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