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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, 20 October 15
API 5 FOB NEWCASTLE COAL SWAP CLOSED NEGATIVE
COALspot.com: API 5 FOB Newcastle Coal swap for Q4’ 2015 delivery decreased $1.23 per ton (2.86%) month over month to US$ 41.80 per ton. The ...
Monday, 19 October 15
RUSSIA MAJOR COAL MINER KRU CUTS 4.5 MLN T/YR "UNPROFITABLE" EURO SALES - JACQUELINE HOLMES
COALspot.com: Kuzbassrazrezugol (KRU), one of Russia's largest producers of high-quality coal, plans to cut its coal exports in 2016 by about 4 ...
Monday, 19 October 15
CFR SOUTH CHINA COAL SWAP CLOSED AT $48.68 PER TON
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery down just US cents 55 (1.12 %) per ton month over month.
A commodity ...
Monday, 19 October 15
KOMIPO SEEKS 1.28 MILLION T/Y COAL FOR DEC 2015 - Q2 2016
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender for 1,280,000 Metric Tons (MT) of minimum 4,600 kc ...
Sunday, 18 October 15
THE BDI AND OTHER INDICES CLOSED OFF ON NEGATIVE NOTE THIS FRIDAY
COALspot.com: The BDI closed off on negative note this Friday compared to previous Friday's closing.
The BDI closed this Friday (16 Octobe ...
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- Barasentosa Lestari - Indonesia
- Baramulti Group, Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Deloitte Consulting - India
- ICICI Bank Limited - India
- Port Waratah Coal Services - Australia
- Indian Oil Corporation Limited
- Orica Mining Services - Indonesia
- Jindal Steel & Power Ltd - India
- Maheswari Brothers Coal Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Commonwealth Bank - Australia
- South Luzon Thermal Energy Corporation
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Metalloyd Limited - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Sindya Power Generating Company Private Ltd
- Timah Investasi Mineral - Indoneisa
- The Treasury - Australian Government
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Minerals Council of Australia
- Siam City Cement - Thailand
- AsiaOL BioFuels Corp., Philippines
- Latin American Coal - Colombia
- Sinarmas Energy and Mining - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Georgia Ports Authority, United States
- International Coal Ventures Pvt Ltd - India
- Bhatia International Limited - India
- Makarim & Taira - Indonesia
- Salva Resources Pvt Ltd - India
- Orica Australia Pty. Ltd.
- London Commodity Brokers - England
- Africa Commodities Group - South Africa
- Xindia Steels Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Romanian Commodities Exchange
- Riau Bara Harum - Indonesia
- Straits Asia Resources Limited - Singapore
- Lanco Infratech Ltd - India
- New Zealand Coal & Carbon
- Electricity Authority, New Zealand
- Krishnapatnam Port Company Ltd. - India
- PetroVietnam Power Coal Import and Supply Company
- Rio Tinto Coal - Australia
- Bangladesh Power Developement Board
- Singapore Mercantile Exchange
- Directorate Of Revenue Intelligence - India
- Agrawal Coal Company - India
- Power Finance Corporation Ltd., India
- Meralco Power Generation, Philippines
- The State Trading Corporation of India Ltd
- Maharashtra Electricity Regulatory Commission - India
- Rashtriya Ispat Nigam Limited - India
- Grasim Industreis Ltd - India
- Vedanta Resources Plc - India
- TNB Fuel Sdn Bhd - Malaysia
- Parry Sugars Refinery, India
- PTC India Limited - India
- Eastern Coal Council - USA
- Standard Chartered Bank - UAE
- Jaiprakash Power Ventures ltd
- Eastern Energy - Thailand
- Manunggal Multi Energi - Indonesia
- Ministry of Finance - Indonesia
- TeaM Sual Corporation - Philippines
- Tamil Nadu electricity Board
- Dalmia Cement Bharat India
- Semirara Mining Corp, Philippines
- Thai Mozambique Logistica
- Directorate General of MIneral and Coal - Indonesia
- Energy Development Corp, Philippines
- Leighton Contractors Pty Ltd - Australia
- Karbindo Abesyapradhi - Indoneisa
- Semirara Mining and Power Corporation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Sakthi Sugars Limited - India
- Samtan Co., Ltd - South Korea
- Anglo American - United Kingdom
- Thiess Contractors Indonesia
- Ministry of Mines - Canada
- Vijayanagar Sugar Pvt Ltd - India
- SMC Global Power, Philippines
- Gujarat Sidhee Cement - India
- San Jose City I Power Corp, Philippines
- Australian Coal Association
- Indo Tambangraya Megah - Indonesia
- Posco Energy - South Korea
- Miang Besar Coal Terminal - Indonesia
- Star Paper Mills Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Globalindo Alam Lestari - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Oldendorff Carriers - Singapore
- SN Aboitiz Power Inc, Philippines
- Indonesian Coal Mining Association
- Central Electricity Authority - India
- CIMB Investment Bank - Malaysia
- Mercuria Energy - Indonesia
- Mercator Lines Limited - India
- IEA Clean Coal Centre - UK
- OPG Power Generation Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Wilmar Investment Holdings
- Ind-Barath Power Infra Limited - India
- Kepco SPC Power Corporation, Philippines
- Uttam Galva Steels Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sarangani Energy Corporation, Philippines
- VISA Power Limited - India
- Goldman Sachs - Singapore
- Mjunction Services Limited - India
- Siam City Cement PLC, Thailand
- Formosa Plastics Group - Taiwan
- Tata Chemicals Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Bahari Cakrawala Sebuku - Indonesia
- Kideco Jaya Agung - Indonesia
- MS Steel International - UAE
- Trasteel International SA, Italy
- Bukit Baiduri Energy - Indonesia
- Renaissance Capital - South Africa
- Chettinad Cement Corporation Ltd - India
- Binh Thuan Hamico - Vietnam
- Madhucon Powers Ltd - India
- Heidelberg Cement - Germany
- Petron Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Bukit Makmur.PT - Indonesia
- European Bulk Services B.V. - Netherlands
- Sical Logistics Limited - India
- Malabar Cements Ltd - India
- ASAPP Information Group - India
- Ceylon Electricity Board - Sri Lanka
- Bharathi Cement Corporation - India
- Karaikal Port Pvt Ltd - India
- Savvy Resources Ltd - HongKong
- Coalindo Energy - Indonesia
- Mintek Dendrill Indonesia
- Billiton Holdings Pty Ltd - Australia
- Medco Energi Mining Internasional
- Essar Steel Hazira Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Intertek Mineral Services - Indonesia
- Aboitiz Power Corporation - Philippines
- Australian Commodity Traders Exchange
- Kobexindo Tractors - Indoneisa
- GMR Energy Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Coal and Oil Company - UAE
- Larsen & Toubro Limited - India
- Edison Trading Spa - Italy
- Bulk Trading Sa - Switzerland
- Antam Resourcindo - Indonesia
- Simpson Spence & Young - Indonesia
- Iligan Light & Power Inc, Philippines
- Electricity Generating Authority of Thailand
- Sojitz Corporation - Japan
- Banpu Public Company Limited - Thailand
- Therma Luzon, Inc, Philippines
- Central Java Power - Indonesia
- PNOC Exploration Corporation - Philippines
- Chamber of Mines of South Africa
- Wood Mackenzie - Singapore
- McConnell Dowell - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- SMG Consultants - Indonesia
- Indogreen Group - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Ambuja Cements Ltd - India
- Kaltim Prima Coal - Indonesia
- GAC Shipping (India) Pvt Ltd
- Global Coal Blending Company Limited - Australia
- Bayan Resources Tbk. - Indonesia
- Pendopo Energi Batubara - Indonesia
- Indika Energy - Indonesia
- Global Business Power Corporation, Philippines
- Indian Energy Exchange, India
- Carbofer General Trading SA - India
- Cigading International Bulk Terminal - Indonesia
- Planning Commission, India
- Gujarat Mineral Development Corp Ltd - India
- CNBM International Corporation - China
- Aditya Birla Group - India
- Bhushan Steel Limited - India
- Sree Jayajothi Cements Limited - India
- Global Green Power PLC Corporation, Philippines
- Bhoruka Overseas - Indonesia
- India Bulls Power Limited - India
- Videocon Industries ltd - India
- Parliament of New Zealand
- Price Waterhouse Coopers - Russia
- LBH Netherlands Bv - Netherlands
- IHS Mccloskey Coal Group - USA
- Petrochimia International Co. Ltd.- Taiwan
- GN Power Mariveles Coal Plant, Philippines
- Marubeni Corporation - India
- The University of Queensland
- Borneo Indobara - Indonesia
- Cement Manufacturers Association - India
- White Energy Company Limited
- Interocean Group of Companies - India
- Ministry of Transport, Egypt
- Attock Cement Pakistan Limited
- Economic Council, Georgia
- Kartika Selabumi Mining - Indonesia
- Independent Power Producers Association of India
- Altura Mining Limited, Indonesia
- Gujarat Electricity Regulatory Commission - India
- PowerSource Philippines DevCo
- Merrill Lynch Commodities Europe
- Vizag Seaport Private Limited - India
- Kumho Petrochemical, South Korea
- Meenaskhi Energy Private Limited - India
- Toyota Tsusho Corporation, Japan
- GVK Power & Infra Limited - India
- Coastal Gujarat Power Limited - India
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