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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, 01 September 15
FOB RICHARDS BAY COAL SWAPS STILL SLIDING; Q2'16 DELIVERY LOST AROUND 6 PERCENT M-O-M
COALspot.com: API4 FOB Richards Bay Coal swap for delivery 4Q' 2015 gain week over week but declined month over month.
The 4Q swap was dow ...
Monday, 31 August 15
API 5 FOB NEWCASTLE COAL SWAP GAINS WEEK OVER WEEK
COALspot.com: API 5 FOB Newcastle Coal swap for 4Q’ 2015 delivery down $ 1.85 per MT (-4.23%) month over month to US$ 41.87 per mt. The swap ...
Monday, 31 August 15
Q1'16 CFR SOUTH CHINA COAL SWAP ENDS DOWN MORE THAN 4 PERCENT MONTH OVER MONTH
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined just US$ 1.91 (3.78%) per MT month over month.
A commodity ...
Sunday, 30 August 15
THE DRY BULK MARKET UNDOUBTEDLY REMAINS WEAK & VOLATILE THIS WEEK
COALspot.com: The BDI slipped further down this week, moving closer to 900 level. This week’s BDI falls 9.15 pct and closed at 903 points. Wh ...
Friday, 28 August 15
DRY BULK SHIP OWNER OPTIMISTIC ABOUT FUTURE PROSPECTS OF THE MARKET: NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Dry bulk ship owner Golden Ocean appeared optimistic on the long term prospects of the dry bulk market, mainly thanks to an expected resolution of ...
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- Xindia Steels Limited - India
- Indo Tambangraya Megah - Indonesia
- Merrill Lynch Commodities Europe
- Gujarat Electricity Regulatory Commission - India
- Eastern Energy - Thailand
- Salva Resources Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Independent Power Producers Association of India
- Goldman Sachs - Singapore
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- Power Finance Corporation Ltd., India
- Renaissance Capital - South Africa
- Offshore Bulk Terminal Pte Ltd, Singapore
- Pipit Mutiara Jaya. PT, Indonesia
- Posco Energy - South Korea
- Formosa Plastics Group - Taiwan
- Kumho Petrochemical, South Korea
- Grasim Industreis Ltd - India
- Australian Commodity Traders Exchange
- Minerals Council of Australia
- Aboitiz Power Corporation - Philippines
- Bhushan Steel Limited - India
- Tamil Nadu electricity Board
- Samtan Co., Ltd - South Korea
- Binh Thuan Hamico - Vietnam
- Australian Coal Association
- GN Power Mariveles Coal Plant, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- The State Trading Corporation of India Ltd
- Latin American Coal - Colombia
- Anglo American - United Kingdom
- Billiton Holdings Pty Ltd - Australia
- Therma Luzon, Inc, Philippines
- Simpson Spence & Young - Indonesia
- Manunggal Multi Energi - Indonesia
- Africa Commodities Group - South Africa
- SMG Consultants - Indonesia
- Mercator Lines Limited - India
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- TNB Fuel Sdn Bhd - Malaysia
- International Coal Ventures Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Parry Sugars Refinery, India
- LBH Netherlands Bv - Netherlands
- Sindya Power Generating Company Private Ltd
- Kapuas Tunggal Persada - Indonesia
- Edison Trading Spa - Italy
- Iligan Light & Power Inc, Philippines
- SMC Global Power, Philippines
- GVK Power & Infra Limited - India
- Energy Development Corp, Philippines
- Singapore Mercantile Exchange
- Bhoruka Overseas - Indonesia
- IEA Clean Coal Centre - UK
- Port Waratah Coal Services - Australia
- Tata Chemicals Ltd - India
- Thai Mozambique Logistica
- CNBM International Corporation - China
- Pendopo Energi Batubara - Indonesia
- Wilmar Investment Holdings
- Ind-Barath Power Infra Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Cigading International Bulk Terminal - Indonesia
- Star Paper Mills Limited - India
- CIMB Investment Bank - Malaysia
- Directorate Of Revenue Intelligence - India
- VISA Power Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Intertek Mineral Services - Indonesia
- Heidelberg Cement - Germany
- Semirara Mining and Power Corporation, Philippines
- Marubeni Corporation - India
- Semirara Mining Corp, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Sinarmas Energy and Mining - Indonesia
- PTC India Limited - India
- Sakthi Sugars Limited - India
- Vedanta Resources Plc - India
- Uttam Galva Steels Limited - India
- Ministry of Mines - Canada
- Kideco Jaya Agung - Indonesia
- Bhatia International Limited - India
- Bulk Trading Sa - Switzerland
- South Luzon Thermal Energy Corporation
- GMR Energy Limited - India
- Indogreen Group - Indonesia
- Georgia Ports Authority, United States
- Kaltim Prima Coal - Indonesia
- Sojitz Corporation - Japan
- Aditya Birla Group - India
- Gujarat Sidhee Cement - India
- Indonesian Coal Mining Association
- Chamber of Mines of South Africa
- Kepco SPC Power Corporation, Philippines
- Sree Jayajothi Cements Limited - India
- MS Steel International - UAE
- San Jose City I Power Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Jindal Steel & Power Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- ICICI Bank Limited - India
- Coal and Oil Company - UAE
- Alfred C Toepfer International GmbH - Germany
- Krishnapatnam Port Company Ltd. - India
- Romanian Commodities Exchange
- Bayan Resources Tbk. - Indonesia
- Standard Chartered Bank - UAE
- Lanco Infratech Ltd - India
- Orica Australia Pty. Ltd.
- Meralco Power Generation, Philippines
- PNOC Exploration Corporation - Philippines
- Indian Oil Corporation Limited
- European Bulk Services B.V. - Netherlands
- Wood Mackenzie - Singapore
- Kobexindo Tractors - Indoneisa
- Vizag Seaport Private Limited - India
- India Bulls Power Limited - India
- New Zealand Coal & Carbon
- Carbofer General Trading SA - India
- Coalindo Energy - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Indika Energy - Indonesia
- London Commodity Brokers - England
- Ministry of Transport, Egypt
- Riau Bara Harum - Indonesia
- Indian Energy Exchange, India
- IHS Mccloskey Coal Group - USA
- Electricity Generating Authority of Thailand
- Neyveli Lignite Corporation Ltd, - India
- Maheswari Brothers Coal Limited - India
- Economic Council, Georgia
- Metalloyd Limited - United Kingdom
- Dalmia Cement Bharat India
- ASAPP Information Group - India
- Petrochimia International Co. Ltd.- Taiwan
- Videocon Industries ltd - India
- Deloitte Consulting - India
- Sarangani Energy Corporation, Philippines
- Jaiprakash Power Ventures ltd
- Cement Manufacturers Association - India
- Agrawal Coal Company - India
- Planning Commission, India
- Karbindo Abesyapradhi - Indoneisa
- Mercuria Energy - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Chettinad Cement Corporation Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Parliament of New Zealand
- Commonwealth Bank - Australia
- Larsen & Toubro Limited - India
- Banpu Public Company Limited - Thailand
- AsiaOL BioFuels Corp., Philippines
- Makarim & Taira - Indonesia
- Essar Steel Hazira Ltd - India
- Medco Energi Mining Internasional
- Electricity Authority, New Zealand
- Bukit Baiduri Energy - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Siam City Cement - Thailand
- Ministry of Finance - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- PowerSource Philippines DevCo
- Baramulti Group, Indonesia
- Global Business Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- Mintek Dendrill Indonesia
- Bangladesh Power Developement Board
- Altura Mining Limited, Indonesia
- Madhucon Powers Ltd - India
- Meenaskhi Energy Private Limited - India
- Interocean Group of Companies - India
- Antam Resourcindo - Indonesia
- Price Waterhouse Coopers - Russia
- Bukit Asam (Persero) Tbk - Indonesia
- Central Java Power - Indonesia
- Malabar Cements Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Savvy Resources Ltd - HongKong
- Central Electricity Authority - India
- Karaikal Port Pvt Ltd - India
- Thiess Contractors Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Bharathi Cement Corporation - India
- Energy Link Ltd, New Zealand
- Trasteel International SA, Italy
- Bukit Makmur.PT - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Petron Corporation, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Miang Besar Coal Terminal - Indonesia
- Sical Logistics Limited - India
- SN Aboitiz Power Inc, Philippines
- Global Coal Blending Company Limited - Australia
- Kartika Selabumi Mining - Indonesia
- Orica Mining Services - Indonesia
- Toyota Tsusho Corporation, Japan
- TeaM Sual Corporation - Philippines
- Borneo Indobara - Indonesia
- The Treasury - Australian Government
- The University of Queensland
- Directorate General of MIneral and Coal - Indonesia
- Coastal Gujarat Power Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Barasentosa Lestari - Indonesia
- White Energy Company Limited
- Attock Cement Pakistan Limited
- Rio Tinto Coal - Australia
- Eastern Coal Council - USA
- Globalindo Alam Lestari - Indonesia
- Ambuja Cements Ltd - India
- Timah Investasi Mineral - Indoneisa
- Straits Asia Resources Limited - Singapore
- McConnell Dowell - Australia
- GAC Shipping (India) Pvt Ltd
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