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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, 14 December 15
CFR SOUTH CHINA COAL SWAP IS STILL SLIDING
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery declined US$ 0.93(2.18%) per ton month over month.
A commodity swap ...
Sunday, 13 December 15
THE LOW VESSEL DEMANDS PUSHED DOWN BALTIC DRY INDEX FURTHER DOWN
COALspot.com: The low vessel demand across nearly all vessel sizes pushed the Baltic Exchange’s main sea freight index further down in this F ...
Sunday, 13 December 15
DRY BULK RATES KEEP ON FALLING AS LOW VESSEL DEMAND IS STILL THE NORM - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market nowadays is in an endless downward spiral, which as it turns out is unable to recover, at least as long as the current balance ...
Friday, 11 December 15
US COAL PRODUCTION UP 7.7% IN WEEK ENDED DECEMBER 5, 2015
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 16.1 million shor ...
Thursday, 10 December 15
LIENING CARGO - WHICH LIEN CLAUSE APPLIES TO THE BILL OF LADING? : WIKBORG REIN | HELLENIC SHIPPING NEWS
KNOWLEDGE TO ELEVATE
In a dry bulk market where a charterer is not paying freight or hire, its counterparty is often left to consider whether ...
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- Kobexindo Tractors - Indoneisa
- SN Aboitiz Power Inc, Philippines
- Barasentosa Lestari - Indonesia
- Eastern Energy - Thailand
- Semirara Mining and Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Vizag Seaport Private Limited - India
- Globalindo Alam Lestari - Indonesia
- Directorate Of Revenue Intelligence - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Salva Resources Pvt Ltd - India
- Africa Commodities Group - South Africa
- Standard Chartered Bank - UAE
- Marubeni Corporation - India
- Borneo Indobara - Indonesia
- Parry Sugars Refinery, India
- Karbindo Abesyapradhi - Indoneisa
- Georgia Ports Authority, United States
- Metalloyd Limited - United Kingdom
- Energy Development Corp, Philippines
- Attock Cement Pakistan Limited
- Sree Jayajothi Cements Limited - India
- Planning Commission, India
- Maheswari Brothers Coal Limited - India
- Vedanta Resources Plc - India
- Jindal Steel & Power Ltd - India
- Essar Steel Hazira Ltd - India
- White Energy Company Limited
- IEA Clean Coal Centre - UK
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Heidelberg Cement - Germany
- Petron Corporation, Philippines
- Global Green Power PLC Corporation, Philippines
- CIMB Investment Bank - Malaysia
- Timah Investasi Mineral - Indoneisa
- Sical Logistics Limited - India
- Billiton Holdings Pty Ltd - Australia
- CNBM International Corporation - China
- Semirara Mining Corp, Philippines
- Economic Council, Georgia
- Kideco Jaya Agung - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Tata Chemicals Ltd - India
- San Jose City I Power Corp, Philippines
- Formosa Plastics Group - Taiwan
- Power Finance Corporation Ltd., India
- Binh Thuan Hamico - Vietnam
- Posco Energy - South Korea
- Jaiprakash Power Ventures ltd
- Eastern Coal Council - USA
- Kartika Selabumi Mining - Indonesia
- Kumho Petrochemical, South Korea
- Renaissance Capital - South Africa
- Kohat Cement Company Ltd. - Pakistan
- McConnell Dowell - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Global Coal Blending Company Limited - Australia
- Meralco Power Generation, Philippines
- Sakthi Sugars Limited - India
- LBH Netherlands Bv - Netherlands
- Independent Power Producers Association of India
- Central Electricity Authority - India
- Xindia Steels Limited - India
- Rashtriya Ispat Nigam Limited - India
- Dalmia Cement Bharat India
- IHS Mccloskey Coal Group - USA
- New Zealand Coal & Carbon
- Mercator Lines Limited - India
- South Luzon Thermal Energy Corporation
- Edison Trading Spa - Italy
- Neyveli Lignite Corporation Ltd, - India
- Coastal Gujarat Power Limited - India
- Bukit Baiduri Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- Sojitz Corporation - Japan
- Electricity Authority, New Zealand
- Toyota Tsusho Corporation, Japan
- Bhatia International Limited - India
- Mintek Dendrill Indonesia
- Leighton Contractors Pty Ltd - Australia
- Ministry of Finance - Indonesia
- Larsen & Toubro Limited - India
- MS Steel International - UAE
- Miang Besar Coal Terminal - Indonesia
- Indian Energy Exchange, India
- The State Trading Corporation of India Ltd
- The Treasury - Australian Government
- Bukit Asam (Persero) Tbk - Indonesia
- Star Paper Mills Limited - India
- AsiaOL BioFuels Corp., Philippines
- Iligan Light & Power Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Latin American Coal - Colombia
- TeaM Sual Corporation - Philippines
- Banpu Public Company Limited - Thailand
- Kaltim Prima Coal - Indonesia
- Tamil Nadu electricity Board
- Central Java Power - Indonesia
- Intertek Mineral Services - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Ministry of Transport, Egypt
- GAC Shipping (India) Pvt Ltd
- PowerSource Philippines DevCo
- Trasteel International SA, Italy
- Siam City Cement PLC, Thailand
- Orica Mining Services - Indonesia
- Altura Mining Limited, Indonesia
- Pendopo Energi Batubara - Indonesia
- ICICI Bank Limited - India
- Mjunction Services Limited - India
- Sindya Power Generating Company Private Ltd
- Coal and Oil Company - UAE
- Lanco Infratech Ltd - India
- GMR Energy Limited - India
- Coalindo Energy - Indonesia
- Gujarat Sidhee Cement - India
- Cigading International Bulk Terminal - Indonesia
- Bulk Trading Sa - Switzerland
- Samtan Co., Ltd - South Korea
- SMG Consultants - Indonesia
- Baramulti Group, Indonesia
- PNOC Exploration Corporation - Philippines
- The University of Queensland
- Orica Australia Pty. Ltd.
- Aditya Birla Group - India
- Anglo American - United Kingdom
- Cement Manufacturers Association - India
- Indo Tambangraya Megah - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- India Bulls Power Limited - India
- Bharathi Cement Corporation - India
- Thai Mozambique Logistica
- Videocon Industries ltd - India
- Agrawal Coal Company - India
- Medco Energi Mining Internasional
- Petrochimia International Co. Ltd.- Taiwan
- Goldman Sachs - Singapore
- Sarangani Energy Corporation, Philippines
- Thiess Contractors Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Singapore Mercantile Exchange
- SMC Global Power, Philippines
- Madhucon Powers Ltd - India
- Savvy Resources Ltd - HongKong
- Kepco SPC Power Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Carbofer General Trading SA - India
- Straits Asia Resources Limited - Singapore
- Global Business Power Corporation, Philippines
- Gujarat Electricity Regulatory Commission - India
- Romanian Commodities Exchange
- Vijayanagar Sugar Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Bhushan Steel Limited - India
- Electricity Generating Authority of Thailand
- Malabar Cements Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Maharashtra Electricity Regulatory Commission - India
- Ind-Barath Power Infra Limited - India
- Merrill Lynch Commodities Europe
- Offshore Bulk Terminal Pte Ltd, Singapore
- Antam Resourcindo - Indonesia
- European Bulk Services B.V. - Netherlands
- Karaikal Port Pvt Ltd - India
- Indogreen Group - Indonesia
- Oldendorff Carriers - Singapore
- Mercuria Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Commonwealth Bank - Australia
- OPG Power Generation Pvt Ltd - India
- Australian Coal Association
- Therma Luzon, Inc, Philippines
- GVK Power & Infra Limited - India
- Parliament of New Zealand
- ASAPP Information Group - India
- Indian Oil Corporation Limited
- Jorong Barutama Greston.PT - Indonesia
- Bukit Makmur.PT - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- VISA Power Limited - India
- Rio Tinto Coal - Australia
- Ministry of Mines - Canada
- Indonesian Coal Mining Association
- Simpson Spence & Young - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Makarim & Taira - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Minerals Council of Australia
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- Directorate General of MIneral and Coal - Indonesia
- Bayan Resources Tbk. - Indonesia
- International Coal Ventures Pvt Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Chamber of Mines of South Africa
- Riau Bara Harum - Indonesia
- Grasim Industreis Ltd - India
- Wilmar Investment Holdings
- PTC India Limited - India
- Port Waratah Coal Services - Australia
- London Commodity Brokers - England
- Krishnapatnam Port Company Ltd. - India
- Ceylon Electricity Board - Sri Lanka
- Price Waterhouse Coopers - Russia
- Bank of Tokyo Mitsubishi UFJ Ltd
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- Siam City Cement - Thailand
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- Australian Commodity Traders Exchange
- Wood Mackenzie - Singapore
- Aboitiz Power Corporation - Philippines
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