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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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Thursday, 19 November 15
CHINA STEEL PRODUCTION CAPACITY TO PEAK IN 2016 - FITCH RATINGS
COALspot.com: Fitch Ratings today says that China's steel production capacity is likely to peak in 2016, with capacity elimination over the nex ...
Thursday, 19 November 15
Q3' 16 RICHARDS BAY COAL SWAP CLOSED 9% LOWER THAN Q1' 16 DELIVERY PRICE
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, 19 November 15
RATES FOR CAPES KEPT MOVING SOUTH - INTERMODAL
COALspot.com: With the BDI currently standing at less than 30 points above the historical lows marked in February this year and with activity acros ...
Wednesday, 18 November 15
MARKET (SHIPPING) INSIGHT - THEODORE NTALAKOS
Supply VS Demand
According to data from the IMF, global growth for 2015 is projected at 3.1 percent, 0.3 percentage point lower than in 2014, ...
Tuesday, 17 November 15
KOMIPO INVITES BIDS FOR (SEMI) ANTHRACITE COAL FOR SEOCHEON POWER PLANT
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender for 70,000 Metric Tons of (Semi) Anthracite for Ja ...
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- SMC Global Power, Philippines
- Asmin Koalindo Tuhup - Indonesia
- IHS Mccloskey Coal Group - USA
- Sakthi Sugars Limited - India
- Samtan Co., Ltd - South Korea
- TNB Fuel Sdn Bhd - Malaysia
- Port Waratah Coal Services - Australia
- Meralco Power Generation, Philippines
- Wood Mackenzie - Singapore
- Bulk Trading Sa - Switzerland
- Ceylon Electricity Board - Sri Lanka
- Bukit Asam (Persero) Tbk - Indonesia
- IEA Clean Coal Centre - UK
- Planning Commission, India
- MS Steel International - UAE
- Global Green Power PLC Corporation, Philippines
- Maheswari Brothers Coal Limited - India
- Bangladesh Power Developement Board
- Electricity Authority, New Zealand
- Antam Resourcindo - Indonesia
- Sree Jayajothi Cements Limited - India
- Kapuas Tunggal Persada - Indonesia
- Xindia Steels Limited - India
- Malabar Cements Ltd - India
- Economic Council, Georgia
- GN Power Mariveles Coal Plant, Philippines
- Ministry of Finance - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Minerals Council of Australia
- Toyota Tsusho Corporation, Japan
- SMG Consultants - Indonesia
- McConnell Dowell - Australia
- Globalindo Alam Lestari - Indonesia
- Attock Cement Pakistan Limited
- Rio Tinto Coal - Australia
- Africa Commodities Group - South Africa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Gujarat Sidhee Cement - India
- Sojitz Corporation - Japan
- Aditya Birla Group - India
- Ambuja Cements Ltd - India
- GAC Shipping (India) Pvt Ltd
- Kartika Selabumi Mining - Indonesia
- Kobexindo Tractors - Indoneisa
- Formosa Plastics Group - Taiwan
- Simpson Spence & Young - Indonesia
- Coalindo Energy - Indonesia
- Metalloyd Limited - United Kingdom
- Coastal Gujarat Power Limited - India
- Global Business Power Corporation, Philippines
- Vedanta Resources Plc - India
- Cigading International Bulk Terminal - Indonesia
- Parry Sugars Refinery, India
- Salva Resources Pvt Ltd - India
- Sindya Power Generating Company Private Ltd
- Neyveli Lignite Corporation Ltd, - India
- Intertek Mineral Services - Indonesia
- Ministry of Transport, Egypt
- Makarim & Taira - Indonesia
- PNOC Exploration Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- Tamil Nadu electricity Board
- Central Electricity Authority - India
- GVK Power & Infra Limited - India
- Australian Coal Association
- VISA Power Limited - India
- Sical Logistics Limited - India
- Indogreen Group - Indonesia
- Indonesian Coal Mining Association
- Thai Mozambique Logistica
- Goldman Sachs - Singapore
- Bharathi Cement Corporation - India
- Renaissance Capital - South Africa
- Therma Luzon, Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Dalmia Cement Bharat India
- Interocean Group of Companies - India
- Eastern Energy - Thailand
- The University of Queensland
- Agrawal Coal Company - India
- Lanco Infratech Ltd - India
- Energy Development Corp, Philippines
- Price Waterhouse Coopers - Russia
- Barasentosa Lestari - Indonesia
- San Jose City I Power Corp, Philippines
- Bhatia International Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- AsiaOL BioFuels Corp., Philippines
- Pendopo Energi Batubara - Indonesia
- Standard Chartered Bank - UAE
- Savvy Resources Ltd - HongKong
- Mercator Lines Limited - India
- Jaiprakash Power Ventures ltd
- Bukit Baiduri Energy - Indonesia
- Wilmar Investment Holdings
- Merrill Lynch Commodities Europe
- Heidelberg Cement - Germany
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Meenaskhi Energy Private Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Vijayanagar Sugar Pvt Ltd - India
- Mintek Dendrill Indonesia
- Commonwealth Bank - Australia
- Maharashtra Electricity Regulatory Commission - India
- Rashtriya Ispat Nigam Limited - India
- Indika Energy - Indonesia
- ICICI Bank Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Latin American Coal - Colombia
- Oldendorff Carriers - Singapore
- Cement Manufacturers Association - India
- Straits Asia Resources Limited - Singapore
- Uttam Galva Steels Limited - India
- Georgia Ports Authority, United States
- Star Paper Mills Limited - India
- CIMB Investment Bank - Malaysia
- Mercuria Energy - Indonesia
- Tata Chemicals Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Electricity Generating Authority of Thailand
- Gujarat Mineral Development Corp Ltd - India
- Karaikal Port Pvt Ltd - India
- Central Java Power - Indonesia
- Orica Australia Pty. Ltd.
- Borneo Indobara - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Posco Energy - South Korea
- Power Finance Corporation Ltd., India
- Videocon Industries ltd - India
- Gujarat Electricity Regulatory Commission - India
- Miang Besar Coal Terminal - Indonesia
- Semirara Mining and Power Corporation, Philippines
- London Commodity Brokers - England
- Siam City Cement PLC, Thailand
- Marubeni Corporation - India
- Eastern Coal Council - USA
- LBH Netherlands Bv - Netherlands
- TeaM Sual Corporation - Philippines
- Parliament of New Zealand
- Bahari Cakrawala Sebuku - Indonesia
- OPG Power Generation Pvt Ltd - India
- CNBM International Corporation - China
- Kepco SPC Power Corporation, Philippines
- Alfred C Toepfer International GmbH - Germany
- PetroVietnam Power Coal Import and Supply Company
- Energy Link Ltd, New Zealand
- Banpu Public Company Limited - Thailand
- Semirara Mining Corp, Philippines
- Orica Mining Services - Indonesia
- Romanian Commodities Exchange
- PTC India Limited - India
- Timah Investasi Mineral - Indoneisa
- International Coal Ventures Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Vizag Seaport Private Limited - India
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Manunggal Multi Energi - Indonesia
- Essar Steel Hazira Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- The State Trading Corporation of India Ltd
- India Bulls Power Limited - India
- Larsen & Toubro Limited - India
- Jindal Steel & Power Ltd - India
- Indo Tambangraya Megah - Indonesia
- European Bulk Services B.V. - Netherlands
- Siam City Cement - Thailand
- Kideco Jaya Agung - Indonesia
- Thiess Contractors Indonesia
- Krishnapatnam Port Company Ltd. - India
- Bhushan Steel Limited - India
- Aboitiz Power Corporation - Philippines
- Binh Thuan Hamico - Vietnam
- Australian Commodity Traders Exchange
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- Edison Trading Spa - Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kumho Petrochemical, South Korea
- Baramulti Group, Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Madhucon Powers Ltd - India
- Independent Power Producers Association of India
- Deloitte Consulting - India
- Altura Mining Limited, Indonesia
- Chettinad Cement Corporation Ltd - India
- Global Coal Blending Company Limited - Australia
- PowerSource Philippines DevCo
- White Energy Company Limited
- Leighton Contractors Pty Ltd - Australia
- Medco Energi Mining Internasional
- Mjunction Services Limited - India
- Bayan Resources Tbk. - Indonesia
- Indian Oil Corporation Limited
- Grasim Industreis Ltd - India
- The Treasury - Australian Government
- Ministry of Mines - Canada
- ASAPP Information Group - India
- Iligan Light & Power Inc, Philippines
- Chamber of Mines of South Africa
- SN Aboitiz Power Inc, Philippines
- GMR Energy Limited - India
- Trasteel International SA, Italy
- Carbofer General Trading SA - India
- Ind-Barath Power Infra Limited - India
- Holcim Trading Pte Ltd - Singapore
- Directorate Of Revenue Intelligence - India
- Bukit Makmur.PT - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Anglo American - United Kingdom
- Singapore Mercantile Exchange
- Indian Energy Exchange, India
- Coal and Oil Company - UAE
- South Luzon Thermal Energy Corporation
- Bhoruka Overseas - Indonesia
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