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