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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, 06 September 15
AUTOMATION AND TECHNOLOGY IS CERTAINLY PART OF THE SOLUTION FOR IMPROVING PERFORMANCE AND EFFICIENCY TO MAKE THE MINE OPERATIONS MORE PROFITABLE, HOWEVER............ - LUKE JALSEVAC
"The Technology and Innovation in Mining 2015" production team at Information Exchange Group interviewed Luke Jalsevac, Director, Busines ...
Sunday, 06 September 15
THE CAPE SIZE INDEX ROSE 10.83 PER CENT WEEK OVER WEEK
COALspot.com: The BDI, the Baltic exchange's main sea freight index, which tracks rates for ships carrying dry bulk commodities, declined o ...
Saturday, 05 September 15
DRY BULK MARKET MAY SUFFER NOW, BUT IS BOUND FOR A RECOVERY THANKS TO A LIMITED FUTURE FLEET GROWTH - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The slow increase of dry bulk tonnage growth this year could turn into a solid indicator of the market’s future prospects. According to a rec ...
Friday, 04 September 15
U.S. COAL PRODUCTION FOR THE W/E AUGUST 29, UP SLIGHTLY; FALL 4.5 PERCENT Y-Y: EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 18.7 million shor ...
Friday, 04 September 15
GOVERNORS WILL HAVE THE POWER TO REVOKE MINERS' PERMITS: ENERGY MINISTRY - JG
Starting Oct. 1, Indonesia's governors will lawfully become "executors" in revoking the licenses of miners that fail to secure a &quo ...
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- Latin American Coal - Colombia
- Petrochimia International Co. Ltd.- Taiwan
- Port Waratah Coal Services - Australia
- Jorong Barutama Greston.PT - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Interocean Group of Companies - India
- Orica Australia Pty. Ltd.
- Larsen & Toubro Limited - India
- Bharathi Cement Corporation - India
- Gujarat Sidhee Cement - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Directorate General of MIneral and Coal - Indonesia
- Bhushan Steel Limited - India
- Heidelberg Cement - Germany
- Globalindo Alam Lestari - Indonesia
- London Commodity Brokers - England
- Indika Energy - Indonesia
- Therma Luzon, Inc, Philippines
- Medco Energi Mining Internasional
- Energy Development Corp, Philippines
- Maheswari Brothers Coal Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- The Treasury - Australian Government
- Energy Link Ltd, New Zealand
- European Bulk Services B.V. - Netherlands
- Essar Steel Hazira Ltd - India
- Indonesian Coal Mining Association
- Siam City Cement - Thailand
- Jaiprakash Power Ventures ltd
- McConnell Dowell - Australia
- Orica Mining Services - Indonesia
- IHS Mccloskey Coal Group - USA
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Leighton Contractors Pty Ltd - Australia
- Central Java Power - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Thiess Contractors Indonesia
- CNBM International Corporation - China
- Coalindo Energy - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Barasentosa Lestari - Indonesia
- Wood Mackenzie - Singapore
- PNOC Exploration Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Deloitte Consulting - India
- International Coal Ventures Pvt Ltd - India
- Independent Power Producers Association of India
- AsiaOL BioFuels Corp., Philippines
- Ministry of Mines - Canada
- Kapuas Tunggal Persada - Indonesia
- LBH Netherlands Bv - Netherlands
- Mercuria Energy - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- Vizag Seaport Private Limited - India
- Samtan Co., Ltd - South Korea
- Posco Energy - South Korea
- Sree Jayajothi Cements Limited - India
- Meenaskhi Energy Private Limited - India
- Binh Thuan Hamico - Vietnam
- Xindia Steels Limited - India
- Mercator Lines Limited - India
- Australian Commodity Traders Exchange
- Bhoruka Overseas - Indonesia
- Kartika Selabumi Mining - Indonesia
- Planning Commission, India
- Karaikal Port Pvt Ltd - India
- VISA Power Limited - India
- Krishnapatnam Port Company Ltd. - India
- Mjunction Services Limited - India
- Thai Mozambique Logistica
- Sojitz Corporation - Japan
- Goldman Sachs - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Renaissance Capital - South Africa
- GMR Energy Limited - India
- Alfred C Toepfer International GmbH - Germany
- Global Green Power PLC Corporation, Philippines
- Tamil Nadu electricity Board
- Bukit Asam (Persero) Tbk - Indonesia
- Merrill Lynch Commodities Europe
- Standard Chartered Bank - UAE
- Global Coal Blending Company Limited - Australia
- Bukit Baiduri Energy - Indonesia
- CIMB Investment Bank - Malaysia
- Kepco SPC Power Corporation, Philippines
- Sical Logistics Limited - India
- Electricity Authority, New Zealand
- Electricity Generating Authority of Thailand
- Cigading International Bulk Terminal - Indonesia
- PTC India Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Indian Energy Exchange, India
- Africa Commodities Group - South Africa
- Meralco Power Generation, Philippines
- White Energy Company Limited
- Siam City Cement PLC, Thailand
- Cement Manufacturers Association - India
- Attock Cement Pakistan Limited
- Mintek Dendrill Indonesia
- Uttam Galva Steels Limited - India
- Bhatia International Limited - India
- Banpu Public Company Limited - Thailand
- Tata Chemicals Ltd - India
- Salva Resources Pvt Ltd - India
- Bayan Resources Tbk. - Indonesia
- Price Waterhouse Coopers - Russia
- Australian Coal Association
- Metalloyd Limited - United Kingdom
- Madhucon Powers Ltd - India
- Formosa Plastics Group - Taiwan
- Pipit Mutiara Jaya. PT, Indonesia
- Georgia Ports Authority, United States
- Kalimantan Lumbung Energi - Indonesia
- Antam Resourcindo - Indonesia
- Aditya Birla Group - India
- GVK Power & Infra Limited - India
- Riau Bara Harum - Indonesia
- Grasim Industreis Ltd - India
- Ministry of Finance - Indonesia
- Singapore Mercantile Exchange
- Chamber of Mines of South Africa
- Agrawal Coal Company - India
- Parry Sugars Refinery, India
- Lanco Infratech Ltd - India
- Marubeni Corporation - India
- Ind-Barath Power Infra Limited - India
- Edison Trading Spa - Italy
- The State Trading Corporation of India Ltd
- South Luzon Thermal Energy Corporation
- Petron Corporation, Philippines
- Anglo American - United Kingdom
- ICICI Bank Limited - India
- Power Finance Corporation Ltd., India
- Minerals Council of Australia
- Directorate Of Revenue Intelligence - India
- Indian Oil Corporation Limited
- Manunggal Multi Energi - Indonesia
- PowerSource Philippines DevCo
- Straits Asia Resources Limited - Singapore
- Bank of Tokyo Mitsubishi UFJ Ltd
- TeaM Sual Corporation - Philippines
- Iligan Light & Power Inc, Philippines
- New Zealand Coal & Carbon
- Borneo Indobara - Indonesia
- Ambuja Cements Ltd - India
- MS Steel International - UAE
- Rashtriya Ispat Nigam Limited - India
- SMG Consultants - Indonesia
- Kideco Jaya Agung - Indonesia
- Semirara Mining Corp, Philippines
- Videocon Industries ltd - India
- Bukit Makmur.PT - Indonesia
- Dalmia Cement Bharat India
- Global Business Power Corporation, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Pendopo Energi Batubara - Indonesia
- Central Electricity Authority - India
- India Bulls Power Limited - India
- Makarim & Taira - Indonesia
- Simpson Spence & Young - Indonesia
- Malabar Cements Ltd - India
- Altura Mining Limited, Indonesia
- Eastern Coal Council - USA
- Romanian Commodities Exchange
- Parliament of New Zealand
- Eastern Energy - Thailand
- Holcim Trading Pte Ltd - Singapore
- Coastal Gujarat Power Limited - India
- Bulk Trading Sa - Switzerland
- TNB Fuel Sdn Bhd - Malaysia
- Maharashtra Electricity Regulatory Commission - India
- Intertek Mineral Services - Indonesia
- IEA Clean Coal Centre - UK
- San Jose City I Power Corp, Philippines
- ASAPP Information Group - India
- Vedanta Resources Plc - India
- Trasteel International SA, Italy
- Karbindo Abesyapradhi - Indoneisa
- Bangladesh Power Developement Board
- Coal and Oil Company - UAE
- Ministry of Transport, Egypt
- Indogreen Group - Indonesia
- SMC Global Power, Philippines
- Rio Tinto Coal - Australia
- Wilmar Investment Holdings
- Timah Investasi Mineral - Indoneisa
- Toyota Tsusho Corporation, Japan
- Semirara Mining and Power Corporation, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Baramulti Group, Indonesia
- Jindal Steel & Power Ltd - India
- Sakthi Sugars Limited - India
- The University of Queensland
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Indo Tambangraya Megah - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Carbofer General Trading SA - India
- Kohat Cement Company Ltd. - Pakistan
- Vijayanagar Sugar Pvt Ltd - India
- GAC Shipping (India) Pvt Ltd
- Oldendorff Carriers - Singapore
- Savvy Resources Ltd - HongKong
- Kumho Petrochemical, South Korea
- Chettinad Cement Corporation Ltd - India
- Sarangani Energy Corporation, Philippines
- Commonwealth Bank - Australia
- Gujarat Mineral Development Corp Ltd - India
- Kaltim Prima Coal - Indonesia
- Kobexindo Tractors - Indoneisa
- OPG Power Generation Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Billiton Holdings Pty Ltd - Australia
- Star Paper Mills Limited - India
- Economic Council, Georgia
- Sindya Power Generating Company Private Ltd
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