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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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Friday, 11 September 15
U.S'S WEEKLY COAL PRODUCTION WAS ALMOST FLAT PAST WEEK
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 18.6 million shor ...
Thursday, 10 September 15
U.S. H1' 15 STEAM COAL EXPORTS FELL BY 21 PER CENT Y-Y: EIA
Coal Trade
Slower growth in world coal demand, lower international coal prices, and higher coal output in other coal-exporting countries have all ...
Thursday, 10 September 15
INDONESIAN COAL BENCHMARK PRICE HITS A NEW LOW OF $58.21 PER TON
COALspot.com - The Director General of Mineral and Coal of Indonesia once a again revised down Indonesian coal benchmark price to US$ 58.21 per MT ...
Thursday, 10 September 15
IF NOT NOW, WHEN? - GIANNIS ANDRITSOPOULOS
Our industry is well known to be cyclical with some cycles lasting longer than others. Despite the fact that these shifts in the behavior of the fr ...
Wednesday, 09 September 15
FOB INDONESIA COAL SWAP LOSE GROUND ON SLOWING DEMAND
COALspot.com: Indonesian coal swap for delivery 4Q 2015 declined month on month and week over week.
The 4Q swap declined $ 1.92 (-4.52%) per t ...
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- Altura Mining Limited, Indonesia
- Essar Steel Hazira Ltd - India
- Sical Logistics Limited - India
- Directorate Of Revenue Intelligence - India
- Ceylon Electricity Board - Sri Lanka
- Karbindo Abesyapradhi - Indoneisa
- The University of Queensland
- Straits Asia Resources Limited - Singapore
- Central Electricity Authority - India
- Parliament of New Zealand
- Goldman Sachs - Singapore
- Semirara Mining Corp, Philippines
- Kepco SPC Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Thiess Contractors Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Therma Luzon, Inc, Philippines
- Minerals Council of Australia
- Vijayanagar Sugar Pvt Ltd - India
- PTC India Limited - India
- Mercuria Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- TeaM Sual Corporation - Philippines
- Independent Power Producers Association of India
- Alfred C Toepfer International GmbH - Germany
- OPG Power Generation Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- India Bulls Power Limited - India
- Port Waratah Coal Services - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Siam City Cement - Thailand
- Jorong Barutama Greston.PT - Indonesia
- Borneo Indobara - Indonesia
- Cement Manufacturers Association - India
- Planning Commission, India
- Central Java Power - Indonesia
- IHS Mccloskey Coal Group - USA
- South Luzon Thermal Energy Corporation
- SMC Global Power, Philippines
- Australian Coal Association
- Mintek Dendrill Indonesia
- Jaiprakash Power Ventures ltd
- Tata Chemicals Ltd - India
- Bhoruka Overseas - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bangladesh Power Developement Board
- Ministry of Mines - Canada
- Commonwealth Bank - Australia
- Kartika Selabumi Mining - Indonesia
- Maheswari Brothers Coal Limited - India
- CNBM International Corporation - China
- Attock Cement Pakistan Limited
- LBH Netherlands Bv - Netherlands
- Bhatia International Limited - India
- Orica Australia Pty. Ltd.
- Mercator Lines Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- PowerSource Philippines DevCo
- Eastern Coal Council - USA
- Bhushan Steel Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bukit Asam (Persero) Tbk - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Holcim Trading Pte Ltd - Singapore
- Globalindo Alam Lestari - Indonesia
- Videocon Industries ltd - India
- SMG Consultants - Indonesia
- Timah Investasi Mineral - Indoneisa
- Edison Trading Spa - Italy
- Jindal Steel & Power Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Bulk Trading Sa - Switzerland
- Bukit Makmur.PT - Indonesia
- Medco Energi Mining Internasional
- Kaltim Prima Coal - Indonesia
- Grasim Industreis Ltd - India
- Intertek Mineral Services - Indonesia
- Interocean Group of Companies - India
- Samtan Co., Ltd - South Korea
- International Coal Ventures Pvt Ltd - India
- Lanco Infratech Ltd - India
- Salva Resources Pvt Ltd - India
- PNOC Exploration Corporation - Philippines
- Malabar Cements Ltd - India
- Carbofer General Trading SA - India
- Latin American Coal - Colombia
- GN Power Mariveles Coal Plant, Philippines
- Savvy Resources Ltd - HongKong
- CIMB Investment Bank - Malaysia
- Coal and Oil Company - UAE
- Krishnapatnam Port Company Ltd. - India
- Eastern Energy - Thailand
- Sindya Power Generating Company Private Ltd
- Wood Mackenzie - Singapore
- Trasteel International SA, Italy
- Ambuja Cements Ltd - India
- Bukit Baiduri Energy - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Oldendorff Carriers - Singapore
- Manunggal Multi Energi - Indonesia
- Global Business Power Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Uttam Galva Steels Limited - India
- Singapore Mercantile Exchange
- Orica Mining Services - Indonesia
- Energy Development Corp, Philippines
- Price Waterhouse Coopers - Russia
- Leighton Contractors Pty Ltd - Australia
- McConnell Dowell - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Iligan Light & Power Inc, Philippines
- Tamil Nadu electricity Board
- GVK Power & Infra Limited - India
- Indian Energy Exchange, India
- Bayan Resources Tbk. - Indonesia
- Renaissance Capital - South Africa
- Vedanta Resources Plc - India
- Pendopo Energi Batubara - Indonesia
- Sree Jayajothi Cements Limited - India
- Sojitz Corporation - Japan
- Ministry of Transport, Egypt
- Indian Oil Corporation Limited
- Power Finance Corporation Ltd., India
- Electricity Generating Authority of Thailand
- Baramulti Group, Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Indika Energy - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Vizag Seaport Private Limited - India
- Aditya Birla Group - India
- Australian Commodity Traders Exchange
- Miang Besar Coal Terminal - Indonesia
- Wilmar Investment Holdings
- Aboitiz Power Corporation - Philippines
- Bharathi Cement Corporation - India
- Parry Sugars Refinery, India
- Deloitte Consulting - India
- Anglo American - United Kingdom
- Banpu Public Company Limited - Thailand
- Rashtriya Ispat Nigam Limited - India
- Mjunction Services Limited - India
- Karaikal Port Pvt Ltd - India
- Dalmia Cement Bharat India
- Kumho Petrochemical, South Korea
- Indogreen Group - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Rio Tinto Coal - Australia
- Simpson Spence & Young - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Thai Mozambique Logistica
- Marubeni Corporation - India
- Kideco Jaya Agung - Indonesia
- AsiaOL BioFuels Corp., Philippines
- The State Trading Corporation of India Ltd
- Georgia Ports Authority, United States
- Barasentosa Lestari - Indonesia
- The Treasury - Australian Government
- GMR Energy Limited - India
- Cigading International Bulk Terminal - Indonesia
- Binh Thuan Hamico - Vietnam
- Chettinad Cement Corporation Ltd - India
- New Zealand Coal & Carbon
- Energy Link Ltd, New Zealand
- Star Paper Mills Limited - India
- Kapuas Tunggal Persada - Indonesia
- Madhucon Powers Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Coalindo Energy - Indonesia
- Formosa Plastics Group - Taiwan
- Merrill Lynch Commodities Europe
- Electricity Authority, New Zealand
- Petron Corporation, Philippines
- Global Coal Blending Company Limited - Australia
- Makarim & Taira - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Romanian Commodities Exchange
- San Jose City I Power Corp, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Sarangani Energy Corporation, Philippines
- Toyota Tsusho Corporation, Japan
- Siam City Cement PLC, Thailand
- GAC Shipping (India) Pvt Ltd
- IEA Clean Coal Centre - UK
- London Commodity Brokers - England
- Xindia Steels Limited - India
- Agrawal Coal Company - India
- Riau Bara Harum - Indonesia
- European Bulk Services B.V. - Netherlands
- Larsen & Toubro Limited - India
- Chamber of Mines of South Africa
- SN Aboitiz Power Inc, Philippines
- Standard Chartered Bank - UAE
- Economic Council, Georgia
- ICICI Bank Limited - India
- Coastal Gujarat Power Limited - India
- Global Green Power PLC Corporation, Philippines
- VISA Power Limited - India
- White Energy Company Limited
- Antam Resourcindo - Indonesia
- Kobexindo Tractors - Indoneisa
- Metalloyd Limited - United Kingdom
- Pipit Mutiara Jaya. PT, Indonesia
- Indo Tambangraya Megah - Indonesia
- Posco Energy - South Korea
- Heidelberg Cement - Germany
- MS Steel International - UAE
- Indonesian Coal Mining Association
- Ministry of Finance - Indonesia
- Africa Commodities Group - South Africa
- Maharashtra Electricity Regulatory Commission - India
- Meralco Power Generation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Gujarat Sidhee Cement - India
- Kohat Cement Company Ltd. - Pakistan
- ASAPP Information Group - India
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