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