larsen & Toubro Limited - India
- Rio Tinto Coal - Australia
- The State Trading Corporation of India Ltd
- Kohat Cement Company Ltd. - Pakistan
- Karbindo Abesyapradhi - Indoneisa
- Heidelberg Cement - Germany
- Kepco SPC Power Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Vizag Seaport Private Limited - India
- Sical Logistics Limited - India
- Planning Commission, India
- CNBM International Corporation - China
- Directorate General of MIneral and Coal - Indonesia
- Kobexindo Tractors - Indoneisa
- CIMB Investment Bank - Malaysia
- Chettinad Cement Corporation Ltd - India
- Globalindo Alam Lestari - Indonesia
- SMC Global Power, Philippines
- Semirara Mining Corp, Philippines
- Xindia Steels Limited - India
- Sinarmas Energy and Mining - Indonesia
- Indian Energy Exchange, India
- Dalmia Cement Bharat India
- Bhatia International Limited - India
- Anglo American - United Kingdom
- London Commodity Brokers - England
- Maheswari Brothers Coal Limited - India
- Merrill Lynch Commodities Europe
- PowerSource Philippines DevCo
- Eastern Coal Council - USA
- Agrawal Coal Company - India
- Madhucon Powers Ltd - India
- Savvy Resources Ltd - HongKong
- Global Coal Blending Company Limited - Australia
- Attock Cement Pakistan Limited
- Barasentosa Lestari - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Simpson Spence & Young - Indonesia
- Indo Tambangraya Megah - Indonesia
- OPG Power Generation Pvt Ltd - India
- The Treasury - Australian Government
- Siam City Cement - Thailand
- Thiess Contractors Indonesia
- Kaltim Prima Coal - Indonesia
- Singapore Mercantile Exchange
- Minerals Council of Australia
- SMG Consultants - Indonesia
- Intertek Mineral Services - Indonesia
- Ind-Barath Power Infra Limited - India
- Antam Resourcindo - Indonesia
- Karaikal Port Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Ministry of Transport, Egypt
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- Energy Link Ltd, New Zealand
- IHS Mccloskey Coal Group - USA
- PNOC Exploration Corporation - Philippines
- Parry Sugars Refinery, India
- Ministry of Finance - Indonesia
- VISA Power Limited - India
- Straits Asia Resources Limited - Singapore
- Bangladesh Power Developement Board
- Bank of Tokyo Mitsubishi UFJ Ltd
- Posco Energy - South Korea
- Thai Mozambique Logistica
- GVK Power & Infra Limited - India
- Coal and Oil Company - UAE
- Electricity Generating Authority of Thailand
- The University of Queensland
- Mintek Dendrill Indonesia
- Bulk Trading Sa - Switzerland
- Port Waratah Coal Services - Australia
- Miang Besar Coal Terminal - Indonesia
- Oldendorff Carriers - Singapore
- MS Steel International - UAE
- Maharashtra Electricity Regulatory Commission - India
- Trasteel International SA, Italy
- Tamil Nadu electricity Board
- Krishnapatnam Port Company Ltd. - India
- Gujarat Mineral Development Corp Ltd - India
- Electricity Authority, New Zealand
- Makarim & Taira - Indonesia
- Medco Energi Mining Internasional
- Orica Australia Pty. Ltd.
- ICICI Bank Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Aboitiz Power Corporation - Philippines
- Georgia Ports Authority, United States
- Indonesian Coal Mining Association
- Alfred C Toepfer International GmbH - Germany
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Samtan Co., Ltd - South Korea
- Wood Mackenzie - Singapore
- Indika Energy - Indonesia
- Timah Investasi Mineral - Indoneisa
- Wilmar Investment Holdings
- Africa Commodities Group - South Africa
- Riau Bara Harum - Indonesia
- Goldman Sachs - Singapore
- Meenaskhi Energy Private Limited - India
- Latin American Coal - Colombia
- South Luzon Thermal Energy Corporation
- Bukit Asam (Persero) Tbk - Indonesia
- Price Waterhouse Coopers - Russia
- Mjunction Services Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- ASAPP Information Group - India
- Economic Council, Georgia
- Aditya Birla Group - India
- Salva Resources Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Chamber of Mines of South Africa
- Parliament of New Zealand
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