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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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Saturday, 26 December 15
FOB INDONESIA COAL SWAPS KEEP DROPPING
COALspot.com: Indonesian coal swap delivery Q1 2016 declined month on month and week over week.
According to AsiaClear OTC coal swap's rep ...
Friday, 25 December 15
WEEKLY US COAL PRODUCTION ESTIMATES DIP 8.5%
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 14.7 million shor ...
Thursday, 24 December 15
Q3' 16 FOB RICHARDS BAY COAL SWAP SHED US$ 0.60 PER TON OVER WEEK, AND STANDS AT US$ 43.25 PER TON
COALspot.com: Q1’ 2016 API4 FOB Richards Bay Coal swap decline month over month and slightly up week over week.
The Q1’ 2016 FOB R ...
Thursday, 24 December 15
GLOBAL MARINE FUEL REGULATIONS COULD SHOCK REFINING AND OIL MARKETS - OPEC | HELLENIC SHIPPING NEWS
IMO regulations call for global standards for sulphur content in marine fuel to be tightened to 0.5% from its present 3.5%. There is uncertainty ov ...
Thursday, 24 December 15
DRY BULKERS' VALUES ARE PLUNGING - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Dry bulk carriers’ values are falling across the board, as the fall of freight rates is taking its toll, as is to be expected. In fact, accor ...
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- Latin American Coal - Colombia
- Australian Coal Association
- Economic Council, Georgia
- Commonwealth Bank - Australia
- Ambuja Cements Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Banpu Public Company Limited - Thailand
- Carbofer General Trading SA - India
- Antam Resourcindo - Indonesia
- GVK Power & Infra Limited - India
- Petron Corporation, Philippines
- Australian Commodity Traders Exchange
- ASAPP Information Group - India
- Intertek Mineral Services - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- GAC Shipping (India) Pvt Ltd
- Samtan Co., Ltd - South Korea
- Eastern Coal Council - USA
- Krishnapatnam Port Company Ltd. - India
- Georgia Ports Authority, United States
- Agrawal Coal Company - India
- Eastern Energy - Thailand
- Price Waterhouse Coopers - Russia
- Power Finance Corporation Ltd., India
- Pipit Mutiara Jaya. PT, Indonesia
- Coalindo Energy - Indonesia
- Bukit Makmur.PT - Indonesia
- India Bulls Power Limited - India
- MS Steel International - UAE
- Thiess Contractors Indonesia
- Thai Mozambique Logistica
- Gujarat Mineral Development Corp Ltd - India
- Xindia Steels Limited - India
- Larsen & Toubro Limited - India
- Gujarat Sidhee Cement - India
- Wood Mackenzie - Singapore
- Semirara Mining Corp, Philippines
- Miang Besar Coal Terminal - Indonesia
- Toyota Tsusho Corporation, Japan
- Parliament of New Zealand
- Africa Commodities Group - South Africa
- Energy Development Corp, Philippines
- LBH Netherlands Bv - Netherlands
- Karbindo Abesyapradhi - Indoneisa
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Siam City Cement - Thailand
- Metalloyd Limited - United Kingdom
- Bhatia International Limited - India
- Bulk Trading Sa - Switzerland
- Port Waratah Coal Services - Australia
- Kohat Cement Company Ltd. - Pakistan
- Standard Chartered Bank - UAE
- Indogreen Group - Indonesia
- The Treasury - Australian Government
- Binh Thuan Hamico - Vietnam
- Bayan Resources Tbk. - Indonesia
- Ind-Barath Power Infra Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Tata Chemicals Ltd - India
- Edison Trading Spa - Italy
- CIMB Investment Bank - Malaysia
- Jaiprakash Power Ventures ltd
- London Commodity Brokers - England
- New Zealand Coal & Carbon
- Billiton Holdings Pty Ltd - Australia
- Romanian Commodities Exchange
- Videocon Industries ltd - India
- SN Aboitiz Power Inc, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Sindya Power Generating Company Private Ltd
- Holcim Trading Pte Ltd - Singapore
- Indian Energy Exchange, India
- Singapore Mercantile Exchange
- Rio Tinto Coal - Australia
- Leighton Contractors Pty Ltd - Australia
- Indo Tambangraya Megah - Indonesia
- Tamil Nadu electricity Board
- Goldman Sachs - Singapore
- Bangladesh Power Developement Board
- White Energy Company Limited
- Semirara Mining and Power Corporation, Philippines
- Anglo American - United Kingdom
- Kalimantan Lumbung Energi - Indonesia
- Minerals Council of Australia
- Makarim & Taira - Indonesia
- OPG Power Generation Pvt Ltd - India
- TeaM Sual Corporation - Philippines
- Petrochimia International Co. Ltd.- Taiwan
- PowerSource Philippines DevCo
- Therma Luzon, Inc, Philippines
- Maheswari Brothers Coal Limited - India
- Karaikal Port Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Simpson Spence & Young - Indonesia
- Heidelberg Cement - Germany
- Borneo Indobara - Indonesia
- Sakthi Sugars Limited - India
- San Jose City I Power Corp, Philippines
- Vedanta Resources Plc - India
- Attock Cement Pakistan Limited
- Madhucon Powers Ltd - India
- Merrill Lynch Commodities Europe
- Kartika Selabumi Mining - Indonesia
- Global Green Power PLC Corporation, Philippines
- Straits Asia Resources Limited - Singapore
- Central Electricity Authority - India
- Manunggal Multi Energi - Indonesia
- GMR Energy Limited - India
- The University of Queensland
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Coastal Gujarat Power Limited - India
- CNBM International Corporation - China
- Ministry of Transport, Egypt
- Ministry of Finance - Indonesia
- Savvy Resources Ltd - HongKong
- International Coal Ventures Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Dalmia Cement Bharat India
- Cement Manufacturers Association - India
- ICICI Bank Limited - India
- AsiaOL BioFuels Corp., Philippines
- Coal and Oil Company - UAE
- PNOC Exploration Corporation - Philippines
- GN Power Mariveles Coal Plant, Philippines
- Iligan Light & Power Inc, Philippines
- Timah Investasi Mineral - Indoneisa
- Energy Link Ltd, New Zealand
- Siam City Cement PLC, Thailand
- Essar Steel Hazira Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- McConnell Dowell - Australia
- Malabar Cements Ltd - India
- Baramulti Group, Indonesia
- Orica Mining Services - Indonesia
- IHS Mccloskey Coal Group - USA
- Kapuas Tunggal Persada - Indonesia
- Medco Energi Mining Internasional
- The State Trading Corporation of India Ltd
- Barasentosa Lestari - Indonesia
- Kepco SPC Power Corporation, Philippines
- Sarangani Energy Corporation, Philippines
- Bharathi Cement Corporation - India
- Wilmar Investment Holdings
- Uttam Galva Steels Limited - India
- Posco Energy - South Korea
- Parry Sugars Refinery, India
- Meralco Power Generation, Philippines
- Salva Resources Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Meenaskhi Energy Private Limited - India
- Indonesian Coal Mining Association
- Directorate Of Revenue Intelligence - India
- Sojitz Corporation - Japan
- Electricity Generating Authority of Thailand
- Mercuria Energy - Indonesia
- Aboitiz Power Corporation - Philippines
- Mercator Lines Limited - India
- South Luzon Thermal Energy Corporation
- Interocean Group of Companies - India
- Kideco Jaya Agung - Indonesia
- Altura Mining Limited, Indonesia
- Asmin Koalindo Tuhup - Indonesia
- SMC Global Power, Philippines
- Kumho Petrochemical, South Korea
- TNB Fuel Sdn Bhd - Malaysia
- Renaissance Capital - South Africa
- Mjunction Services Limited - India
- Gujarat Electricity Regulatory Commission - India
- Global Coal Blending Company Limited - Australia
- Sical Logistics Limited - India
- Orica Australia Pty. Ltd.
- Offshore Bulk Terminal Pte Ltd, Singapore
- Deloitte Consulting - India
- Indian Oil Corporation Limited
- SMG Consultants - Indonesia
- Central Java Power - Indonesia
- Star Paper Mills Limited - India
- Independent Power Producers Association of India
- Marubeni Corporation - India
- Neyveli Lignite Corporation Ltd, - India
- Bahari Cakrawala Sebuku - Indonesia
- Grasim Industreis Ltd - India
- Lanco Infratech Ltd - India
- Electricity Authority, New Zealand
- Globalindo Alam Lestari - Indonesia
- Planning Commission, India
- Directorate General of MIneral and Coal - Indonesia
- Aditya Birla Group - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhoruka Overseas - Indonesia
- IEA Clean Coal Centre - UK
- Global Business Power Corporation, Philippines
- Bhushan Steel Limited - India
- Trasteel International SA, Italy
- Ministry of Mines - Canada
- Vijayanagar Sugar Pvt Ltd - India
- PTC India Limited - India
- Chamber of Mines of South Africa
- Kobexindo Tractors - Indoneisa
- Sinarmas Energy and Mining - Indonesia
- Riau Bara Harum - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indika Energy - Indonesia
- Mintek Dendrill Indonesia
- Kaltim Prima Coal - Indonesia
- Formosa Plastics Group - Taiwan
- Rashtriya Ispat Nigam Limited - India
- Jindal Steel & Power Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- Chettinad Cement Corporation Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Sree Jayajothi Cements Limited - India
- Ceylon Electricity Board - Sri Lanka
- VISA Power Limited - India
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