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