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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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Wednesday, 30 September 15
Q1'16 FOB INDONESIA COAL SWAP FALLS $1.25 A TON AS SLIDE CONTINUES
COALspot.com: Indonesian coal swap for delivery Q4 2015 declined month on month and week over week.
The Q4 swap declined $ 0.72 (-1.78%) per t ...
Wednesday, 30 September 15
NEW BUILDING MARKET INSIGHT
COALspot.com: This year has been, beyond any doubt, a rather strenuous one for the newbuilding market. Ordering activity with regards to Dry Bulker ...
Tuesday, 29 September 15
FOB RICHARDS BAY COAL SWAPS ARE SLIDING
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q4' 2015 declined week over week and month over month.
The Q4 swap was down US$ ...
Monday, 28 September 15
API 5 FOB NEWCASTLE COAL SWAPS UP $2.15 IN ONE MONTH
COALspot.com: API 5 FOB Newcastle Coal swap for Q4’ 2015 delivery increased $2.10 per ton (5.15%) month over month to US$ 42.93 per ton. The ...
Monday, 28 September 15
CAPESIZE FLEET INCREASES BY JUST 1 VESSEL DURING LAST 12 MONTHS, IN POSITIVE SIGN FOR DRY BULK SHIPPING MARKET - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
After a rather tumultuous period, the shipping industry and more particular the dry bulk market has started to adjust to the new realities of globa ...
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- Semirara Mining and Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- OPG Power Generation Pvt Ltd - India
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- Energy Link Ltd, New Zealand
- Indian Energy Exchange, India
- Thai Mozambique Logistica
- Maharashtra Electricity Regulatory Commission - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- PowerSource Philippines DevCo
- Oldendorff Carriers - Singapore
- Gujarat Electricity Regulatory Commission - India
- Latin American Coal - Colombia
- Energy Development Corp, Philippines
- Mjunction Services Limited - India
- Kartika Selabumi Mining - Indonesia
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- Jorong Barutama Greston.PT - Indonesia
- Rio Tinto Coal - Australia
- Bukit Asam (Persero) Tbk - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Coal and Oil Company - UAE
- Marubeni Corporation - India
- Singapore Mercantile Exchange
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- AsiaOL BioFuels Corp., Philippines
- Karaikal Port Pvt Ltd - India
- Ministry of Transport, Egypt
- Krishnapatnam Port Company Ltd. - India
- GMR Energy Limited - India
- Price Waterhouse Coopers - Russia
- Carbofer General Trading SA - India
- Goldman Sachs - Singapore
- Jindal Steel & Power Ltd - India
- Meenaskhi Energy Private Limited - India
- Power Finance Corporation Ltd., India
- Bayan Resources Tbk. - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Malabar Cements Ltd - India
- IHS Mccloskey Coal Group - USA
- Indika Energy - Indonesia
- GAC Shipping (India) Pvt Ltd
- Baramulti Group, Indonesia
- Chettinad Cement Corporation Ltd - India
- White Energy Company Limited
- Petron Corporation, Philippines
- Central Electricity Authority - India
- Trasteel International SA, Italy
- Gujarat Sidhee Cement - India
- Economic Council, Georgia
- Cigading International Bulk Terminal - Indonesia
- Kaltim Prima Coal - Indonesia
- Bharathi Cement Corporation - India
- SMG Consultants - Indonesia
- Pendopo Energi Batubara - Indonesia
- Samtan Co., Ltd - South Korea
- Australian Commodity Traders Exchange
- European Bulk Services B.V. - Netherlands
- Essar Steel Hazira Ltd - India
- Heidelberg Cement - Germany
- Sindya Power Generating Company Private Ltd
- Antam Resourcindo - Indonesia
- Bukit Makmur.PT - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indian Oil Corporation Limited
- Iligan Light & Power Inc, Philippines
- Dalmia Cement Bharat India
- Mintek Dendrill Indonesia
- Cement Manufacturers Association - India
- Posco Energy - South Korea
- Global Business Power Corporation, Philippines
- Australian Coal Association
- Aboitiz Power Corporation - Philippines
- Borneo Indobara - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Sojitz Corporation - Japan
- Independent Power Producers Association of India
- Global Coal Blending Company Limited - Australia
- SN Aboitiz Power Inc, Philippines
- Medco Energi Mining Internasional
- Bhushan Steel Limited - India
- Salva Resources Pvt Ltd - India
- TeaM Sual Corporation - Philippines
- Madhucon Powers Ltd - India
- Kepco SPC Power Corporation, Philippines
- Toyota Tsusho Corporation, Japan
- Bhoruka Overseas - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Semirara Mining Corp, Philippines
- Vizag Seaport Private Limited - India
- Videocon Industries ltd - India
- Sakthi Sugars Limited - India
- Maheswari Brothers Coal Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Star Paper Mills Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sarangani Energy Corporation, Philippines
- Straits Asia Resources Limited - Singapore
- Global Green Power PLC Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Mercuria Energy - Indonesia
- Romanian Commodities Exchange
- New Zealand Coal & Carbon
- Thiess Contractors Indonesia
- Central Java Power - Indonesia
- McConnell Dowell - Australia
- Makarim & Taira - Indonesia
- GVK Power & Infra Limited - India
- PNOC Exploration Corporation - Philippines
- Ambuja Cements Ltd - India
- ICICI Bank Limited - India
- Mercator Lines Limited - India
- Sree Jayajothi Cements Limited - India
- Interocean Group of Companies - India
- The State Trading Corporation of India Ltd
- Larsen & Toubro Limited - India
- International Coal Ventures Pvt Ltd - India
- Georgia Ports Authority, United States
- Pipit Mutiara Jaya. PT, Indonesia
- Kalimantan Lumbung Energi - Indonesia
- South Luzon Thermal Energy Corporation
- Bukit Baiduri Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- CIMB Investment Bank - Malaysia
- Bulk Trading Sa - Switzerland
- Banpu Public Company Limited - Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Metalloyd Limited - United Kingdom
- Barasentosa Lestari - Indonesia
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- Kumho Petrochemical, South Korea
- Electricity Generating Authority of Thailand
- Kideco Jaya Agung - Indonesia
- Eastern Coal Council - USA
- Altura Mining Limited, Indonesia
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- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ceylon Electricity Board - Sri Lanka
- Neyveli Lignite Corporation Ltd, - India
- Leighton Contractors Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Simpson Spence & Young - Indonesia
- Tamil Nadu electricity Board
- Wood Mackenzie - Singapore
- Indonesian Coal Mining Association
- Commonwealth Bank - Australia
- Savvy Resources Ltd - HongKong
- VISA Power Limited - India
- Lanco Infratech Ltd - India
- Planning Commission, India
- The Treasury - Australian Government
- Kobexindo Tractors - Indoneisa
- TNB Fuel Sdn Bhd - Malaysia
- Sinarmas Energy and Mining - Indonesia
- Wilmar Investment Holdings
- MS Steel International - UAE
- Merrill Lynch Commodities Europe
- Rashtriya Ispat Nigam Limited - India
- Vedanta Resources Plc - India
- Tata Chemicals Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Directorate Of Revenue Intelligence - India
- Deloitte Consulting - India
- Xindia Steels Limited - India
- Coastal Gujarat Power Limited - India
- Uttam Galva Steels Limited - India
- Parliament of New Zealand
- Ministry of Mines - Canada
- Indo Tambangraya Megah - Indonesia
- Siam City Cement - Thailand
- Chamber of Mines of South Africa
- Binh Thuan Hamico - Vietnam
- Timah Investasi Mineral - Indoneisa
- IEA Clean Coal Centre - UK
- Intertek Mineral Services - Indonesia
- Bhatia International Limited - India
- Bangladesh Power Developement Board
- PetroVietnam Power Coal Import and Supply Company
- Orica Mining Services - Indonesia
- Renaissance Capital - South Africa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Agrawal Coal Company - India
- Electricity Authority, New Zealand
- Minerals Council of Australia
- Vijayanagar Sugar Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- The University of Queensland
- Karbindo Abesyapradhi - Indoneisa
- Standard Chartered Bank - UAE
- Therma Luzon, Inc, Philippines
- CNBM International Corporation - China
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- PTC India Limited - India
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- ASAPP Information Group - India
- SMC Global Power, Philippines
- Jaiprakash Power Ventures ltd
- GN Power Mariveles Coal Plant, Philippines
- Port Waratah Coal Services - Australia
- Billiton Holdings Pty Ltd - Australia
- Riau Bara Harum - Indonesia
- Orica Australia Pty. Ltd.
- Africa Commodities Group - South Africa
- Indogreen Group - Indonesia
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- Holcim Trading Pte Ltd - Singapore
- Anglo American - United Kingdom
- Grasim Industreis Ltd - India
- London Commodity Brokers - England
- India Bulls Power Limited - India
- Eastern Energy - Thailand
- Ministry of Finance - Indonesia
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- Meralco Power Generation, Philippines
- Edison Trading Spa - Italy
- Siam City Cement PLC, Thailand
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