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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, 25 August 15
INDONESIA MINERS' NPLS TO RISE FURTHER, BANK RISKS BUILD - FITCH
The NPLs of Indonesian mine and mine services companies are likely to rise further in the short term, says Fitch Ratings, after reaching multi-year ...
Tuesday, 25 August 15
MINER'S EARNINGS DROP ON FALLING COAL PRICES; Q2'16 FOB RICHARDS BAY COAL SWAP CLOSED AT $ 52.23 A TON
COALspot.com: API4 FOB Richards Bay Coal swap for delivery 4Q' 2015 declined month over month and week over week.
The 4Q swap was down US$ ...
Monday, 24 August 15
FOB NEWCASTLE COAL SWAPS HIT FRESH LOW, DIPPING BELOW $42 A TON
COALspot.com: API 5 FOB Newcastle Coal swap for 4Q’ 2015 delivery down $ 2.20 per MT (-5.01%) month over month to US$ 41.70 per mt. The swap ...
Monday, 24 August 15
Q1'16 CFR SOUTH CHINA COAL SWAP CLOSED AT $ 48.65 PMT
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined just US$ 1.89 (3.74%) per MT month over month.
A commodity ...
Monday, 24 August 15
IS CHINA'S STEEL EXPORTS ENOUGH TO SUPPORT THE FREIGHT MARKET? - BIMCO
No, it’s not enough, you will need lower Chinese iron ore production too in order to keep growing imports of iron ore into China that will su ...
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- SMC Global Power, Philippines
- Chamber of Mines of South Africa
- Directorate General of MIneral and Coal - Indonesia
- Grasim Industreis Ltd - India
- Indian Energy Exchange, India
- Manunggal Multi Energi - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Eastern Coal Council - USA
- Kapuas Tunggal Persada - Indonesia
- Larsen & Toubro Limited - India
- Global Coal Blending Company Limited - Australia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Mintek Dendrill Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Karbindo Abesyapradhi - Indoneisa
- Baramulti Group, Indonesia
- Kobexindo Tractors - Indoneisa
- ICICI Bank Limited - India
- Central Electricity Authority - India
- Ceylon Electricity Board - Sri Lanka
- Sojitz Corporation - Japan
- Central Java Power - Indonesia
- Cement Manufacturers Association - India
- Anglo American - United Kingdom
- Madhucon Powers Ltd - India
- Chettinad Cement Corporation Ltd - India
- New Zealand Coal & Carbon
- Bhatia International Limited - India
- Renaissance Capital - South Africa
- TNB Fuel Sdn Bhd - Malaysia
- Bharathi Cement Corporation - India
- Leighton Contractors Pty Ltd - Australia
- Thai Mozambique Logistica
- Vedanta Resources Plc - India
- The Treasury - Australian Government
- Makarim & Taira - Indonesia
- IHS Mccloskey Coal Group - USA
- Sical Logistics Limited - India
- India Bulls Power Limited - India
- PTC India Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Maheswari Brothers Coal Limited - India
- Samtan Co., Ltd - South Korea
- GMR Energy Limited - India
- Pendopo Energi Batubara - Indonesia
- Power Finance Corporation Ltd., India
- SMG Consultants - Indonesia
- Sarangani Energy Corporation, Philippines
- Independent Power Producers Association of India
- Bulk Trading Sa - Switzerland
- Binh Thuan Hamico - Vietnam
- Vizag Seaport Private Limited - India
- Heidelberg Cement - Germany
- Mercator Lines Limited - India
- Barasentosa Lestari - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Wood Mackenzie - Singapore
- Krishnapatnam Port Company Ltd. - India
- Karaikal Port Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Australian Coal Association
- Bukit Baiduri Energy - Indonesia
- Carbofer General Trading SA - India
- Lanco Infratech Ltd - India
- Malabar Cements Ltd - India
- Gujarat Sidhee Cement - India
- Essar Steel Hazira Ltd - India
- GAC Shipping (India) Pvt Ltd
- CIMB Investment Bank - Malaysia
- Sakthi Sugars Limited - India
- McConnell Dowell - Australia
- Parliament of New Zealand
- Star Paper Mills Limited - India
- Wilmar Investment Holdings
- Siam City Cement PLC, Thailand
- Indian Oil Corporation Limited
- Sree Jayajothi Cements Limited - India
- London Commodity Brokers - England
- CNBM International Corporation - China
- GN Power Mariveles Coal Plant, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Medco Energi Mining Internasional
- Merrill Lynch Commodities Europe
- Uttam Galva Steels Limited - India
- International Coal Ventures Pvt Ltd - India
- Planning Commission, India
- Asmin Koalindo Tuhup - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Electricity Generating Authority of Thailand
- Ministry of Finance - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Iligan Light & Power Inc, Philippines
- Interocean Group of Companies - India
- Kohat Cement Company Ltd. - Pakistan
- Aboitiz Power Corporation - Philippines
- Meenaskhi Energy Private Limited - India
- Attock Cement Pakistan Limited
- Electricity Authority, New Zealand
- LBH Netherlands Bv - Netherlands
- Edison Trading Spa - Italy
- Sindya Power Generating Company Private Ltd
- Gujarat Mineral Development Corp Ltd - India
- Banpu Public Company Limited - Thailand
- GVK Power & Infra Limited - India
- South Luzon Thermal Energy Corporation
- AsiaOL BioFuels Corp., Philippines
- Sinarmas Energy and Mining - Indonesia
- Semirara Mining Corp, Philippines
- Kideco Jaya Agung - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Goldman Sachs - Singapore
- Bangladesh Power Developement Board
- Jindal Steel & Power Ltd - India
- Petron Corporation, Philippines
- Energy Link Ltd, New Zealand
- Ministry of Mines - Canada
- Tamil Nadu electricity Board
- Globalindo Alam Lestari - Indonesia
- Dalmia Cement Bharat India
- Aditya Birla Group - India
- Indogreen Group - Indonesia
- The State Trading Corporation of India Ltd
- Jorong Barutama Greston.PT - Indonesia
- White Energy Company Limited
- Jaiprakash Power Ventures ltd
- San Jose City I Power Corp, Philippines
- MS Steel International - UAE
- OPG Power Generation Pvt Ltd - India
- Borneo Indobara - Indonesia
- Kaltim Prima Coal - Indonesia
- Economic Council, Georgia
- Orica Mining Services - Indonesia
- Kumho Petrochemical, South Korea
- Videocon Industries ltd - India
- Kartika Selabumi Mining - Indonesia
- Mjunction Services Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Riau Bara Harum - Indonesia
- Salva Resources Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Trasteel International SA, Italy
- Global Business Power Corporation, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Indika Energy - Indonesia
- Indonesian Coal Mining Association
- ASAPP Information Group - India
- Bahari Cakrawala Sebuku - Indonesia
- Orica Australia Pty. Ltd.
- Intertek Mineral Services - Indonesia
- Georgia Ports Authority, United States
- TeaM Sual Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
- Africa Commodities Group - South Africa
- Posco Energy - South Korea
- Eastern Energy - Thailand
- Savvy Resources Ltd - HongKong
- PNOC Exploration Corporation - Philippines
- Ind-Barath Power Infra Limited - India
- Cigading International Bulk Terminal - Indonesia
- Meralco Power Generation, Philippines
- Energy Development Corp, Philippines
- Indo Tambangraya Megah - Indonesia
- PowerSource Philippines DevCo
- Ministry of Transport, Egypt
- Altura Mining Limited, Indonesia
- Semirara Mining and Power Corporation, Philippines
- Bukit Makmur.PT - Indonesia
- Kepco SPC Power Corporation, Philippines
- Metalloyd Limited - United Kingdom
- Timah Investasi Mineral - Indoneisa
- Formosa Plastics Group - Taiwan
- Bhushan Steel Limited - India
- Straits Asia Resources Limited - Singapore
- Singapore Mercantile Exchange
- Marubeni Corporation - India
- Miang Besar Coal Terminal - Indonesia
- SN Aboitiz Power Inc, Philippines
- Agrawal Coal Company - India
- Holcim Trading Pte Ltd - Singapore
- Oldendorff Carriers - Singapore
- Therma Luzon, Inc, Philippines
- Parry Sugars Refinery, India
- IEA Clean Coal Centre - UK
- Price Waterhouse Coopers - Russia
- VISA Power Limited - India
- Rashtriya Ispat Nigam Limited - India
- Latin American Coal - Colombia
- Antam Resourcindo - Indonesia
- Coalindo Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- Tata Chemicals Ltd - India
- Minerals Council of Australia
- Romanian Commodities Exchange
- Thiess Contractors Indonesia
- Standard Chartered Bank - UAE
- Gujarat Electricity Regulatory Commission - India
- Rio Tinto Coal - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Simpson Spence & Young - Indonesia
- Xindia Steels Limited - India
- Coastal Gujarat Power Limited - India
- European Bulk Services B.V. - Netherlands
- Commonwealth Bank - Australia
- Coal and Oil Company - UAE
- Ambuja Cements Ltd - India
- Siam City Cement - Thailand
- Maharashtra Electricity Regulatory Commission - India
- Toyota Tsusho Corporation, Japan
- The University of Queensland
- Australian Commodity Traders Exchange
- Bukit Asam (Persero) Tbk - Indonesia
- Port Waratah Coal Services - Australia
- Mercuria Energy - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Deloitte Consulting - India
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