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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, 28 August 15
COAL PRODUCTION IN THE U.S. FOR THE WEEK ENDING AUGUST 22 ROSE FOR THE THIRD STRAIGHT WEEK
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 18.5 million shor ...
Friday, 28 August 15
BANPU STRENGTHENS GROWTH PLAN
Coal Business: Asia-Pacific Synergies Increase Competitiveness for Premium Export Market.
Banpu Public Company Limited (BANPU) strengthens its ...
Thursday, 27 August 15
RATES FOR CAPES REMAINED ON A FREE FALL LAST WEEK - INTERMODAL
COALspot.com: Keeping everyone on their toes with the volatility seen in August, the Dry Bulk market undoubtedly remains a steady provider of chall ...
Wednesday, 26 August 15
MARKET INSIGHT - STRATOS TINIAKOS
It’s always interesting to comment on the market when big economies around the world are facing troubling times. Following the collapse of th ...
Wednesday, 26 August 15
2Q'16 FOB INDONESIA COAL SWAP FALLS NEARLY 4.76 PER CENT M-O-M
COALspot.com: Indonesian coal swap for delivery 4Q 2015 declined month on month and week over week.
The 4Q swap was declined $ 2.20 (-5.13%) p ...
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- Agrawal Coal Company - India
- San Jose City I Power Corp, Philippines
- Simpson Spence & Young - Indonesia
- Binh Thuan Hamico - Vietnam
- GN Power Mariveles Coal Plant, Philippines
- Energy Development Corp, Philippines
- Ministry of Mines - Canada
- London Commodity Brokers - England
- Banpu Public Company Limited - Thailand
- VISA Power Limited - India
- India Bulls Power Limited - India
- Indika Energy - Indonesia
- MS Steel International - UAE
- Latin American Coal - Colombia
- Bhushan Steel Limited - India
- Mercuria Energy - Indonesia
- Indogreen Group - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Deloitte Consulting - India
- Orica Mining Services - Indonesia
- Australian Coal Association
- Asmin Koalindo Tuhup - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Videocon Industries ltd - India
- Altura Mining Limited, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- SMG Consultants - Indonesia
- Directorate Of Revenue Intelligence - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Aditya Birla Group - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Eastern Energy - Thailand
- OPG Power Generation Pvt Ltd - India
- Tamil Nadu electricity Board
- Sakthi Sugars Limited - India
- IEA Clean Coal Centre - UK
- Global Business Power Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- Cement Manufacturers Association - India
- GVK Power & Infra Limited - India
- Coastal Gujarat Power Limited - India
- CNBM International Corporation - China
- Straits Asia Resources Limited - Singapore
- Rashtriya Ispat Nigam Limited - India
- Commonwealth Bank - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Electricity Generating Authority of Thailand
- Semirara Mining Corp, Philippines
- Ministry of Transport, Egypt
- Holcim Trading Pte Ltd - Singapore
- Makarim & Taira - Indonesia
- McConnell Dowell - Australia
- Metalloyd Limited - United Kingdom
- Eastern Coal Council - USA
- Vijayanagar Sugar Pvt Ltd - India
- Trasteel International SA, Italy
- South Luzon Thermal Energy Corporation
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Dalmia Cement Bharat India
- Anglo American - United Kingdom
- Mercator Lines Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Parliament of New Zealand
- Renaissance Capital - South Africa
- Petrochimia International Co. Ltd.- Taiwan
- The State Trading Corporation of India Ltd
- Thiess Contractors Indonesia
- Kaltim Prima Coal - Indonesia
- ASAPP Information Group - India
- Chettinad Cement Corporation Ltd - India
- International Coal Ventures Pvt Ltd - India
- Indian Oil Corporation Limited
- Salva Resources Pvt Ltd - India
- Madhucon Powers Ltd - India
- Toyota Tsusho Corporation, Japan
- Energy Link Ltd, New Zealand
- Global Coal Blending Company Limited - Australia
- Central Java Power - Indonesia
- Formosa Plastics Group - Taiwan
- Leighton Contractors Pty Ltd - Australia
- Sarangani Energy Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Meralco Power Generation, Philippines
- Petron Corporation, Philippines
- Singapore Mercantile Exchange
- Miang Besar Coal Terminal - Indonesia
- New Zealand Coal & Carbon
- Rio Tinto Coal - Australia
- Electricity Authority, New Zealand
- Romanian Commodities Exchange
- Indonesian Coal Mining Association
- Maharashtra Electricity Regulatory Commission - India
- Medco Energi Mining Internasional
- Ind-Barath Power Infra Limited - India
- Port Waratah Coal Services - Australia
- White Energy Company Limited
- Manunggal Multi Energi - Indonesia
- Uttam Galva Steels Limited - India
- Karaikal Port Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Bulk Trading Sa - Switzerland
- Krishnapatnam Port Company Ltd. - India
- Bahari Cakrawala Sebuku - Indonesia
- Africa Commodities Group - South Africa
- Planning Commission, India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Vedanta Resources Plc - India
- Bhoruka Overseas - Indonesia
- The Treasury - Australian Government
- Sindya Power Generating Company Private Ltd
- AsiaOL BioFuels Corp., Philippines
- Merrill Lynch Commodities Europe
- GMR Energy Limited - India
- Maheswari Brothers Coal Limited - India
- Bharathi Cement Corporation - India
- PTC India Limited - India
- Kideco Jaya Agung - Indonesia
- Thai Mozambique Logistica
- Ambuja Cements Ltd - India
- Indo Tambangraya Megah - Indonesia
- Indian Energy Exchange, India
- Jindal Steel & Power Ltd - India
- Cigading International Bulk Terminal - Indonesia
- SMC Global Power, Philippines
- Malabar Cements Ltd - India
- Timah Investasi Mineral - Indoneisa
- Tata Chemicals Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Intertek Mineral Services - Indonesia
- Savvy Resources Ltd - HongKong
- Neyveli Lignite Corporation Ltd, - India
- Grasim Industreis Ltd - India
- ICICI Bank Limited - India
- Sojitz Corporation - Japan
- Mjunction Services Limited - India
- Sical Logistics Limited - India
- GAC Shipping (India) Pvt Ltd
- Riau Bara Harum - Indonesia
- Ministry of Finance - Indonesia
- Chamber of Mines of South Africa
- Essar Steel Hazira Ltd - India
- Power Finance Corporation Ltd., India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Wilmar Investment Holdings
- Kapuas Tunggal Persada - Indonesia
- Bangladesh Power Developement Board
- European Bulk Services B.V. - Netherlands
- SN Aboitiz Power Inc, Philippines
- Sinarmas Energy and Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- Semirara Mining and Power Corporation, Philippines
- PowerSource Philippines DevCo
- Coalindo Energy - Indonesia
- TeaM Sual Corporation - Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Goldman Sachs - Singapore
- IHS Mccloskey Coal Group - USA
- Siam City Cement - Thailand
- Heidelberg Cement - Germany
- Standard Chartered Bank - UAE
- Jaiprakash Power Ventures ltd
- Larsen & Toubro Limited - India
- Bukit Baiduri Energy - Indonesia
- Baramulti Group, Indonesia
- Central Electricity Authority - India
- Australian Commodity Traders Exchange
- Kepco SPC Power Corporation, Philippines
- The University of Queensland
- Alfred C Toepfer International GmbH - Germany
- Interocean Group of Companies - India
- Attock Cement Pakistan Limited
- Pendopo Energi Batubara - Indonesia
- Bhatia International Limited - India
- Samtan Co., Ltd - South Korea
- Barasentosa Lestari - Indonesia
- Global Green Power PLC Corporation, Philippines
- Orica Australia Pty. Ltd.
- Kumho Petrochemical, South Korea
- Georgia Ports Authority, United States
- Sree Jayajothi Cements Limited - India
- Mintek Dendrill Indonesia
- Wood Mackenzie - Singapore
- Kohat Cement Company Ltd. - Pakistan
- Borneo Indobara - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Antam Resourcindo - Indonesia
- Gujarat Sidhee Cement - India
- Independent Power Producers Association of India
- Star Paper Mills Limited - India
- Siam City Cement PLC, Thailand
- Posco Energy - South Korea
- Gujarat Electricity Regulatory Commission - India
- Marubeni Corporation - India
- LBH Netherlands Bv - Netherlands
- Coal and Oil Company - UAE
- Xindia Steels Limited - India
- Bayan Resources Tbk. - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- PNOC Exploration Corporation - Philippines
- Lanco Infratech Ltd - India
- CIMB Investment Bank - Malaysia
- Directorate General of MIneral and Coal - Indonesia
- Vizag Seaport Private Limited - India
- Billiton Holdings Pty Ltd - Australia
- Ceylon Electricity Board - Sri Lanka
- Economic Council, Georgia
- Iligan Light & Power Inc, Philippines
- Minerals Council of Australia
- Oldendorff Carriers - Singapore
- Parry Sugars Refinery, India
- Globalindo Alam Lestari - Indonesia
- Edison Trading Spa - Italy
- Therma Luzon, Inc, Philippines
- Carbofer General Trading SA - India
- Meenaskhi Energy Private Limited - India
- Kartika Selabumi Mining - Indonesia
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