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