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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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Friday, 27 November 15
INDONESIA COAL SWAPS: WEEK ENDING 20 NOVEMBER CLOSED HIGHER COMPARED TO THE PREVIOUS WEEK
COALspot.com: Indonesian coal swaps for delivery Q1 2016 declined month on month and up on week over week. Coal prices seen slight improvements thi ...
Friday, 27 November 15
FOB RICHARDS BAY COAL SWAPS UP FROM LAST WEEK
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q1’ 2016 up week over week and month over month.
The Q1’ 2016 swa ...
Thursday, 26 November 15
ITALY'S STEAM COAL IMPORTS EXPECTED TO REACH 16 MILLION TONS AND COKING COAL IMPORTS TO AMOUNT TO 4 MILLION TONS - ASSOCARBONI
ASSOCARBONI LOOKS AT COAL FROM A DIFFERENT ANGLE
- “Coal has made huge steps towards environmental sustainability, making itself t ...
Thursday, 26 November 15
DRY BULK MARKET WILL REBOUND EVENTUALLY, BUT THINGS WILL BECOME EVEN WORSE BEFORE THEY IMPROVE SAYS SHIPBROKER - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
As the dry bulk market’s benchmark, the Baltic Dry Index (BDI) reached an all-time late last week and has failed to rebound significantly eve ...
Thursday, 26 November 15
Q3'16 FOB NEWCASTLE COAL SWAP FALLS 27.5% SINCE 20 FEB 2015
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery slid $5 per ton (12.05%) month over month to US$ 36.50 per ton. The s ...
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- SN Aboitiz Power Inc, Philippines
- AsiaOL BioFuels Corp., Philippines
- Sakthi Sugars Limited - India
- Ministry of Mines - Canada
- Grasim Industreis Ltd - India
- Altura Mining Limited, Indonesia
- Bangladesh Power Developement Board
- Mintek Dendrill Indonesia
- Holcim Trading Pte Ltd - Singapore
- Metalloyd Limited - United Kingdom
- Ministry of Transport, Egypt
- Salva Resources Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Attock Cement Pakistan Limited
- Videocon Industries ltd - India
- Timah Investasi Mineral - Indoneisa
- Sarangani Energy Corporation, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Kepco SPC Power Corporation, Philippines
- Indian Oil Corporation Limited
- Gujarat Electricity Regulatory Commission - India
- Malabar Cements Ltd - India
- Standard Chartered Bank - UAE
- Global Business Power Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Gujarat Sidhee Cement - India
- Wilmar Investment Holdings
- Globalindo Alam Lestari - Indonesia
- Kartika Selabumi Mining - Indonesia
- Tamil Nadu electricity Board
- Samtan Co., Ltd - South Korea
- Rio Tinto Coal - Australia
- Mercator Lines Limited - India
- Commonwealth Bank - Australia
- Planning Commission, India
- Semirara Mining and Power Corporation, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Indika Energy - Indonesia
- Deloitte Consulting - India
- Therma Luzon, Inc, Philippines
- Electricity Authority, New Zealand
- Parliament of New Zealand
- Romanian Commodities Exchange
- Australian Commodity Traders Exchange
- Bukit Baiduri Energy - Indonesia
- Indogreen Group - Indonesia
- Coal and Oil Company - UAE
- Directorate General of MIneral and Coal - Indonesia
- Manunggal Multi Energi - Indonesia
- GMR Energy Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Simpson Spence & Young - Indonesia
- Star Paper Mills Limited - India
- Sree Jayajothi Cements Limited - India
- Siam City Cement PLC, Thailand
- Cigading International Bulk Terminal - Indonesia
- Global Green Power PLC Corporation, Philippines
- Goldman Sachs - Singapore
- Riau Bara Harum - Indonesia
- MS Steel International - UAE
- McConnell Dowell - Australia
- Coalindo Energy - Indonesia
- Antam Resourcindo - Indonesia
- Posco Energy - South Korea
- Chettinad Cement Corporation Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Edison Trading Spa - Italy
- Ambuja Cements Ltd - India
- Larsen & Toubro Limited - India
- Eastern Energy - Thailand
- Merrill Lynch Commodities Europe
- Karaikal Port Pvt Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Neyveli Lignite Corporation Ltd, - India
- Mercuria Energy - Indonesia
- VISA Power Limited - India
- Bukit Makmur.PT - Indonesia
- Lanco Infratech Ltd - India
- Jaiprakash Power Ventures ltd
- Billiton Holdings Pty Ltd - Australia
- Orica Australia Pty. Ltd.
- Sojitz Corporation - Japan
- Pendopo Energi Batubara - Indonesia
- TeaM Sual Corporation - Philippines
- Ceylon Electricity Board - Sri Lanka
- Jindal Steel & Power Ltd - India
- Toyota Tsusho Corporation, Japan
- Wood Mackenzie - Singapore
- Price Waterhouse Coopers - Russia
- Indian Energy Exchange, India
- Ministry of Finance - Indonesia
- Medco Energi Mining Internasional
- White Energy Company Limited
- OPG Power Generation Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- Bhoruka Overseas - Indonesia
- CIMB Investment Bank - Malaysia
- Power Finance Corporation Ltd., India
- Heidelberg Cement - Germany
- Agrawal Coal Company - India
- Energy Development Corp, Philippines
- International Coal Ventures Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Anglo American - United Kingdom
- Bhushan Steel Limited - India
- Bulk Trading Sa - Switzerland
- Kideco Jaya Agung - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Electricity Generating Authority of Thailand
- Tata Chemicals Ltd - India
- Coastal Gujarat Power Limited - India
- LBH Netherlands Bv - Netherlands
- Vizag Seaport Private Limited - India
- SMC Global Power, Philippines
- Formosa Plastics Group - Taiwan
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bhatia International Limited - India
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- Maheswari Brothers Coal Limited - India
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- Binh Thuan Hamico - Vietnam
- Intertek Mineral Services - Indonesia
- The State Trading Corporation of India Ltd
- Orica Mining Services - Indonesia
- Oldendorff Carriers - Singapore
- IEA Clean Coal Centre - UK
- Marubeni Corporation - India
- SMG Consultants - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Pipit Mutiara Jaya. PT, Indonesia
- Economic Council, Georgia
- Essar Steel Hazira Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Kobexindo Tractors - Indoneisa
- European Bulk Services B.V. - Netherlands
- Leighton Contractors Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- London Commodity Brokers - England
- Petrochimia International Co. Ltd.- Taiwan
- Asmin Koalindo Tuhup - Indonesia
- Africa Commodities Group - South Africa
- Cement Manufacturers Association - India
- Krishnapatnam Port Company Ltd. - India
- Kapuas Tunggal Persada - Indonesia
- Central Java Power - Indonesia
- GVK Power & Infra Limited - India
- New Zealand Coal & Carbon
- CNBM International Corporation - China
- Kaltim Prima Coal - Indonesia
- Georgia Ports Authority, United States
- Vijayanagar Sugar Pvt Ltd - India
- Indo Tambangraya Megah - Indonesia
- Banpu Public Company Limited - Thailand
- PetroVietnam Power Coal Import and Supply Company
- Savvy Resources Ltd - HongKong
- Port Waratah Coal Services - Australia
- Sindya Power Generating Company Private Ltd
- Madhucon Powers Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Interocean Group of Companies - India
- Bayan Resources Tbk. - Indonesia
- Petron Corporation, Philippines
- The University of Queensland
- Renaissance Capital - South Africa
- Thiess Contractors Indonesia
- Meenaskhi Energy Private Limited - India
- Eastern Coal Council - USA
- Global Coal Blending Company Limited - Australia
- IHS Mccloskey Coal Group - USA
- Indonesian Coal Mining Association
- Kumho Petrochemical, South Korea
- Trasteel International SA, Italy
- Bharathi Cement Corporation - India
- Energy Link Ltd, New Zealand
- Dalmia Cement Bharat India
- PTC India Limited - India
- Independent Power Producers Association of India
- PowerSource Philippines DevCo
- Bukit Asam (Persero) Tbk - Indonesia
- GAC Shipping (India) Pvt Ltd
- Chamber of Mines of South Africa
- Sical Logistics Limited - India
- Latin American Coal - Colombia
- South Luzon Thermal Energy Corporation
- Bahari Cakrawala Sebuku - Indonesia
- Singapore Mercantile Exchange
- Minerals Council of Australia
- Central Electricity Authority - India
- Australian Coal Association
- Kohat Cement Company Ltd. - Pakistan
- Carbofer General Trading SA - India
- Iligan Light & Power Inc, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Borneo Indobara - Indonesia
- Thai Mozambique Logistica
- ASAPP Information Group - India
- Straits Asia Resources Limited - Singapore
- Uttam Galva Steels Limited - India
- Rashtriya Ispat Nigam Limited - India
- Alfred C Toepfer International GmbH - Germany
- Parry Sugars Refinery, India
- Aditya Birla Group - India
- The Treasury - Australian Government
- Directorate Of Revenue Intelligence - India
- TNB Fuel Sdn Bhd - Malaysia
- Makarim & Taira - Indonesia
- Meralco Power Generation, Philippines
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- Siam City Cement - Thailand
- GN Power Mariveles Coal Plant, Philippines
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