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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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Wednesday, 11 November 15
VESSEL VALUES ARE DOWN BY AT LEAST 20% SINCE MID-AUGUST - INTERMODAL
I had promised not to spend another broker’s insight focusing on the dry bulk side. However, the sale of the M/V Churchill Bulker (179,362 dw ...
Tuesday, 10 November 15
SELF-HEATING OF COAL HAS EMPHASISED THE IMPORTANCE OF CHECKING THE ACCURACY OF SHIPPER'S DECLARATIONS - GARD
Recent incidents involving self-heating of coal has emphasised the importance of checking the accuracy of shipper’s declarations for all type ...
Tuesday, 10 November 15
API 5 FOB NEWCASTLE COAL SWAP SLIDES CONTINUE
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery slid $3.55 per ton (8.50%) month over month to US$ 38.20 per ton. The swap ...
Monday, 09 November 15
BUNKER PRICES TO KEEP SLIDING THIS WEEK, EXPERT SAYS - MARINE BUNKER EXCHANGE
The oil price volatility has continued this week. Two dollars up one day and the next day two dollars down. The oil market has been trading on the ...
Monday, 09 November 15
CFR SOUTH CHINA THERMAL COAL SWAP FOR Q3' 16 CONTRACT DECLINED US$ 4 PER TON
COALspot.com: API 8 CFR South China Coal swap for Q1’ 2016 delivery declined US$ 4.35 (9.03 %) per ton month over month.
A commodity swa ...
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- Gujarat Electricity Regulatory Commission - India
- Trasteel International SA, Italy
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- GN Power Mariveles Coal Plant, Philippines
- GAC Shipping (India) Pvt Ltd
- Thai Mozambique Logistica
- The University of Queensland
- Kohat Cement Company Ltd. - Pakistan
- Mercator Lines Limited - India
- Renaissance Capital - South Africa
- Marubeni Corporation - India
- Star Paper Mills Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Parry Sugars Refinery, India
- Agrawal Coal Company - India
- CNBM International Corporation - China
- Global Business Power Corporation, Philippines
- Sojitz Corporation - Japan
- Maharashtra Electricity Regulatory Commission - India
- Semirara Mining and Power Corporation, Philippines
- Petron Corporation, Philippines
- Oldendorff Carriers - Singapore
- Savvy Resources Ltd - HongKong
- Posco Energy - South Korea
- Coal and Oil Company - UAE
- Dalmia Cement Bharat India
- Iligan Light & Power Inc, Philippines
- Eastern Energy - Thailand
- Xindia Steels Limited - India
- Formosa Plastics Group - Taiwan
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- India Bulls Power Limited - India
- New Zealand Coal & Carbon
- Videocon Industries ltd - India
- Merrill Lynch Commodities Europe
- Banpu Public Company Limited - Thailand
- Bhoruka Overseas - Indonesia
- White Energy Company Limited
- Bhatia International Limited - India
- Power Finance Corporation Ltd., India
- Lanco Infratech Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Petrochimia International Co. Ltd.- Taiwan
- Heidelberg Cement - Germany
- Manunggal Multi Energi - Indonesia
- Bayan Resources Tbk. - Indonesia
- Meenaskhi Energy Private Limited - India
- Vizag Seaport Private Limited - India
- Deloitte Consulting - India
- The State Trading Corporation of India Ltd
- Price Waterhouse Coopers - Russia
- Bangladesh Power Developement Board
- Bharathi Cement Corporation - India
- Bukit Makmur.PT - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Miang Besar Coal Terminal - Indonesia
- Energy Development Corp, Philippines
- Mjunction Services Limited - India
- Siam City Cement - Thailand
- Sarangani Energy Corporation, Philippines
- ICICI Bank Limited - India
- Goldman Sachs - Singapore
- Latin American Coal - Colombia
- Chettinad Cement Corporation Ltd - India
- Indogreen Group - Indonesia
- Malabar Cements Ltd - India
- McConnell Dowell - Australia
- Georgia Ports Authority, United States
- Vedanta Resources Plc - India
- Sree Jayajothi Cements Limited - India
- Orica Australia Pty. Ltd.
- Sinarmas Energy and Mining - Indonesia
- Ministry of Finance - Indonesia
- Samtan Co., Ltd - South Korea
- Central Electricity Authority - India
- Karbindo Abesyapradhi - Indoneisa
- Wilmar Investment Holdings
- Essar Steel Hazira Ltd - India
- Aboitiz Power Corporation - Philippines
- Bhushan Steel Limited - India
- MS Steel International - UAE
- Kartika Selabumi Mining - Indonesia
- Kideco Jaya Agung - Indonesia
- Simpson Spence & Young - Indonesia
- Riau Bara Harum - Indonesia
- Interocean Group of Companies - India
- Holcim Trading Pte Ltd - Singapore
- Globalindo Alam Lestari - Indonesia
- GMR Energy Limited - India
- AsiaOL BioFuels Corp., Philippines
- Gujarat Mineral Development Corp Ltd - India
- Kaltim Prima Coal - Indonesia
- Standard Chartered Bank - UAE
- Sical Logistics Limited - India
- Billiton Holdings Pty Ltd - Australia
- Planning Commission, India
- IHS Mccloskey Coal Group - USA
- Australian Coal Association
- Singapore Mercantile Exchange
- SMC Global Power, Philippines
- Energy Link Ltd, New Zealand
- Krishnapatnam Port Company Ltd. - India
- PNOC Exploration Corporation - Philippines
- Tamil Nadu electricity Board
- Global Green Power PLC Corporation, Philippines
- Orica Mining Services - Indonesia
- Attock Cement Pakistan Limited
- Independent Power Producers Association of India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indika Energy - Indonesia
- Port Waratah Coal Services - Australia
- Meralco Power Generation, Philippines
- Uttam Galva Steels Limited - India
- Siam City Cement PLC, Thailand
- Bukit Baiduri Energy - Indonesia
- Africa Commodities Group - South Africa
- CIMB Investment Bank - Malaysia
- Coastal Gujarat Power Limited - India
- Therma Luzon, Inc, Philippines
- Rashtriya Ispat Nigam Limited - India
- Carbofer General Trading SA - India
- Chamber of Mines of South Africa
- Ministry of Mines - Canada
- Gujarat Sidhee Cement - India
- Coalindo Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- San Jose City I Power Corp, Philippines
- Indian Energy Exchange, India
- Parliament of New Zealand
- Tata Chemicals Ltd - India
- European Bulk Services B.V. - Netherlands
- Kapuas Tunggal Persada - Indonesia
- Toyota Tsusho Corporation, Japan
- Jaiprakash Power Ventures ltd
- Binh Thuan Hamico - Vietnam
- South Luzon Thermal Energy Corporation
- SMG Consultants - Indonesia
- Ministry of Transport, Egypt
- LBH Netherlands Bv - Netherlands
- Ambuja Cements Ltd - India
- ASAPP Information Group - India
- Altura Mining Limited, Indonesia
- PTC India Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Electricity Authority, New Zealand
- Vijayanagar Sugar Pvt Ltd - India
- Commonwealth Bank - Australia
- PetroVietnam Power Coal Import and Supply Company
- GVK Power & Infra Limited - India
- Indonesian Coal Mining Association
- Cigading International Bulk Terminal - Indonesia
- Cement Manufacturers Association - India
- Kumho Petrochemical, South Korea
- OPG Power Generation Pvt Ltd - India
- Minerals Council of Australia
- VISA Power Limited - India
- SN Aboitiz Power Inc, Philippines
- Directorate General of MIneral and Coal - Indonesia
- The Treasury - Australian Government
- Leighton Contractors Pty Ltd - Australia
- Central Java Power - Indonesia
- Intertek Mineral Services - Indonesia
- Medco Energi Mining Internasional
- Electricity Generating Authority of Thailand
- Wood Mackenzie - Singapore
- TeaM Sual Corporation - Philippines
- Indo Tambangraya Megah - Indonesia
- Kepco SPC Power Corporation, Philippines
- Mintek Dendrill Indonesia
- Kobexindo Tractors - Indoneisa
- Maheswari Brothers Coal Limited - India
- Pendopo Energi Batubara - Indonesia
- Mercuria Energy - Indonesia
- Larsen & Toubro Limited - India
- Karaikal Port Pvt Ltd - India
- International Coal Ventures Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Economic Council, Georgia
- PowerSource Philippines DevCo
- Ceylon Electricity Board - Sri Lanka
- Kalimantan Lumbung Energi - Indonesia
- Anglo American - United Kingdom
- Alfred C Toepfer International GmbH - Germany
- London Commodity Brokers - England
- TNB Fuel Sdn Bhd - Malaysia
- Grasim Industreis Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Australian Commodity Traders Exchange
- Metalloyd Limited - United Kingdom
- Borneo Indobara - Indonesia
- Eastern Coal Council - USA
- Ind-Barath Power Infra Limited - India
- Global Coal Blending Company Limited - Australia
- Rio Tinto Coal - Australia
- Directorate Of Revenue Intelligence - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Sakthi Sugars Limited - India
- IEA Clean Coal Centre - UK
- Semirara Mining Corp, Philippines
- Romanian Commodities Exchange
- Timah Investasi Mineral - Indoneisa
- Aditya Birla Group - India
- Thiess Contractors Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Barasentosa Lestari - Indonesia
- Sindya Power Generating Company Private Ltd
- Straits Asia Resources Limited - Singapore
- Antam Resourcindo - Indonesia
- Salva Resources Pvt Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Bahari Cakrawala Sebuku - Indonesia
- Edison Trading Spa - Italy
- Madhucon Powers Ltd - India
- Makarim & Taira - Indonesia
- Jindal Steel & Power Ltd - India
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