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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, 05 November 15
INFORMATION EXCHANGE GROUP'S LATAM MINING SECURITY SUMMIT 2016 - INTERNATIONAL CONFERENCE ON TECHNOLOGY SECURITY IN MINING
Press Release: LATAM Mining Security Summit 2016 is a carefully designed event that will bring together the leading stakeholders in the mining sect ...
Wednesday, 04 November 15
MARKET INSIGHT - CHRISTOPHER THOMAS WHITTY
Four companies dominate global iron ore production, namely; BHP Billiton, Vale, Rio Tinto, and Fortescue Metals Group. Together these companies con ...
Wednesday, 04 November 15
FOB RICHARDS BAY COAL SWAPS GAIN W-W AND M-M
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q4' 2015 gained week over week and month over month.
The Q4 swap was up US$ 1.4 ...
Tuesday, 03 November 15
THE DISCHARGE OF CARGO IN THE PRC WITHOUT ORIGINAL BILLS OF LADING - CLYDE&CO
KNOWLEDGE TO ELEVATE
On occasions, a vessel may arrive at a port and be ready to discharge but the original bills of lading in respect of the ...
Tuesday, 03 November 15
API 5 FOB NEWCASTLE COAL SWAPS DECLINE CONTINUES
COALspot.com: API 5 FOB Newcastle Coal swap for Q4’ 2015 delivery slid $1.84 per ton (4.34%) month over month to US$ 40.54 per ton. The swap ...
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- Sical Logistics Limited - India
- Indo Tambangraya Megah - Indonesia
- Orica Australia Pty. Ltd.
- Directorate General of MIneral and Coal - Indonesia
- Wilmar Investment Holdings
- Energy Development Corp, Philippines
- Mercuria Energy - Indonesia
- Manunggal Multi Energi - Indonesia
- Carbofer General Trading SA - India
- Jaiprakash Power Ventures ltd
- Chamber of Mines of South Africa
- Riau Bara Harum - Indonesia
- The University of Queensland
- Central Java Power - Indonesia
- Borneo Indobara - Indonesia
- Electricity Generating Authority of Thailand
- Agrawal Coal Company - India
- Goldman Sachs - Singapore
- Globalindo Alam Lestari - Indonesia
- Ambuja Cements Ltd - India
- Sindya Power Generating Company Private Ltd
- Bukit Makmur.PT - Indonesia
- South Luzon Thermal Energy Corporation
- Vedanta Resources Plc - India
- Independent Power Producers Association of India
- Kohat Cement Company Ltd. - Pakistan
- Ind-Barath Power Infra Limited - India
- Romanian Commodities Exchange
- Thiess Contractors Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Cement Manufacturers Association - India
- Bhatia International Limited - India
- Kobexindo Tractors - Indoneisa
- Global Business Power Corporation, Philippines
- Anglo American - United Kingdom
- Indika Energy - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Mjunction Services Limited - India
- Port Waratah Coal Services - Australia
- GAC Shipping (India) Pvt Ltd
- The Treasury - Australian Government
- PTC India Limited - India
- Siam City Cement - Thailand
- Asmin Koalindo Tuhup - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Eastern Energy - Thailand
- Makarim & Taira - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Bangladesh Power Developement Board
- New Zealand Coal & Carbon
- Iligan Light & Power Inc, Philippines
- Coal and Oil Company - UAE
- Interocean Group of Companies - India
- Ministry of Finance - Indonesia
- Indogreen Group - Indonesia
- Kaltim Prima Coal - Indonesia
- Metalloyd Limited - United Kingdom
- AsiaOL BioFuels Corp., Philippines
- McConnell Dowell - Australia
- SMG Consultants - Indonesia
- London Commodity Brokers - England
- International Coal Ventures Pvt Ltd - India
- Power Finance Corporation Ltd., India
- Gujarat Mineral Development Corp Ltd - India
- Bayan Resources Tbk. - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Semirara Mining and Power Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Binh Thuan Hamico - Vietnam
- San Jose City I Power Corp, Philippines
- Sree Jayajothi Cements Limited - India
- Timah Investasi Mineral - Indoneisa
- Posco Energy - South Korea
- Gujarat Sidhee Cement - India
- Commonwealth Bank - Australia
- White Energy Company Limited
- Bharathi Cement Corporation - India
- Price Waterhouse Coopers - Russia
- Bhushan Steel Limited - India
- Merrill Lynch Commodities Europe
- MS Steel International - UAE
- Eastern Coal Council - USA
- Madhucon Powers Ltd - India
- Georgia Ports Authority, United States
- Tamil Nadu electricity Board
- Banpu Public Company Limited - Thailand
- Ministry of Mines - Canada
- Siam City Cement PLC, Thailand
- Savvy Resources Ltd - HongKong
- Kideco Jaya Agung - Indonesia
- Uttam Galva Steels Limited - India
- TeaM Sual Corporation - Philippines
- Maheswari Brothers Coal Limited - India
- Kumho Petrochemical, South Korea
- Parry Sugars Refinery, India
- Salva Resources Pvt Ltd - India
- Indian Oil Corporation Limited
- Bukit Asam (Persero) Tbk - Indonesia
- Coastal Gujarat Power Limited - India
- Australian Coal Association
- Electricity Authority, New Zealand
- Planning Commission, India
- Altura Mining Limited, Indonesia
- LBH Netherlands Bv - Netherlands
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Videocon Industries ltd - India
- Deloitte Consulting - India
- Chettinad Cement Corporation Ltd - India
- Rio Tinto Coal - Australia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Intertek Mineral Services - Indonesia
- ICICI Bank Limited - India
- Samtan Co., Ltd - South Korea
- SMC Global Power, Philippines
- Simpson Spence & Young - Indonesia
- The State Trading Corporation of India Ltd
- Straits Asia Resources Limited - Singapore
- Oldendorff Carriers - Singapore
- Larsen & Toubro Limited - India
- Global Coal Blending Company Limited - Australia
- Petron Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Baramulti Group, Indonesia
- Central Electricity Authority - India
- Wood Mackenzie - Singapore
- Medco Energi Mining Internasional
- Meenaskhi Energy Private Limited - India
- Ceylon Electricity Board - Sri Lanka
- CIMB Investment Bank - Malaysia
- PowerSource Philippines DevCo
- Formosa Plastics Group - Taiwan
- Petrochimia International Co. Ltd.- Taiwan
- Meralco Power Generation, Philippines
- Bukit Baiduri Energy - Indonesia
- CNBM International Corporation - China
- Aditya Birla Group - India
- Gujarat Electricity Regulatory Commission - India
- Latin American Coal - Colombia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ministry of Transport, Egypt
- Kapuas Tunggal Persada - Indonesia
- SN Aboitiz Power Inc, Philippines
- IHS Mccloskey Coal Group - USA
- Marubeni Corporation - India
- Alfred C Toepfer International GmbH - Germany
- Miang Besar Coal Terminal - Indonesia
- Orica Mining Services - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Lanco Infratech Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Dalmia Cement Bharat India
- Pipit Mutiara Jaya. PT, Indonesia
- Essar Steel Hazira Ltd - India
- Jindal Steel & Power Ltd - India
- Toyota Tsusho Corporation, Japan
- Rashtriya Ispat Nigam Limited - India
- Tata Chemicals Ltd - India
- Sakthi Sugars Limited - India
- Sarangani Energy Corporation, Philippines
- GMR Energy Limited - India
- Attock Cement Pakistan Limited
- Grasim Industreis Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- IEA Clean Coal Centre - UK
- ASAPP Information Group - India
- Vizag Seaport Private Limited - India
- Thai Mozambique Logistica
- Asia Pacific Energy Resources Ventures Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Bulk Trading Sa - Switzerland
- Bhoruka Overseas - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Karbindo Abesyapradhi - Indoneisa
- India Bulls Power Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Africa Commodities Group - South Africa
- Mintek Dendrill Indonesia
- Energy Link Ltd, New Zealand
- Indian Energy Exchange, India
- Parliament of New Zealand
- Directorate Of Revenue Intelligence - India
- Xindia Steels Limited - India
- GVK Power & Infra Limited - India
- Coalindo Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- VISA Power Limited - India
- Billiton Holdings Pty Ltd - Australia
- Malabar Cements Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Economic Council, Georgia
- Kalimantan Lumbung Energi - Indonesia
- Pendopo Energi Batubara - Indonesia
- Star Paper Mills Limited - India
- Barasentosa Lestari - Indonesia
- OPG Power Generation Pvt Ltd - India
- Edison Trading Spa - Italy
- Kartika Selabumi Mining - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Minerals Council of Australia
- Trasteel International SA, Italy
- Antam Resourcindo - Indonesia
- Semirara Mining Corp, Philippines
- Mercator Lines Limited - India
- Therma Luzon, Inc, Philippines
- Standard Chartered Bank - UAE
- Sojitz Corporation - Japan
- Indonesian Coal Mining Association
- Australian Commodity Traders Exchange
- Renaissance Capital - South Africa
- PetroVietnam Power Coal Import and Supply Company
- Jorong Barutama Greston.PT - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- Heidelberg Cement - Germany
- Kepco SPC Power Corporation, Philippines
- Singapore Mercantile Exchange
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