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Thursday, 12 November 15
FOREIGN COAL MINE ACQUISITION - STRATEGY VERSUS OPPORTUNITY FOR INDIAN UTILITIES - DIPESH DIPU
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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- Petrochimia International Co. Ltd.- Taiwan
- Directorate Of Revenue Intelligence - India
- Indogreen Group - Indonesia
- Jindal Steel & Power Ltd - India
- Singapore Mercantile Exchange
- Australian Coal Association
- Latin American Coal - Colombia
- Cigading International Bulk Terminal - Indonesia
- Central Electricity Authority - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- CIMB Investment Bank - Malaysia
- Sindya Power Generating Company Private Ltd
- Aditya Birla Group - India
- McConnell Dowell - Australia
- Thai Mozambique Logistica
- Coal and Oil Company - UAE
- Renaissance Capital - South Africa
- Thiess Contractors Indonesia
- Bukit Makmur.PT - Indonesia
- Mintek Dendrill Indonesia
- Planning Commission, India
- TNB Fuel Sdn Bhd - Malaysia
- Energy Development Corp, Philippines
- Pendopo Energi Batubara - Indonesia
- IHS Mccloskey Coal Group - USA
- Gujarat Sidhee Cement - India
- Malabar Cements Ltd - India
- Indika Energy - Indonesia
- Savvy Resources Ltd - HongKong
- Orica Australia Pty. Ltd.
- Oldendorff Carriers - Singapore
- Essar Steel Hazira Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Therma Luzon, Inc, Philippines
- Sinarmas Energy and Mining - Indonesia
- Indonesian Coal Mining Association
- Sical Logistics Limited - India
- Ind-Barath Power Infra Limited - India
- Anglo American - United Kingdom
- Sakthi Sugars Limited - India
- Edison Trading Spa - Italy
- Bahari Cakrawala Sebuku - Indonesia
- Larsen & Toubro Limited - India
- Semirara Mining Corp, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Bhushan Steel Limited - India
- Banpu Public Company Limited - Thailand
- PNOC Exploration Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- LBH Netherlands Bv - Netherlands
- Indian Energy Exchange, India
- Marubeni Corporation - India
- The Treasury - Australian Government
- Bhoruka Overseas - Indonesia
- Electricity Authority, New Zealand
- Pipit Mutiara Jaya. PT, Indonesia
- Merrill Lynch Commodities Europe
- Africa Commodities Group - South Africa
- Makarim & Taira - Indonesia
- Meenaskhi Energy Private Limited - India
- Bayan Resources Tbk. - Indonesia
- Agrawal Coal Company - India
- Rashtriya Ispat Nigam Limited - India
- Mjunction Services Limited - India
- Metalloyd Limited - United Kingdom
- Posco Energy - South Korea
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coalindo Energy - Indonesia
- Ministry of Mines - Canada
- Jaiprakash Power Ventures ltd
- Standard Chartered Bank - UAE
- Carbofer General Trading SA - India
- Maharashtra Electricity Regulatory Commission - India
- GVK Power & Infra Limited - India
- Wood Mackenzie - Singapore
- Sree Jayajothi Cements Limited - India
- White Energy Company Limited
- Chamber of Mines of South Africa
- Karbindo Abesyapradhi - Indoneisa
- Kumho Petrochemical, South Korea
- Aboitiz Power Corporation - Philippines
- Bangladesh Power Developement Board
- Georgia Ports Authority, United States
- Simpson Spence & Young - Indonesia
- Tamil Nadu electricity Board
- Eastern Energy - Thailand
- Trasteel International SA, Italy
- Bukit Baiduri Energy - Indonesia
- Global Coal Blending Company Limited - Australia
- Deloitte Consulting - India
- Petron Corporation, Philippines
- SMG Consultants - Indonesia
- SN Aboitiz Power Inc, Philippines
- Madhucon Powers Ltd - India
- Global Business Power Corporation, Philippines
- New Zealand Coal & Carbon
- Indian Oil Corporation Limited
- Indo Tambangraya Megah - Indonesia
- Mercuria Energy - Indonesia
- Videocon Industries ltd - India
- Karaikal Port Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- Maheswari Brothers Coal Limited - India
- Antam Resourcindo - Indonesia
- Independent Power Producers Association of India
- Commonwealth Bank - Australia
- Electricity Generating Authority of Thailand
- Medco Energi Mining Internasional
- Globalindo Alam Lestari - Indonesia
- Timah Investasi Mineral - Indoneisa
- Sarangani Energy Corporation, Philippines
- Neyveli Lignite Corporation Ltd, - India
- MS Steel International - UAE
- Vedanta Resources Plc - India
- Grasim Industreis Ltd - India
- India Bulls Power Limited - India
- Goldman Sachs - Singapore
- Bulk Trading Sa - Switzerland
- Altura Mining Limited, Indonesia
- Vizag Seaport Private Limited - India
- Port Waratah Coal Services - Australia
- Kepco SPC Power Corporation, Philippines
- Dalmia Cement Bharat India
- European Bulk Services B.V. - Netherlands
- Kartika Selabumi Mining - Indonesia
- The University of Queensland
- ICICI Bank Limited - India
- Attock Cement Pakistan Limited
- Power Finance Corporation Ltd., India
- Australian Commodity Traders Exchange
- Riau Bara Harum - Indonesia
- International Coal Ventures Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Samtan Co., Ltd - South Korea
- Meralco Power Generation, Philippines
- Ministry of Transport, Egypt
- Ceylon Electricity Board - Sri Lanka
- Minerals Council of Australia
- Uttam Galva Steels Limited - India
- Central Java Power - Indonesia
- Alfred C Toepfer International GmbH - Germany
- AsiaOL BioFuels Corp., Philippines
- Binh Thuan Hamico - Vietnam
- PetroVietnam Power Coal Import and Supply Company
- Jorong Barutama Greston.PT - Indonesia
- Chettinad Cement Corporation Ltd - India
- ASAPP Information Group - India
- Rio Tinto Coal - Australia
- Interocean Group of Companies - India
- Gujarat Electricity Regulatory Commission - India
- Ambuja Cements Ltd - India
- Ministry of Finance - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kobexindo Tractors - Indoneisa
- Global Green Power PLC Corporation, Philippines
- Salva Resources Pvt Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Orica Mining Services - Indonesia
- Bhatia International Limited - India
- IEA Clean Coal Centre - UK
- Parry Sugars Refinery, India
- Xindia Steels Limited - India
- GMR Energy Limited - India
- Kaltim Prima Coal - Indonesia
- South Luzon Thermal Energy Corporation
- VISA Power Limited - India
- Asmin Koalindo Tuhup - Indonesia
- PTC India Limited - India
- Cement Manufacturers Association - India
- Bharathi Cement Corporation - India
- Directorate General of MIneral and Coal - Indonesia
- Krishnapatnam Port Company Ltd. - India
- San Jose City I Power Corp, Philippines
- Economic Council, Georgia
- GAC Shipping (India) Pvt Ltd
- London Commodity Brokers - England
- Straits Asia Resources Limited - Singapore
- Borneo Indobara - Indonesia
- Siam City Cement - Thailand
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bukit Asam (Persero) Tbk - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Price Waterhouse Coopers - Russia
- Wilmar Investment Holdings
- Kohat Cement Company Ltd. - Pakistan
- Semirara Mining and Power Corporation, Philippines
- Kideco Jaya Agung - Indonesia
- Parliament of New Zealand
- SMC Global Power, Philippines
- Tata Chemicals Ltd - India
- Energy Link Ltd, New Zealand
- Romanian Commodities Exchange
- Sojitz Corporation - Japan
- Gujarat Mineral Development Corp Ltd - India
- Coastal Gujarat Power Limited - India
- Lanco Infratech Ltd - India
- OPG Power Generation Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Baramulti Group, Indonesia
- Siam City Cement PLC, Thailand
- Eastern Coal Council - USA
- CNBM International Corporation - China
- Kapuas Tunggal Persada - Indonesia
- TeaM Sual Corporation - Philippines
- Kalimantan Lumbung Energi - Indonesia
- Toyota Tsusho Corporation, Japan
- Mercator Lines Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Star Paper Mills Limited - India
- Heidelberg Cement - Germany
- PowerSource Philippines DevCo
- Iligan Light & Power Inc, Philippines
- The State Trading Corporation of India Ltd
- Formosa Plastics Group - Taiwan
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