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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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Sunday, 22 November 15
INDONESIA TO INDIA FREIGHT RATES TO REMAIN DULL NEXT WEEK
COALspot.com: The BDI was down to historical lows closing at 498 points which is down by almost 95.77 per cent compared to 11,800 points in 2008.
...
Sunday, 22 November 15
INDIA COULD PROVIDE SILVER LINING FOR SHIPPING INDUSTRY - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The rise of India as a global player in the shipping market could be just a couple of years away, as the country has the potential to become a seco ...
Friday, 20 November 15
U.S. COAL PRODUCTION FOR THE WEEK ENDING NOVEMBER '14; NO CHANGE FROM LAST WEEK
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 16.5 million shor ...
Friday, 20 November 15
NO IMPROVEMENT SEEN IN NEAR-TERM COAL DEMAND; SWAPS CLOSE LOWER
COALspot.com: Indonesian coal swap for delivery Q1 2016 declined month on month and flat on week over week. Price of coal seen no improvements this ...
Friday, 20 November 15
CHANGING CRUDE SUPPLY TRENDS MAY HELP EUROPEAN REFINERS - FITCH RATINGS
COALspot.com: Changes in global oil supply trends, including high Russian production, the expected renewal of Iranian heavy crude exports and the p ...
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- Marubeni Corporation - India
- Directorate General of MIneral and Coal - Indonesia
- PTC India Limited - India
- Sinarmas Energy and Mining - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Straits Asia Resources Limited - Singapore
- Bulk Trading Sa - Switzerland
- Rashtriya Ispat Nigam Limited - India
- Savvy Resources Ltd - HongKong
- Krishnapatnam Port Company Ltd. - India
- Makarim & Taira - Indonesia
- Commonwealth Bank - Australia
- Dalmia Cement Bharat India
- Borneo Indobara - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Orica Mining Services - Indonesia
- Kideco Jaya Agung - Indonesia
- Semirara Mining Corp, Philippines
- Formosa Plastics Group - Taiwan
- Globalindo Alam Lestari - Indonesia
- Thiess Contractors Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Ministry of Mines - Canada
- Altura Mining Limited, Indonesia
- Grasim Industreis Ltd - India
- CNBM International Corporation - China
- GMR Energy Limited - India
- Metalloyd Limited - United Kingdom
- Banpu Public Company Limited - Thailand
- Anglo American - United Kingdom
- Sindya Power Generating Company Private Ltd
- Meralco Power Generation, Philippines
- Economic Council, Georgia
- Malabar Cements Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Binh Thuan Hamico - Vietnam
- Sical Logistics Limited - India
- Medco Energi Mining Internasional
- Tamil Nadu electricity Board
- PowerSource Philippines DevCo
- GAC Shipping (India) Pvt Ltd
- Goldman Sachs - Singapore
- Coalindo Energy - Indonesia
- Baramulti Group, Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Eastern Coal Council - USA
- Riau Bara Harum - Indonesia
- Electricity Generating Authority of Thailand
- Toyota Tsusho Corporation, Japan
- Romanian Commodities Exchange
- Meenaskhi Energy Private Limited - India
- ASAPP Information Group - India
- Port Waratah Coal Services - Australia
- Gujarat Sidhee Cement - India
- TeaM Sual Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bhushan Steel Limited - India
- Bukit Baiduri Energy - Indonesia
- IHS Mccloskey Coal Group - USA
- Essar Steel Hazira Ltd - India
- Indian Energy Exchange, India
- Vijayanagar Sugar Pvt Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Intertek Mineral Services - Indonesia
- Aboitiz Power Corporation - Philippines
- Chamber of Mines of South Africa
- Kaltim Prima Coal - Indonesia
- Holcim Trading Pte Ltd - Singapore
- London Commodity Brokers - England
- Kapuas Tunggal Persada - Indonesia
- South Luzon Thermal Energy Corporation
- Global Coal Blending Company Limited - Australia
- Energy Development Corp, Philippines
- Independent Power Producers Association of India
- Carbofer General Trading SA - India
- Trasteel International SA, Italy
- Indo Tambangraya Megah - Indonesia
- Jindal Steel & Power Ltd - India
- Ministry of Transport, Egypt
- Australian Commodity Traders Exchange
- Simpson Spence & Young - Indonesia
- SN Aboitiz Power Inc, Philippines
- Directorate Of Revenue Intelligence - India
- Indika Energy - Indonesia
- Georgia Ports Authority, United States
- Barasentosa Lestari - Indonesia
- Eastern Energy - Thailand
- SMG Consultants - Indonesia
- Ambuja Cements Ltd - India
- Larsen & Toubro Limited - India
- Merrill Lynch Commodities Europe
- Petron Corporation, Philippines
- Global Business Power Corporation, Philippines
- Africa Commodities Group - South Africa
- Mintek Dendrill Indonesia
- Latin American Coal - Colombia
- Minerals Council of Australia
- Mercator Lines Limited - India
- Bangladesh Power Developement Board
- Heidelberg Cement - Germany
- IEA Clean Coal Centre - UK
- Tata Chemicals Ltd - India
- San Jose City I Power Corp, Philippines
- Edison Trading Spa - Italy
- Manunggal Multi Energi - Indonesia
- Parry Sugars Refinery, India
- Timah Investasi Mineral - Indoneisa
- Vizag Seaport Private Limited - India
- PetroVietnam Power Coal Import and Supply Company
- VISA Power Limited - India
- Mjunction Services Limited - India
- Standard Chartered Bank - UAE
- Lanco Infratech Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Parliament of New Zealand
- Rio Tinto Coal - Australia
- Sarangani Energy Corporation, Philippines
- Indogreen Group - Indonesia
- Cement Manufacturers Association - India
- Price Waterhouse Coopers - Russia
- Pendopo Energi Batubara - Indonesia
- The University of Queensland
- Indonesian Coal Mining Association
- The Treasury - Australian Government
- SMC Global Power, Philippines
- Chettinad Cement Corporation Ltd - India
- Jaiprakash Power Ventures ltd
- Deloitte Consulting - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Madhucon Powers Ltd - India
- LBH Netherlands Bv - Netherlands
- Singapore Mercantile Exchange
- Attock Cement Pakistan Limited
- Alfred C Toepfer International GmbH - Germany
- Central Java Power - Indonesia
- Orica Australia Pty. Ltd.
- Kumho Petrochemical, South Korea
- Kepco SPC Power Corporation, Philippines
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Thai Mozambique Logistica
- Kartika Selabumi Mining - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Power Finance Corporation Ltd., India
- Oldendorff Carriers - Singapore
- Maheswari Brothers Coal Limited - India
- Videocon Industries ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Star Paper Mills Limited - India
- India Bulls Power Limited - India
- Bayan Resources Tbk. - Indonesia
- Antam Resourcindo - Indonesia
- Wilmar Investment Holdings
- New Zealand Coal & Carbon
- Central Electricity Authority - India
- Uttam Galva Steels Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Therma Luzon, Inc, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Mercuria Energy - Indonesia
- Siam City Cement PLC, Thailand
- Karaikal Port Pvt Ltd - India
- Australian Coal Association
- International Coal Ventures Pvt Ltd - India
- Sakthi Sugars Limited - India
- Aditya Birla Group - India
- Wood Mackenzie - Singapore
- Interocean Group of Companies - India
- Karbindo Abesyapradhi - Indoneisa
- Ministry of Finance - Indonesia
- ICICI Bank Limited - India
- Bharathi Cement Corporation - India
- CIMB Investment Bank - Malaysia
- Gujarat Electricity Regulatory Commission - India
- Energy Link Ltd, New Zealand
- Bukit Makmur.PT - Indonesia
- Salva Resources Pvt Ltd - India
- Siam City Cement - Thailand
- Leighton Contractors Pty Ltd - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kohat Cement Company Ltd. - Pakistan
- MS Steel International - UAE
- Renaissance Capital - South Africa
- Indian Oil Corporation Limited
- White Energy Company Limited
- Global Green Power PLC Corporation, Philippines
- Bhatia International Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Planning Commission, India
- Samtan Co., Ltd - South Korea
- Ind-Barath Power Infra Limited - India
- PNOC Exploration Corporation - Philippines
- European Bulk Services B.V. - Netherlands
- Miang Besar Coal Terminal - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Xindia Steels Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- OPG Power Generation Pvt Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Semirara Mining and Power Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- Posco Energy - South Korea
- GN Power Mariveles Coal Plant, Philippines
- Sojitz Corporation - Japan
- Agrawal Coal Company - India
- Kobexindo Tractors - Indoneisa
- The State Trading Corporation of India Ltd
- McConnell Dowell - Australia
- Sree Jayajothi Cements Limited - India
- Bhoruka Overseas - Indonesia
- Coal and Oil Company - UAE
- Coastal Gujarat Power Limited - India
- Vedanta Resources Plc - India
- GVK Power & Infra Limited - India
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