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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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Sunday, 25 October 15
ANOTHER DISAPPOINTING WEEK FOR PANAMAX; INDEX FELL 5.4 PERCENT W-W
COALspot.com: The BDI was slightly up by 2.65 pct closing at 774 points mainly because of Cape index which was up by 10.85 pct closing at 1461 poin ...
Sunday, 25 October 15
DRY BULK SHIP OWNERS ARE LOOKING TO CHINA'S POLICIES FOR CUES ON FUTURE MARKET DEMAND - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
China’s hard or softer landing is a thing which has troubled dry bulk shipping for a couple of years now, as owners have been hit by the coun ...
Friday, 23 October 15
WILL INDIAN DOMESTIC COAL PRICES BE ABLE TO COMPETE IMPORTED COAL PRICES IF THE CURRENT TREND CONTINUES?
COALspot.com: The Most of the Indian end-users are waiting for last minute purchase to enjoy every drop in price. Coal procurement managers are als ...
Friday, 23 October 15
COAL PRODUCTION IN THE U.S. FOR THE WEEK ENDING OCTOBER 17 DECLINED FOR THE SECOND STRAIGHT WEEK
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 16.6 million shor ...
Wednesday, 21 October 15
RUSSIA'S CARBO ONE COAL SALES TO HIT 50 MLN T/YR - JACQUELINE HOLMES
COALspot.com: Russia's Carbo One has become one of the world's leading physical coal traders with an annual volume approaching 50 million t ...
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- Coalindo Energy - Indonesia
- The Treasury - Australian Government
- Petrochimia International Co. Ltd.- Taiwan
- Mercuria Energy - Indonesia
- Parry Sugars Refinery, India
- Anglo American - United Kingdom
- Simpson Spence & Young - Indonesia
- Mjunction Services Limited - India
- Attock Cement Pakistan Limited
- Commonwealth Bank - Australia
- Chettinad Cement Corporation Ltd - India
- Sindya Power Generating Company Private Ltd
- Riau Bara Harum - Indonesia
- Indian Energy Exchange, India
- PTC India Limited - India
- IHS Mccloskey Coal Group - USA
- Bangladesh Power Developement Board
- SN Aboitiz Power Inc, Philippines
- Banpu Public Company Limited - Thailand
- Central Electricity Authority - India
- Bhushan Steel Limited - India
- The University of Queensland
- Ministry of Finance - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Therma Luzon, Inc, Philippines
- Eastern Energy - Thailand
- Madhucon Powers Ltd - India
- Coastal Gujarat Power Limited - India
- Vedanta Resources Plc - India
- AsiaOL BioFuels Corp., Philippines
- Makarim & Taira - Indonesia
- Ind-Barath Power Infra Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Petron Corporation, Philippines
- Electricity Authority, New Zealand
- Oldendorff Carriers - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Malabar Cements Ltd - India
- Minerals Council of Australia
- Meralco Power Generation, Philippines
- Cigading International Bulk Terminal - Indonesia
- Semirara Mining Corp, Philippines
- Thai Mozambique Logistica
- ICICI Bank Limited - India
- Bharathi Cement Corporation - India
- Bahari Cakrawala Sebuku - Indonesia
- Videocon Industries ltd - India
- OPG Power Generation Pvt Ltd - India
- Kobexindo Tractors - Indoneisa
- Kalimantan Lumbung Energi - Indonesia
- Chamber of Mines of South Africa
- Aditya Birla Group - India
- Indogreen Group - Indonesia
- Larsen & Toubro Limited - India
- Energy Development Corp, Philippines
- Romanian Commodities Exchange
- Pendopo Energi Batubara - Indonesia
- Trasteel International SA, Italy
- MS Steel International - UAE
- Sakthi Sugars Limited - India
- SMC Global Power, Philippines
- European Bulk Services B.V. - Netherlands
- Bayan Resources Tbk. - Indonesia
- Carbofer General Trading SA - India
- Kohat Cement Company Ltd. - Pakistan
- The State Trading Corporation of India Ltd
- Bukit Asam (Persero) Tbk - Indonesia
- New Zealand Coal & Carbon
- Port Waratah Coal Services - Australia
- Standard Chartered Bank - UAE
- Tamil Nadu electricity Board
- Samtan Co., Ltd - South Korea
- Goldman Sachs - Singapore
- Merrill Lynch Commodities Europe
- McConnell Dowell - Australia
- South Luzon Thermal Energy Corporation
- PetroVietnam Power Coal Import and Supply Company
- PowerSource Philippines DevCo
- ASAPP Information Group - India
- GN Power Mariveles Coal Plant, Philippines
- Independent Power Producers Association of India
- Gujarat Sidhee Cement - India
- Coal and Oil Company - UAE
- India Bulls Power Limited - India
- Interocean Group of Companies - India
- Deloitte Consulting - India
- Uttam Galva Steels Limited - India
- Australian Coal Association
- GMR Energy Limited - India
- Parliament of New Zealand
- Jindal Steel & Power Ltd - India
- Borneo Indobara - Indonesia
- Africa Commodities Group - South Africa
- Maheswari Brothers Coal Limited - India
- Orica Mining Services - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Asmin Koalindo Tuhup - Indonesia
- Global Coal Blending Company Limited - Australia
- Gujarat Electricity Regulatory Commission - India
- Neyveli Lignite Corporation Ltd, - India
- CNBM International Corporation - China
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Semirara Mining and Power Corporation, Philippines
- Sical Logistics Limited - India
- Altura Mining Limited, Indonesia
- SMG Consultants - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Timah Investasi Mineral - Indoneisa
- Bukit Makmur.PT - Indonesia
- Intertek Mineral Services - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Salva Resources Pvt Ltd - India
- Indonesian Coal Mining Association
- Metalloyd Limited - United Kingdom
- Toyota Tsusho Corporation, Japan
- Antam Resourcindo - Indonesia
- Latin American Coal - Colombia
- Rio Tinto Coal - Australia
- Sinarmas Energy and Mining - Indonesia
- GAC Shipping (India) Pvt Ltd
- TNB Fuel Sdn Bhd - Malaysia
- Aboitiz Power Corporation - Philippines
- Sojitz Corporation - Japan
- Kepco SPC Power Corporation, Philippines
- Formosa Plastics Group - Taiwan
- Essar Steel Hazira Ltd - India
- Singapore Mercantile Exchange
- Karaikal Port Pvt Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Sarangani Energy Corporation, Philippines
- Eastern Coal Council - USA
- International Coal Ventures Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Indika Energy - Indonesia
- Edison Trading Spa - Italy
- Wood Mackenzie - Singapore
- Alfred C Toepfer International GmbH - Germany
- Australian Commodity Traders Exchange
- Iligan Light & Power Inc, Philippines
- Ministry of Transport, Egypt
- Indian Oil Corporation Limited
- Dalmia Cement Bharat India
- Wilmar Investment Holdings
- Agrawal Coal Company - India
- Bhatia International Limited - India
- Mintek Dendrill Indonesia
- Savvy Resources Ltd - HongKong
- Barasentosa Lestari - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Thiess Contractors Indonesia
- Orica Australia Pty. Ltd.
- Jorong Barutama Greston.PT - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- VISA Power Limited - India
- Kaltim Prima Coal - Indonesia
- Tata Chemicals Ltd - India
- Ministry of Mines - Canada
- Lanco Infratech Ltd - India
- Central Java Power - Indonesia
- IEA Clean Coal Centre - UK
- Baramulti Group, Indonesia
- CIMB Investment Bank - Malaysia
- Global Business Power Corporation, Philippines
- Global Green Power PLC Corporation, Philippines
- Heidelberg Cement - Germany
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Marubeni Corporation - India
- Kideco Jaya Agung - Indonesia
- Power Finance Corporation Ltd., India
- Medco Energi Mining Internasional
- Jaiprakash Power Ventures ltd
- Bhoruka Overseas - Indonesia
- Grasim Industreis Ltd - India
- Price Waterhouse Coopers - Russia
- Xindia Steels Limited - India
- Rashtriya Ispat Nigam Limited - India
- Bulk Trading Sa - Switzerland
- Siam City Cement PLC, Thailand
- Sree Jayajothi Cements Limited - India
- Holcim Trading Pte Ltd - Singapore
- Electricity Generating Authority of Thailand
- Kumho Petrochemical, South Korea
- Georgia Ports Authority, United States
- Economic Council, Georgia
- Indo Tambangraya Megah - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Siam City Cement - Thailand
- Miang Besar Coal Terminal - Indonesia
- Posco Energy - South Korea
- Bank of Tokyo Mitsubishi UFJ Ltd
- Mercator Lines Limited - India
- Renaissance Capital - South Africa
- White Energy Company Limited
- Binh Thuan Hamico - Vietnam
- GVK Power & Infra Limited - India
- Straits Asia Resources Limited - Singapore
- Ambuja Cements Ltd - India
- Kartika Selabumi Mining - Indonesia
- LBH Netherlands Bv - Netherlands
- Energy Link Ltd, New Zealand
- Meenaskhi Energy Private Limited - India
- Kapuas Tunggal Persada - Indonesia
- Bukit Baiduri Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- Planning Commission, India
- TeaM Sual Corporation - Philippines
- Billiton Holdings Pty Ltd - Australia
- Gujarat Mineral Development Corp Ltd - India
- PNOC Exploration Corporation - Philippines
- Cement Manufacturers Association - India
- Vizag Seaport Private Limited - India
- Globalindo Alam Lestari - Indonesia
- London Commodity Brokers - England
- Star Paper Mills Limited - India
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