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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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Tuesday, 03 November 15
EU OIL MAJORS FACE FURTHER EARNINGS DECLINE IN Q415 - FITCH RATINGS
The sharp drop in major European oil companies' third-quarter profits is likely to be extended in the fourth quarter as refining margins, which ...
Monday, 02 November 15
DESPITE CHALLENGING MARKET CONDITIONS, ADARO LOWERS COSTS, DEBT AND DELIVERS STRONG FREE CASH FLOW
COALspot.com: Despite challenging market conditions, Adaro lowers costs, lowers debt and delivers strong free cash flow.
The Indonesia’s ...
Monday, 02 November 15
CFR SOUTH CHINA COAL SWAPS CLOSED ON A WEAK NOTE
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined US$ 1.81(3.71 %) per ton month over month.
A commodity swap ...
Sunday, 01 November 15
THE FREIGHT MARKET SENTIMENT REMAINS WEAK
This week’s freight market sentiment remains weak compared to last week.
The Baltic Dry Index (BDI), an economic indicator issued daily ...
Saturday, 31 October 15
ADARO ENERGY'S CORE EARNINGS DECLINE 21 PER CENT FOR THE NINE MONTHS PERIOD TO SEPTEMBER 2015
COALspot.com: Adaro Energy's core earnings decline 21% to US$228 Million for first 9months of this year compared to the same period last year. ...
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- Ministry of Finance - Indonesia
- Coal and Oil Company - UAE
- Gujarat Electricity Regulatory Commission - India
- Formosa Plastics Group - Taiwan
- Chamber of Mines of South Africa
- GVK Power & Infra Limited - India
- Anglo American - United Kingdom
- PNOC Exploration Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Medco Energi Mining Internasional
- Banpu Public Company Limited - Thailand
- CNBM International Corporation - China
- TNB Fuel Sdn Bhd - Malaysia
- Vijayanagar Sugar Pvt Ltd - India
- Sical Logistics Limited - India
- Heidelberg Cement - Germany
- VISA Power Limited - India
- Parliament of New Zealand
- Vizag Seaport Private Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- London Commodity Brokers - England
- Singapore Mercantile Exchange
- Karaikal Port Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Global Business Power Corporation, Philippines
- Australian Coal Association
- Global Coal Blending Company Limited - Australia
- Bhoruka Overseas - Indonesia
- Timah Investasi Mineral - Indoneisa
- Manunggal Multi Energi - Indonesia
- Mercator Lines Limited - India
- Billiton Holdings Pty Ltd - Australia
- Metalloyd Limited - United Kingdom
- Africa Commodities Group - South Africa
- Meenaskhi Energy Private Limited - India
- San Jose City I Power Corp, Philippines
- Kideco Jaya Agung - Indonesia
- Indian Energy Exchange, India
- Wood Mackenzie - Singapore
- Petron Corporation, Philippines
- Posco Energy - South Korea
- Mintek Dendrill Indonesia
- McConnell Dowell - Australia
- Therma Luzon, Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Bulk Trading Sa - Switzerland
- European Bulk Services B.V. - Netherlands
- Deloitte Consulting - India
- Grasim Industreis Ltd - India
- Indo Tambangraya Megah - Indonesia
- Latin American Coal - Colombia
- Gujarat Mineral Development Corp Ltd - India
- Savvy Resources Ltd - HongKong
- Sindya Power Generating Company Private Ltd
- Global Green Power PLC Corporation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Lanco Infratech Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- IEA Clean Coal Centre - UK
- Altura Mining Limited, Indonesia
- Mjunction Services Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Vedanta Resources Plc - India
- Orica Mining Services - Indonesia
- Australian Commodity Traders Exchange
- The University of Queensland
- Orica Australia Pty. Ltd.
- Minerals Council of Australia
- Indogreen Group - Indonesia
- Rio Tinto Coal - Australia
- Malabar Cements Ltd - India
- ICICI Bank Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Makarim & Taira - Indonesia
- Pendopo Energi Batubara - Indonesia
- CIMB Investment Bank - Malaysia
- Aditya Birla Group - India
- Antam Resourcindo - Indonesia
- SN Aboitiz Power Inc, Philippines
- Kumho Petrochemical, South Korea
- Price Waterhouse Coopers - Russia
- Globalindo Alam Lestari - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Carbofer General Trading SA - India
- Eastern Coal Council - USA
- Tata Chemicals Ltd - India
- Indika Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Cigading International Bulk Terminal - Indonesia
- Ind-Barath Power Infra Limited - India
- Gujarat Sidhee Cement - India
- Mercuria Energy - Indonesia
- Bukit Makmur.PT - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Jaiprakash Power Ventures ltd
- Maheswari Brothers Coal Limited - India
- Krishnapatnam Port Company Ltd. - India
- PTC India Limited - India
- Borneo Indobara - Indonesia
- Uttam Galva Steels Limited - India
- Toyota Tsusho Corporation, Japan
- Salva Resources Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- Bangladesh Power Developement Board
- Jindal Steel & Power Ltd - India
- Siam City Cement - Thailand
- Trasteel International SA, Italy
- Edison Trading Spa - Italy
- GN Power Mariveles Coal Plant, Philippines
- Essar Steel Hazira Ltd - India
- Standard Chartered Bank - UAE
- Central Electricity Authority - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kapuas Tunggal Persada - Indonesia
- Barasentosa Lestari - Indonesia
- Independent Power Producers Association of India
- Bahari Cakrawala Sebuku - Indonesia
- Attock Cement Pakistan Limited
- Xindia Steels Limited - India
- Semirara Mining Corp, Philippines
- Kaltim Prima Coal - Indonesia
- SMC Global Power, Philippines
- Georgia Ports Authority, United States
- Parry Sugars Refinery, India
- Ministry of Mines - Canada
- Chettinad Cement Corporation Ltd - India
- Madhucon Powers Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Riau Bara Harum - Indonesia
- SMG Consultants - Indonesia
- Iligan Light & Power Inc, Philippines
- Goldman Sachs - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bhatia International Limited - India
- Sree Jayajothi Cements Limited - India
- Sakthi Sugars Limited - India
- Central Java Power - Indonesia
- Samtan Co., Ltd - South Korea
- Aboitiz Power Corporation - Philippines
- Agrawal Coal Company - India
- Bharathi Cement Corporation - India
- Bayan Resources Tbk. - Indonesia
- Kartika Selabumi Mining - Indonesia
- OPG Power Generation Pvt Ltd - India
- Power Finance Corporation Ltd., India
- Sojitz Corporation - Japan
- White Energy Company Limited
- Economic Council, Georgia
- Cement Manufacturers Association - India
- Rashtriya Ispat Nigam Limited - India
- South Luzon Thermal Energy Corporation
- Directorate Of Revenue Intelligence - India
- Star Paper Mills Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- MS Steel International - UAE
- Energy Development Corp, Philippines
- IHS Mccloskey Coal Group - USA
- TeaM Sual Corporation - Philippines
- Bhushan Steel Limited - India
- Larsen & Toubro Limited - India
- Merrill Lynch Commodities Europe
- Electricity Generating Authority of Thailand
- Ambuja Cements Ltd - India
- Indian Oil Corporation Limited
- Simpson Spence & Young - Indonesia
- Meralco Power Generation, Philippines
- Videocon Industries ltd - India
- Electricity Authority, New Zealand
- Directorate General of MIneral and Coal - Indonesia
- Binh Thuan Hamico - Vietnam
- Jorong Barutama Greston.PT - Indonesia
- Planning Commission, India
- Wilmar Investment Holdings
- Kepco SPC Power Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Energy Link Ltd, New Zealand
- Coalindo Energy - Indonesia
- Coastal Gujarat Power Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ministry of Transport, Egypt
- Holcim Trading Pte Ltd - Singapore
- Dalmia Cement Bharat India
- Offshore Bulk Terminal Pte Ltd, Singapore
- PowerSource Philippines DevCo
- Leighton Contractors Pty Ltd - Australia
- Thiess Contractors Indonesia
- Ceylon Electricity Board - Sri Lanka
- Thai Mozambique Logistica
- Asmin Koalindo Tuhup - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Renaissance Capital - South Africa
- New Zealand Coal & Carbon
- ASAPP Information Group - India
- India Bulls Power Limited - India
- Romanian Commodities Exchange
- Straits Asia Resources Limited - Singapore
- GAC Shipping (India) Pvt Ltd
- Commonwealth Bank - Australia
- Baramulti Group, Indonesia
- Siam City Cement PLC, Thailand
- Kobexindo Tractors - Indoneisa
- The Treasury - Australian Government
- Eastern Energy - Thailand
- Neyveli Lignite Corporation Ltd, - India
- Sarangani Energy Corporation, Philippines
- Tamil Nadu electricity Board
- Marubeni Corporation - India
- Indonesian Coal Mining Association
- Interocean Group of Companies - India
- Oldendorff Carriers - Singapore
- GMR Energy Limited - India
- Semirara Mining and Power Corporation, Philippines
- The State Trading Corporation of India Ltd
- LBH Netherlands Bv - Netherlands
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