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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, 22 September 15
1Q16 FOB INDONESIA COAL SWAP DECLINED 6.49 PER CENT M-M
COALspot.com: Indonesian coal swap for delivery 4Q 2015 declined month on month and week over week.
The 4Q swap declined $ 2.29 (-5.42%) per t ...
Tuesday, 22 September 15
FOB RICHARDS BAY COAL SWAPS FALL CONTINUES
COALspot.com: API4 FOB Richards Bay Coal swap for delivery 4Q' 2015 declined week over week and month over month.
The 4Q swap was down US$ ...
Monday, 21 September 15
Q4' 15 FOB NEWCASTLE COAL SWAP CLOSED HIGHER THAN Q2' 16 SWAP
COALspot.com: API 5 FOB Newcastle Coal swap for 4Q’ 2015 delivery increased $0.43 per ton (1.01%) month over month to US$ 42.95 per ton. The ...
Monday, 21 September 15
CFR SOUTH CHINA COAL SWAP GAINED WEEK OVER WEEK
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined just US$ 0.45 (0.90 %) per ton month over month.
A commodit ...
Monday, 21 September 15
KOMIPO OF KOREA INVITES BIDS FOR BITUMINOUS COAL
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender for 390,000 Metric Tons (MT) of minimum 4,600 kcal ...
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- Bangladesh Power Developement Board
- White Energy Company Limited
- Samtan Co., Ltd - South Korea
- Kaltim Prima Coal - Indonesia
- Borneo Indobara - Indonesia
- Coalindo Energy - Indonesia
- Indika Energy - Indonesia
- Australian Commodity Traders Exchange
- Latin American Coal - Colombia
- Sindya Power Generating Company Private Ltd
- IHS Mccloskey Coal Group - USA
- Timah Investasi Mineral - Indoneisa
- Lanco Infratech Ltd - India
- Eastern Coal Council - USA
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Leighton Contractors Pty Ltd - Australia
- London Commodity Brokers - England
- Ministry of Transport, Egypt
- Bukit Baiduri Energy - Indonesia
- Simpson Spence & Young - Indonesia
- International Coal Ventures Pvt Ltd - India
- Sical Logistics Limited - India
- GAC Shipping (India) Pvt Ltd
- Karbindo Abesyapradhi - Indoneisa
- Mjunction Services Limited - India
- Ind-Barath Power Infra Limited - India
- Coal and Oil Company - UAE
- Petrochimia International Co. Ltd.- Taiwan
- New Zealand Coal & Carbon
- Jindal Steel & Power Ltd - India
- Renaissance Capital - South Africa
- Parliament of New Zealand
- Siam City Cement - Thailand
- Chettinad Cement Corporation Ltd - India
- Chamber of Mines of South Africa
- Mercator Lines Limited - India
- SMG Consultants - Indonesia
- Global Business Power Corporation, Philippines
- San Jose City I Power Corp, Philippines
- Cigading International Bulk Terminal - Indonesia
- VISA Power Limited - India
- Salva Resources Pvt Ltd - India
- Semirara Mining Corp, Philippines
- Anglo American - United Kingdom
- Baramulti Group, Indonesia
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- Heidelberg Cement - Germany
- Jorong Barutama Greston.PT - Indonesia
- Central Electricity Authority - India
- GN Power Mariveles Coal Plant, Philippines
- Energy Link Ltd, New Zealand
- TeaM Sual Corporation - Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Ambuja Cements Ltd - India
- PNOC Exploration Corporation - Philippines
- Savvy Resources Ltd - HongKong
- Mercuria Energy - Indonesia
- Uttam Galva Steels Limited - India
- Trasteel International SA, Italy
- Asmin Koalindo Tuhup - Indonesia
- Therma Luzon, Inc, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Iligan Light & Power Inc, Philippines
- IEA Clean Coal Centre - UK
- Krishnapatnam Port Company Ltd. - India
- Energy Development Corp, Philippines
- ASAPP Information Group - India
- Intertek Mineral Services - Indonesia
- Manunggal Multi Energi - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Madhucon Powers Ltd - India
- Georgia Ports Authority, United States
- Bahari Cakrawala Sebuku - Indonesia
- Barasentosa Lestari - Indonesia
- Petron Corporation, Philippines
- Malabar Cements Ltd - India
- Xindia Steels Limited - India
- Economic Council, Georgia
- Kepco SPC Power Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- Jaiprakash Power Ventures ltd
- Altura Mining Limited, Indonesia
- Edison Trading Spa - Italy
- Orica Australia Pty. Ltd.
- India Bulls Power Limited - India
- Bhoruka Overseas - Indonesia
- Vedanta Resources Plc - India
- Gujarat Sidhee Cement - India
- Vizag Seaport Private Limited - India
- Mintek Dendrill Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Billiton Holdings Pty Ltd - Australia
- Orica Mining Services - Indonesia
- Bhushan Steel Limited - India
- Interocean Group of Companies - India
- Wilmar Investment Holdings
- Global Coal Blending Company Limited - Australia
- Kobexindo Tractors - Indoneisa
- Standard Chartered Bank - UAE
- Videocon Industries ltd - India
- CIMB Investment Bank - Malaysia
- Medco Energi Mining Internasional
- Sinarmas Energy and Mining - Indonesia
- Directorate Of Revenue Intelligence - India
- Kapuas Tunggal Persada - Indonesia
- Karaikal Port Pvt Ltd - India
- Rio Tinto Coal - Australia
- Essar Steel Hazira Ltd - India
- Electricity Authority, New Zealand
- Wood Mackenzie - Singapore
- Independent Power Producers Association of India
- Kumho Petrochemical, South Korea
- Indian Energy Exchange, India
- Aboitiz Power Corporation - Philippines
- Bhatia International Limited - India
- Singapore Mercantile Exchange
- Bukit Makmur.PT - Indonesia
- Sarangani Energy Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Antam Resourcindo - Indonesia
- Riau Bara Harum - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Larsen & Toubro Limited - India
- Tamil Nadu electricity Board
- Sojitz Corporation - Japan
- South Luzon Thermal Energy Corporation
- Thai Mozambique Logistica
- Oldendorff Carriers - Singapore
- Indian Oil Corporation Limited
- Minerals Council of Australia
- ICICI Bank Limited - India
- CNBM International Corporation - China
- Holcim Trading Pte Ltd - Singapore
- OPG Power Generation Pvt Ltd - India
- Indogreen Group - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Romanian Commodities Exchange
- Maheswari Brothers Coal Limited - India
- Bulk Trading Sa - Switzerland
- Star Paper Mills Limited - India
- Ceylon Electricity Board - Sri Lanka
- Banpu Public Company Limited - Thailand
- MS Steel International - UAE
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Marubeni Corporation - India
- The Treasury - Australian Government
- Aditya Birla Group - India
- Alfred C Toepfer International GmbH - Germany
- The State Trading Corporation of India Ltd
- Price Waterhouse Coopers - Russia
- Posco Energy - South Korea
- Eastern Energy - Thailand
- Gujarat Mineral Development Corp Ltd - India
- Grasim Industreis Ltd - India
- Merrill Lynch Commodities Europe
- AsiaOL BioFuels Corp., Philippines
- Ministry of Finance - Indonesia
- SN Aboitiz Power Inc, Philippines
- LBH Netherlands Bv - Netherlands
- Semirara Mining and Power Corporation, Philippines
- Indonesian Coal Mining Association
- Kideco Jaya Agung - Indonesia
- Bayan Resources Tbk. - Indonesia
- Sakthi Sugars Limited - India
- Rashtriya Ispat Nigam Limited - India
- Africa Commodities Group - South Africa
- Power Finance Corporation Ltd., India
- Bharathi Cement Corporation - India
- Toyota Tsusho Corporation, Japan
- TNB Fuel Sdn Bhd - Malaysia
- Metalloyd Limited - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Offshore Bulk Terminal Pte Ltd, Singapore
- Tata Chemicals Ltd - India
- Thiess Contractors Indonesia
- Indo Tambangraya Megah - Indonesia
- Meenaskhi Energy Private Limited - India
- Coastal Gujarat Power Limited - India
- PowerSource Philippines DevCo
- European Bulk Services B.V. - Netherlands
- Siam City Cement PLC, Thailand
- Commonwealth Bank - Australia
- Binh Thuan Hamico - Vietnam
- GMR Energy Limited - India
- Port Waratah Coal Services - Australia
- Kalimantan Lumbung Energi - Indonesia
- Deloitte Consulting - India
- Formosa Plastics Group - Taiwan
- Makarim & Taira - Indonesia
- PTC India Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Parry Sugars Refinery, India
- Globalindo Alam Lestari - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Meralco Power Generation, Philippines
- SMC Global Power, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Central Java Power - Indonesia
- Sree Jayajothi Cements Limited - India
- Planning Commission, India
- Agrawal Coal Company - India
- Ministry of Mines - Canada
- Cement Manufacturers Association - India
- Gujarat Electricity Regulatory Commission - India
- GVK Power & Infra Limited - India
- Attock Cement Pakistan Limited
- Kartika Selabumi Mining - Indonesia
- The University of Queensland
- Straits Asia Resources Limited - Singapore
- McConnell Dowell - Australia
- Miang Besar Coal Terminal - Indonesia
- Goldman Sachs - Singapore
- Dalmia Cement Bharat India
- Australian Coal Association
- Electricity Generating Authority of Thailand
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