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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, 08 December 15
Q1' 16 API 5 FOB NEWCASTLE COAL SWAP CLOSED AT $ 36.73 A TON; 1.73% HIGHER COMPARED TO Q3' 16 PRICE
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery slid $1.47 per ton (3.85%) month over month to US$ 36.73 per ton. The swap ...
Tuesday, 08 December 15
HOW TO MITIGATE LEGAL RISKS WHEN PURCHASING BUNKERS - LESSONS LEARNED FROM THE OW BUNKER COLLAPSE - THE SWEDISH CLUB
KNOWLEDGE TO ELEVATE
About a year has passed since OW Bunker & Trading A/S filed for bankruptcy. The collapse shows that there are signifi ...
Monday, 07 December 15
5000 GAR CS (I) COAL INDEX REMAIN THE SAME OVER LAST WEEK
COALspot.com: The 5000 GAR CS (i) coal index remain the same over last week.
According to the CS (i) coal (system generated) index, the CS 50 ...
Monday, 07 December 15
COAL DEMAND IN 2016 FAILS TO SUPPORT PRICES; CFR SOUTH CHINA COAL SWAPS SEEN AT $US 42 A TON
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery declined US$ 1.70 (3.88%) per ton month over month.
A commodity swap ...
Sunday, 06 December 15
THE BDI DECLINED BY 3.09 PERCENT TO 563 POINTS ON 4 DECEMBER
COALspot.com: The BDI declined by 3.09 percent to 563 points on 4 December 2015.
The Cape index was also declined by 10.01 percent to 890 poin ...
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- CIMB Investment Bank - Malaysia
- Mjunction Services Limited - India
- Chettinad Cement Corporation Ltd - India
- South Luzon Thermal Energy Corporation
- Altura Mining Limited, Indonesia
- Sindya Power Generating Company Private Ltd
- Semirara Mining and Power Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Parry Sugars Refinery, India
- TNB Fuel Sdn Bhd - Malaysia
- Samtan Co., Ltd - South Korea
- Vizag Seaport Private Limited - India
- Chamber of Mines of South Africa
- Kartika Selabumi Mining - Indonesia
- IHS Mccloskey Coal Group - USA
- Aboitiz Power Corporation - Philippines
- Grasim Industreis Ltd - India
- Marubeni Corporation - India
- London Commodity Brokers - England
- Kepco SPC Power Corporation, Philippines
- GVK Power & Infra Limited - India
- Latin American Coal - Colombia
- Barasentosa Lestari - Indonesia
- OPG Power Generation Pvt Ltd - India
- Tamil Nadu electricity Board
- Karbindo Abesyapradhi - Indoneisa
- Mercator Lines Limited - India
- Posco Energy - South Korea
- GMR Energy Limited - India
- Ambuja Cements Ltd - India
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- GAC Shipping (India) Pvt Ltd
- Bhatia International Limited - India
- Renaissance Capital - South Africa
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Trasteel International SA, Italy
- Standard Chartered Bank - UAE
- Bukit Baiduri Energy - Indonesia
- Deloitte Consulting - India
- Makarim & Taira - Indonesia
- Sarangani Energy Corporation, Philippines
- IEA Clean Coal Centre - UK
- SN Aboitiz Power Inc, Philippines
- Thiess Contractors Indonesia
- Medco Energi Mining Internasional
- Vedanta Resources Plc - India
- AsiaOL BioFuels Corp., Philippines
- Formosa Plastics Group - Taiwan
- European Bulk Services B.V. - Netherlands
- Rio Tinto Coal - Australia
- Straits Asia Resources Limited - Singapore
- The State Trading Corporation of India Ltd
- Videocon Industries ltd - India
- Thai Mozambique Logistica
- Kalimantan Lumbung Energi - Indonesia
- Pendopo Energi Batubara - Indonesia
- Jaiprakash Power Ventures ltd
- ICICI Bank Limited - India
- ASAPP Information Group - India
- Aditya Birla Group - India
- Romanian Commodities Exchange
- Anglo American - United Kingdom
- Siam City Cement PLC, Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bahari Cakrawala Sebuku - Indonesia
- Global Coal Blending Company Limited - Australia
- Bulk Trading Sa - Switzerland
- Planning Commission, India
- PowerSource Philippines DevCo
- Singapore Mercantile Exchange
- Bharathi Cement Corporation - India
- Siam City Cement - Thailand
- Timah Investasi Mineral - Indoneisa
- Leighton Contractors Pty Ltd - Australia
- Alfred C Toepfer International GmbH - Germany
- Bayan Resources Tbk. - Indonesia
- International Coal Ventures Pvt Ltd - India
- Sojitz Corporation - Japan
- Goldman Sachs - Singapore
- Simpson Spence & Young - Indonesia
- Banpu Public Company Limited - Thailand
- Indian Oil Corporation Limited
- Indonesian Coal Mining Association
- Ministry of Finance - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Cigading International Bulk Terminal - Indonesia
- Energy Link Ltd, New Zealand
- Electricity Generating Authority of Thailand
- PTC India Limited - India
- Bangladesh Power Developement Board
- Meenaskhi Energy Private Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Sinarmas Energy and Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Semirara Mining Corp, Philippines
- Wilmar Investment Holdings
- Global Green Power PLC Corporation, Philippines
- Savvy Resources Ltd - HongKong
- Eastern Energy - Thailand
- Coal and Oil Company - UAE
- Bank of Tokyo Mitsubishi UFJ Ltd
- Pipit Mutiara Jaya. PT, Indonesia
- Merrill Lynch Commodities Europe
- Lanco Infratech Ltd - India
- New Zealand Coal & Carbon
- MS Steel International - UAE
- Karaikal Port Pvt Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Kaltim Prima Coal - Indonesia
- Independent Power Producers Association of India
- Orica Australia Pty. Ltd.
- Essar Steel Hazira Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Bhushan Steel Limited - India
- Antam Resourcindo - Indonesia
- Eastern Coal Council - USA
- Port Waratah Coal Services - Australia
- Miang Besar Coal Terminal - Indonesia
- VISA Power Limited - India
- Globalindo Alam Lestari - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Gujarat Sidhee Cement - India
- Dalmia Cement Bharat India
- Gujarat Electricity Regulatory Commission - India
- Georgia Ports Authority, United States
- Iligan Light & Power Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coastal Gujarat Power Limited - India
- Jindal Steel & Power Ltd - India
- Meralco Power Generation, Philippines
- Xindia Steels Limited - India
- Power Finance Corporation Ltd., India
- Toyota Tsusho Corporation, Japan
- Price Waterhouse Coopers - Russia
- Intertek Mineral Services - Indonesia
- Commonwealth Bank - Australia
- Sree Jayajothi Cements Limited - India
- The University of Queensland
- India Bulls Power Limited - India
- Cement Manufacturers Association - India
- TeaM Sual Corporation - Philippines
- Sakthi Sugars Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- McConnell Dowell - Australia
- Rashtriya Ispat Nigam Limited - India
- Parliament of New Zealand
- Maheswari Brothers Coal Limited - India
- Sical Logistics Limited - India
- Larsen & Toubro Limited - India
- Oldendorff Carriers - Singapore
- Australian Commodity Traders Exchange
- San Jose City I Power Corp, Philippines
- Kumho Petrochemical, South Korea
- Attock Cement Pakistan Limited
- Edison Trading Spa - Italy
- Economic Council, Georgia
- PNOC Exploration Corporation - Philippines
- Manunggal Multi Energi - Indonesia
- Therma Luzon, Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Mintek Dendrill Indonesia
- Salva Resources Pvt Ltd - India
- Global Business Power Corporation, Philippines
- Ceylon Electricity Board - Sri Lanka
- Star Paper Mills Limited - India
- Baramulti Group, Indonesia
- Agrawal Coal Company - India
- The Treasury - Australian Government
- Central Electricity Authority - India
- Bhoruka Overseas - Indonesia
- Borneo Indobara - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Australian Coal Association
- White Energy Company Limited
- Bukit Makmur.PT - Indonesia
- Wood Mackenzie - Singapore
- Ministry of Mines - Canada
- Krishnapatnam Port Company Ltd. - India
- Indika Energy - Indonesia
- Binh Thuan Hamico - Vietnam
- LBH Netherlands Bv - Netherlands
- Carbofer General Trading SA - India
- Billiton Holdings Pty Ltd - Australia
- Electricity Authority, New Zealand
- Directorate Of Revenue Intelligence - India
- Petron Corporation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Kideco Jaya Agung - Indonesia
- SMG Consultants - Indonesia
- SMC Global Power, Philippines
- Indo Tambangraya Megah - Indonesia
- Minerals Council of Australia
- Metalloyd Limited - United Kingdom
- Indogreen Group - Indonesia
- Africa Commodities Group - South Africa
- Kobexindo Tractors - Indoneisa
- Energy Development Corp, Philippines
- Ministry of Transport, Egypt
- Coalindo Energy - Indonesia
- Uttam Galva Steels Limited - India
- Riau Bara Harum - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Ind-Barath Power Infra Limited - India
- Orica Mining Services - Indonesia
- Mercuria Energy - Indonesia
- CNBM International Corporation - China
- Tata Chemicals Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Interocean Group of Companies - India
- Malabar Cements Ltd - India
- Indian Energy Exchange, India
- Heidelberg Cement - Germany
- PetroVietnam Power Coal Import and Supply Company
- Madhucon Powers Ltd - India
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