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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, 23 August 15
SHIPPING FREIGHT RATES FALL SHARPLY ON EXCESS SUPPLY AND LOW DEMAND
COALspot.com: The BDI continued to soften and was down 5.78 pct and falls back below 1000 points this week.
The cape Index lost 17.25 per cent ...
Friday, 21 August 15
U.S. YEAR-TO-DATE COAL PRODUCTION VOLUME FALLS 8.7% Y-O-Y
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 18.3 million shor ...
Friday, 21 August 15
GLOBALCOAL TO LAUNCH ONLINE TRADING OF PHYSICAL MET COAL ON 13 OCTOBER
On 13 October 2015, globalCOAL will launch an online platform for the physical procurement and trade of high quality hard coking coal delivered FOB ...
Thursday, 20 August 15
COAL PRICES FALL TO 12-YEAR LOWS AS CHINA, INDIA JOIN DEMAND SLOWDOWN - REUTERS
Coal futures have fallen to 12-year lows, hit by soaring production and a slowdown in global buying, including from India and China which until rec ...
Wednesday, 19 August 15
FOB INDONESIA COAL SWAPS CONTINUE FLAT TREND LINE THIS WEEK
COALspot.com: Indonesian coal swap for delivery 4Q 2015 declined month on month and flat week over week, this past week.
The 4Q swap was decli ...
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- Coalindo Energy - Indonesia
- Bangladesh Power Developement Board
- Grasim Industreis Ltd - India
- ICICI Bank Limited - India
- Georgia Ports Authority, United States
- Banpu Public Company Limited - Thailand
- Kaltim Prima Coal - Indonesia
- Global Business Power Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Commonwealth Bank - Australia
- MS Steel International - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Central Electricity Authority - India
- Toyota Tsusho Corporation, Japan
- Jaiprakash Power Ventures ltd
- Bahari Cakrawala Sebuku - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Maharashtra Electricity Regulatory Commission - India
- Directorate General of MIneral and Coal - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indo Tambangraya Megah - Indonesia
- Vedanta Resources Plc - India
- TeaM Sual Corporation - Philippines
- Rio Tinto Coal - Australia
- Central Java Power - Indonesia
- Vizag Seaport Private Limited - India
- Bulk Trading Sa - Switzerland
- Trasteel International SA, Italy
- Billiton Holdings Pty Ltd - Australia
- Mintek Dendrill Indonesia
- Intertek Mineral Services - Indonesia
- Formosa Plastics Group - Taiwan
- Indonesian Coal Mining Association
- Kalimantan Lumbung Energi - Indonesia
- Ind-Barath Power Infra Limited - India
- Thiess Contractors Indonesia
- Global Coal Blending Company Limited - Australia
- SMG Consultants - Indonesia
- Coal and Oil Company - UAE
- PetroVietnam Power Coal Import and Supply Company
- Minerals Council of Australia
- Directorate Of Revenue Intelligence - India
- Parliament of New Zealand
- Bhoruka Overseas - Indonesia
- The University of Queensland
- Cement Manufacturers Association - India
- Mercuria Energy - Indonesia
- Siam City Cement - Thailand
- PowerSource Philippines DevCo
- White Energy Company Limited
- Jindal Steel & Power Ltd - India
- Energy Development Corp, Philippines
- Salva Resources Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Siam City Cement PLC, Thailand
- SMC Global Power, Philippines
- Krishnapatnam Port Company Ltd. - India
- Merrill Lynch Commodities Europe
- Borneo Indobara - Indonesia
- Electricity Generating Authority of Thailand
- Sakthi Sugars Limited - India
- Energy Link Ltd, New Zealand
- Indika Energy - Indonesia
- Xindia Steels Limited - India
- Ambuja Cements Ltd - India
- Anglo American - United Kingdom
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Latin American Coal - Colombia
- Power Finance Corporation Ltd., India
- Pendopo Energi Batubara - Indonesia
- Sical Logistics Limited - India
- Semirara Mining Corp, Philippines
- Madhucon Powers Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Gujarat Sidhee Cement - India
- Samtan Co., Ltd - South Korea
- OPG Power Generation Pvt Ltd - India
- Economic Council, Georgia
- CNBM International Corporation - China
- Indian Energy Exchange, India
- Karaikal Port Pvt Ltd - India
- Carbofer General Trading SA - India
- The Treasury - Australian Government
- Ceylon Electricity Board - Sri Lanka
- Kartika Selabumi Mining - Indonesia
- Posco Energy - South Korea
- SN Aboitiz Power Inc, Philippines
- Renaissance Capital - South Africa
- Lanco Infratech Ltd - India
- Maheswari Brothers Coal Limited - India
- Star Paper Mills Limited - India
- Alfred C Toepfer International GmbH - Germany
- Rashtriya Ispat Nigam Limited - India
- Romanian Commodities Exchange
- Tamil Nadu electricity Board
- London Commodity Brokers - England
- Videocon Industries ltd - India
- Edison Trading Spa - Italy
- Eastern Energy - Thailand
- Jorong Barutama Greston.PT - Indonesia
- Coastal Gujarat Power Limited - India
- Riau Bara Harum - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- IEA Clean Coal Centre - UK
- Australian Coal Association
- Sojitz Corporation - Japan
- GAC Shipping (India) Pvt Ltd
- Semirara Mining and Power Corporation, Philippines
- Tata Chemicals Ltd - India
- Port Waratah Coal Services - Australia
- Altura Mining Limited, Indonesia
- Heidelberg Cement - Germany
- Kepco SPC Power Corporation, Philippines
- Chettinad Cement Corporation Ltd - India
- India Bulls Power Limited - India
- Planning Commission, India
- Kideco Jaya Agung - Indonesia
- Makarim & Taira - Indonesia
- New Zealand Coal & Carbon
- Baramulti Group, Indonesia
- Antam Resourcindo - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Meenaskhi Energy Private Limited - India
- Petron Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- GMR Energy Limited - India
- Malabar Cements Ltd - India
- AsiaOL BioFuels Corp., Philippines
- McConnell Dowell - Australia
- Gujarat Electricity Regulatory Commission - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Asmin Koalindo Tuhup - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- International Coal Ventures Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Deloitte Consulting - India
- Mercator Lines Limited - India
- South Luzon Thermal Energy Corporation
- Aditya Birla Group - India
- Miang Besar Coal Terminal - Indonesia
- Oldendorff Carriers - Singapore
- Globalindo Alam Lestari - Indonesia
- Ministry of Transport, Egypt
- Indogreen Group - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Aboitiz Power Corporation - Philippines
- Straits Asia Resources Limited - Singapore
- Cigading International Bulk Terminal - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- The State Trading Corporation of India Ltd
- Kapuas Tunggal Persada - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Agrawal Coal Company - India
- Wood Mackenzie - Singapore
- Orica Australia Pty. Ltd.
- GN Power Mariveles Coal Plant, Philippines
- Bukit Makmur.PT - Indonesia
- Sree Jayajothi Cements Limited - India
- Africa Commodities Group - South Africa
- LBH Netherlands Bv - Netherlands
- Wilmar Investment Holdings
- Thai Mozambique Logistica
- Goldman Sachs - Singapore
- Kobexindo Tractors - Indoneisa
- Sindya Power Generating Company Private Ltd
- Bayan Resources Tbk. - Indonesia
- Bhatia International Limited - India
- Marubeni Corporation - India
- Standard Chartered Bank - UAE
- Bukit Baiduri Energy - Indonesia
- Australian Commodity Traders Exchange
- Larsen & Toubro Limited - India
- IHS Mccloskey Coal Group - USA
- Kumho Petrochemical, South Korea
- Pipit Mutiara Jaya. PT, Indonesia
- Simpson Spence & Young - Indonesia
- Timah Investasi Mineral - Indoneisa
- Orica Mining Services - Indonesia
- Bharathi Cement Corporation - India
- CIMB Investment Bank - Malaysia
- Bhushan Steel Limited - India
- PNOC Exploration Corporation - Philippines
- Electricity Authority, New Zealand
- Iligan Light & Power Inc, Philippines
- Singapore Mercantile Exchange
- Price Waterhouse Coopers - Russia
- VISA Power Limited - India
- Gujarat Mineral Development Corp Ltd - India
- PTC India Limited - India
- Ministry of Mines - Canada
- Therma Luzon, Inc, Philippines
- Mjunction Services Limited - India
- Dalmia Cement Bharat India
- Independent Power Producers Association of India
- Neyveli Lignite Corporation Ltd, - India
- Eastern Coal Council - USA
- Parry Sugars Refinery, India
- Essar Steel Hazira Ltd - India
- Indian Oil Corporation Limited
- Attock Cement Pakistan Limited
- GVK Power & Infra Limited - India
- Metalloyd Limited - United Kingdom
- Chamber of Mines of South Africa
- Meralco Power Generation, Philippines
- Global Green Power PLC Corporation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Binh Thuan Hamico - Vietnam
- Ministry of Finance - Indonesia
- ASAPP Information Group - India
- Barasentosa Lestari - Indonesia
- Medco Energi Mining Internasional
- San Jose City I Power Corp, Philippines
- Savvy Resources Ltd - HongKong
- Interocean Group of Companies - India
- Uttam Galva Steels Limited - India
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