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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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Wednesday, 16 December 15
FOB RICHARDS BAY COAL SWAP SLUMP 5.5% FROM LAST MONTH
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q1’ 2016 decline month over month and week over week.
The Q1’ 2016 &nbs ...
Wednesday, 16 December 15
MARKET INSIGHT - KATERINA RESTIS
On Friday 4th of December the meeting of OPEC was held in Vienna, Austria. Since its last meeting, oil and product stock levels have continued to r ...
Tuesday, 15 December 15
THE GOVERNMENT DECLARED THERMAL COAL BENCHMARK PRICE CRASHING ONCE AGAIN
COALspot.com: Low coal demand and excess supplies sent Indonesian benchmark coal price down to below 2009 level. HBA has slumped by 1.69% mo ...
Tuesday, 15 December 15
API 5 FOB NEWCASTLE COAL SWAP FIRM W-W; WEAK M-M
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery slid $.13 per ton (0.35%) month over month to US$ 37.07 per ton. The swap w ...
Monday, 14 December 15
5000 GAR CS (I) COAL INDEX DECLINE US$ 0.04 PER TON W-O-W
COALspot.com: The 5000 GAR CS (i) coal index decline US$ 0.04 per ton (-0.10 %) week over week.
According to the CS (i) coal (system generated ...
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- Ministry of Finance - Indonesia
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- Alfred C Toepfer International GmbH - Germany
- Kohat Cement Company Ltd. - Pakistan
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- Iligan Light & Power Inc, Philippines
- Attock Cement Pakistan Limited
- Indian Oil Corporation Limited
- India Bulls Power Limited - India
- Wood Mackenzie - Singapore
- IEA Clean Coal Centre - UK
- The University of Queensland
- Grasim Industreis Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Electricity Generating Authority of Thailand
- Georgia Ports Authority, United States
- Riau Bara Harum - Indonesia
- Energy Development Corp, Philippines
- Commonwealth Bank - Australia
- Rio Tinto Coal - Australia
- Romanian Commodities Exchange
- Ambuja Cements Ltd - India
- Medco Energi Mining Internasional
- Renaissance Capital - South Africa
- Sree Jayajothi Cements Limited - India
- The Treasury - Australian Government
- Sojitz Corporation - Japan
- Carbofer General Trading SA - India
- Bukit Makmur.PT - Indonesia
- Bharathi Cement Corporation - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Binh Thuan Hamico - Vietnam
- Edison Trading Spa - Italy
- Indika Energy - Indonesia
- VISA Power Limited - India
- Star Paper Mills Limited - India
- Semirara Mining and Power Corporation, Philippines
- PowerSource Philippines DevCo
- Bukit Asam (Persero) Tbk - Indonesia
- Eastern Coal Council - USA
- Jindal Steel & Power Ltd - India
- Bhatia International Limited - India
- PNOC Exploration Corporation - Philippines
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- Wilmar Investment Holdings
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- London Commodity Brokers - England
- Miang Besar Coal Terminal - Indonesia
- Maheswari Brothers Coal Limited - India
- Bhushan Steel Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Essar Steel Hazira Ltd - India
- Vedanta Resources Plc - India
- The State Trading Corporation of India Ltd
- Trasteel International SA, Italy
- Pipit Mutiara Jaya. PT, Indonesia
- Simpson Spence & Young - Indonesia
- Bangladesh Power Developement Board
- Sakthi Sugars Limited - India
- Deloitte Consulting - India
- Cigading International Bulk Terminal - Indonesia
- Marubeni Corporation - India
- Billiton Holdings Pty Ltd - Australia
- Chettinad Cement Corporation Ltd - India
- Intertek Mineral Services - Indonesia
- Toyota Tsusho Corporation, Japan
- GN Power Mariveles Coal Plant, Philippines
- Sindya Power Generating Company Private Ltd
- Semirara Mining Corp, Philippines
- Standard Chartered Bank - UAE
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Gujarat Electricity Regulatory Commission - India
- Heidelberg Cement - Germany
- McConnell Dowell - Australia
- Aditya Birla Group - India
- White Energy Company Limited
- Minerals Council of Australia
- Tamil Nadu electricity Board
- Merrill Lynch Commodities Europe
- Latin American Coal - Colombia
- Larsen & Toubro Limited - India
- Thiess Contractors Indonesia
- Coastal Gujarat Power Limited - India
- Tata Chemicals Ltd - India
- Mercator Lines Limited - India
- Antam Resourcindo - Indonesia
- Videocon Industries ltd - India
- Karaikal Port Pvt Ltd - India
- Gujarat Sidhee Cement - India
- SMC Global Power, Philippines
- Directorate Of Revenue Intelligence - India
- Coal and Oil Company - UAE
- Orica Australia Pty. Ltd.
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Meralco Power Generation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Malabar Cements Ltd - India
- ICICI Bank Limited - India
- International Coal Ventures Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Orica Mining Services - Indonesia
- Goldman Sachs - Singapore
- Energy Link Ltd, New Zealand
- Global Coal Blending Company Limited - Australia
- SN Aboitiz Power Inc, Philippines
- Power Finance Corporation Ltd., India
- Mercuria Energy - Indonesia
- Aboitiz Power Corporation - Philippines
- Port Waratah Coal Services - Australia
- South Luzon Thermal Energy Corporation
- Neyveli Lignite Corporation Ltd, - India
- Singapore Mercantile Exchange
- Posco Energy - South Korea
- Central Electricity Authority - India
- Sical Logistics Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Salva Resources Pvt Ltd - India
- Samtan Co., Ltd - South Korea
- Australian Coal Association
- CIMB Investment Bank - Malaysia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GMR Energy Limited - India
- Meenaskhi Energy Private Limited - India
- LBH Netherlands Bv - Netherlands
- Electricity Authority, New Zealand
- Sarangani Energy Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Indian Energy Exchange, India
- PetroVietnam Power Coal Import and Supply Company
- Thai Mozambique Logistica
- Karbindo Abesyapradhi - Indoneisa
- European Bulk Services B.V. - Netherlands
- OPG Power Generation Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Ministry of Mines - Canada
- Bukit Baiduri Energy - Indonesia
- IHS Mccloskey Coal Group - USA
- Vizag Seaport Private Limited - India
- Indogreen Group - Indonesia
- Bayan Resources Tbk. - Indonesia
- Madhucon Powers Ltd - India
- Parry Sugars Refinery, India
- Kartika Selabumi Mining - Indonesia
- Lanco Infratech Ltd - India
- Indo Tambangraya Megah - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Coalindo Energy - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Eastern Energy - Thailand
- Siam City Cement PLC, Thailand
- Planning Commission, India
- Jaiprakash Power Ventures ltd
- Baramulti Group, Indonesia
- Mjunction Services Limited - India
- San Jose City I Power Corp, Philippines
- Ministry of Transport, Egypt
- Formosa Plastics Group - Taiwan
- Kepco SPC Power Corporation, Philippines
- Independent Power Producers Association of India
- Ceylon Electricity Board - Sri Lanka
- Altura Mining Limited, Indonesia
- Globalindo Alam Lestari - Indonesia
- Siam City Cement - Thailand
- ASAPP Information Group - India
- Leighton Contractors Pty Ltd - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Cement Manufacturers Association - India
- SMG Consultants - Indonesia
- Parliament of New Zealand
- Agrawal Coal Company - India
- CNBM International Corporation - China
- Ind-Barath Power Infra Limited - India
- PTC India Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Makarim & Taira - Indonesia
- Petron Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- MS Steel International - UAE
- Bulk Trading Sa - Switzerland
- Sinarmas Energy and Mining - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Price Waterhouse Coopers - Russia
- Borneo Indobara - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Barasentosa Lestari - Indonesia
- Economic Council, Georgia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Xindia Steels Limited - India
- Banpu Public Company Limited - Thailand
- Metalloyd Limited - United Kingdom
- Oldendorff Carriers - Singapore
- Krishnapatnam Port Company Ltd. - India
- Anglo American - United Kingdom
- GVK Power & Infra Limited - India
- Gujarat Mineral Development Corp Ltd - India
- New Zealand Coal & Carbon
- Holcim Trading Pte Ltd - Singapore
- Australian Commodity Traders Exchange
- Global Business Power Corporation, Philippines
- Global Green Power PLC Corporation, Philippines
- Straits Asia Resources Limited - Singapore
- Kumho Petrochemical, South Korea
- Mintek Dendrill Indonesia
- GAC Shipping (India) Pvt Ltd
- Rashtriya Ispat Nigam Limited - India
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- Africa Commodities Group - South Africa
- Timah Investasi Mineral - Indoneisa
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- Uttam Galva Steels Limited - India
- Interocean Group of Companies - India
- Chamber of Mines of South Africa
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- TeaM Sual Corporation - Philippines
- Maharashtra Electricity Regulatory Commission - India
- Indonesian Coal Mining Association
- Kideco Jaya Agung - Indonesia
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