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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, 24 November 15
COAL PRICES SET TO REMAIN UNDER PRESSURE UNTIL 2016 DUE TO OVER SUPPLY GLUT; H1 '16 COAL SWAPS DOWN 13% M-M
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 ...
Monday, 23 November 15
NEGATIVE 2016 OUTLOOK FOR WESTERN EUROPEAN STEEL - SAYS FITCH RATINGS
COALspot.com: European steel in 2016 are both negative for the sector and for issuer ratings.
This reflects our expectation that import levels ...
Monday, 23 November 15
DRY BULK MARKET: NET FLEET GROWTH IS SLOWING DOWN, AS SHIP OWNERS ARE LOOKING FOR WAYS TO ALLEVIATING MARKET MELTDOWN - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market has been in “meltdown” mode for a few weeks now, unable to find support and avoid the fall in historical lows. As s ...
Monday, 23 November 15
CS50 COAL INDEX CLOSED AT $40.27 PER TON; FELL 0.15% FROM LAST WEEK
COALspot.com: The 5700 GAR CS (i) coal index fell by US cents 3 per ton week over week on 20 November 2015. CS 57 (5700 GAR coal) index closed at U ...
Monday, 23 November 15
CFR SOUTH CHINA COAL SWAPS FALL FURTHER ON LOW DEMAND
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery declined US$ 6.75 (13.99%) per ton month over month.
A commodity swa ...
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- New Zealand Coal & Carbon
- Indika Energy - Indonesia
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- Leighton Contractors Pty Ltd - Australia
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- Salva Resources Pvt Ltd - India
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- Mintek Dendrill Indonesia
- Ministry of Finance - Indonesia
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- Kepco SPC Power Corporation, Philippines
- Central Java Power - Indonesia
- Commonwealth Bank - Australia
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- Kapuas Tunggal Persada - Indonesia
- Larsen & Toubro Limited - India
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- Samtan Co., Ltd - South Korea
- Bhushan Steel Limited - India
- Alfred C Toepfer International GmbH - Germany
- Riau Bara Harum - Indonesia
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- Oldendorff Carriers - Singapore
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- Formosa Plastics Group - Taiwan
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- SN Aboitiz Power Inc, Philippines
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- Bulk Trading Sa - Switzerland
- Coalindo Energy - Indonesia
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- Jaiprakash Power Ventures ltd
- Planning Commission, India
- Mercuria Energy - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Makmur.PT - Indonesia
- Carbofer General Trading SA - India
- Eastern Energy - Thailand
- Ministry of Transport, Egypt
- Holcim Trading Pte Ltd - Singapore
- Economic Council, Georgia
- PowerSource Philippines DevCo
- Rio Tinto Coal - Australia
- Billiton Holdings Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- Indian Oil Corporation Limited
- LBH Netherlands Bv - Netherlands
- IHS Mccloskey Coal Group - USA
- ASAPP Information Group - India
- Malabar Cements Ltd - India
- Indonesian Coal Mining Association
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- ICICI Bank Limited - India
- Interocean Group of Companies - India
- Singapore Mercantile Exchange
- AsiaOL BioFuels Corp., Philippines
- The University of Queensland
- Latin American Coal - Colombia
- Videocon Industries ltd - India
- Indogreen Group - Indonesia
- Antam Resourcindo - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Standard Chartered Bank - UAE
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Borneo Indobara - Indonesia
- Bharathi Cement Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Anglo American - United Kingdom
- Star Paper Mills Limited - India
- Krishnapatnam Port Company Ltd. - India
- Directorate Of Revenue Intelligence - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Romanian Commodities Exchange
- Dalmia Cement Bharat India
- Marubeni Corporation - India
- Global Green Power PLC Corporation, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Indian Energy Exchange, India
- Coastal Gujarat Power Limited - India
- Rashtriya Ispat Nigam Limited - India
- Cigading International Bulk Terminal - Indonesia
- Thai Mozambique Logistica
- The State Trading Corporation of India Ltd
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- Wilmar Investment Holdings
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- London Commodity Brokers - England
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- Bukit Asam (Persero) Tbk - Indonesia
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- Toyota Tsusho Corporation, Japan
- Africa Commodities Group - South Africa
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- MS Steel International - UAE
- Bhatia International Limited - India
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- Baramulti Group, Indonesia
- Orica Mining Services - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Global Business Power Corporation, Philippines
- Parliament of New Zealand
- Mjunction Services Limited - India
- Energy Link Ltd, New Zealand
- Sindya Power Generating Company Private Ltd
- CIMB Investment Bank - Malaysia
- Chamber of Mines of South Africa
- Essar Steel Hazira Ltd - India
- Australian Commodity Traders Exchange
- South Luzon Thermal Energy Corporation
- Altura Mining Limited, Indonesia
- Minerals Council of Australia
- Vijayanagar Sugar Pvt Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- European Bulk Services B.V. - Netherlands
- PetroVietnam Power Coal Import and Supply Company
- Edison Trading Spa - Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Deloitte Consulting - India
- Metalloyd Limited - United Kingdom
- Petron Corporation, Philippines
- Heidelberg Cement - Germany
- GAC Shipping (India) Pvt Ltd
- Madhucon Powers Ltd - India
- Intertek Mineral Services - Indonesia
- Maheswari Brothers Coal Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- CNBM International Corporation - China
- Bayan Resources Tbk. - Indonesia
- Uttam Galva Steels Limited - India
- International Coal Ventures Pvt Ltd - India
- Goldman Sachs - Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Iligan Light & Power Inc, Philippines
- Xindia Steels Limited - India
- Cement Manufacturers Association - India
- Electricity Generating Authority of Thailand
- Australian Coal Association
- Ministry of Mines - Canada
- Sakthi Sugars Limited - India
- Sarangani Energy Corporation, Philippines
- Trasteel International SA, Italy
- Meenaskhi Energy Private Limited - India
- Simpson Spence & Young - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Siam City Cement PLC, Thailand
- Power Finance Corporation Ltd., India
- Merrill Lynch Commodities Europe
- Bank of Tokyo Mitsubishi UFJ Ltd
- Lanco Infratech Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- GN Power Mariveles Coal Plant, Philippines
- Sical Logistics Limited - India
- Banpu Public Company Limited - Thailand
- Globalindo Alam Lestari - Indonesia
- Global Coal Blending Company Limited - Australia
- Renaissance Capital - South Africa
- Indo Tambangraya Megah - Indonesia
- Tata Chemicals Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Makarim & Taira - Indonesia
- Energy Development Corp, Philippines
- Georgia Ports Authority, United States
- Manunggal Multi Energi - Indonesia
- Vedanta Resources Plc - India
- Directorate General of MIneral and Coal - Indonesia
- PNOC Exploration Corporation - Philippines
- Chettinad Cement Corporation Ltd - India
- Eastern Coal Council - USA
- Semirara Mining and Power Corporation, Philippines
- SMC Global Power, Philippines
- Port Waratah Coal Services - Australia
- Therma Luzon, Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Central Electricity Authority - India
- Orica Australia Pty. Ltd.
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- White Energy Company Limited
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- Parry Sugars Refinery, India
- Binh Thuan Hamico - Vietnam
- Price Waterhouse Coopers - Russia
- Bangladesh Power Developement Board
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