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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, 18 August 15
DRY BULK: MARKETS HAVE CONTINUED TO BE SEVERELY CHALLENGED - CLARKSONS
The dry bulk markets have continued to be severely challenged with freight rates falling during the period to below operating expense. The Baltic D ...
Tuesday, 18 August 15
1Q'16 FOB RICHARDS BAY COAL SWAP FALLS BELOW $54 A TON
COALspot.com: API4 FOB Richards Bay Coal swap for delivery 4Q' 2015 declined month over month and week over week.
The 4Q swap was down US$ ...
Tuesday, 18 August 15
2Q' 16 FOB NEWCASTLE COAL SWAP CLOSED AT $43 PER MT W/E 14 AUGUST
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Monday, 17 August 15
TROUBLED DRY BULK MARKET FACES TURMOIL AS CHINESE COAL IMPORTS REMAIN WEAK - BIMCO
The demand for coal in China continues to diminish. So much in fact that India is expected to succeed China as the world’s largest imp ...
Monday, 17 August 15
INDONESIAN THERMAL COAL REFERENCE PRICE HITS RECORD LOW AGAIN!
COALspot.com - The Director General of Mineral and Coal of Indonesia revised down Indonesian coal benchmark price once again to US$ 59.14 per MT fo ...
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- Bhatia International Limited - India
- Australian Commodity Traders Exchange
- Siam City Cement PLC, Thailand
- MS Steel International - UAE
- Chamber of Mines of South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Globalindo Alam Lestari - Indonesia
- Renaissance Capital - South Africa
- Samtan Co., Ltd - South Korea
- Interocean Group of Companies - India
- Singapore Mercantile Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- PowerSource Philippines DevCo
- Sinarmas Energy and Mining - Indonesia
- Karaikal Port Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Bangladesh Power Developement Board
- Chettinad Cement Corporation Ltd - India
- Anglo American - United Kingdom
- Meralco Power Generation, Philippines
- Semirara Mining Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- ASAPP Information Group - India
- Jindal Steel & Power Ltd - India
- Central Electricity Authority - India
- Lanco Infratech Ltd - India
- Bayan Resources Tbk. - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Dalmia Cement Bharat India
- Metalloyd Limited - United Kingdom
- Petrochimia International Co. Ltd.- Taiwan
- Thai Mozambique Logistica
- Rio Tinto Coal - Australia
- Carbofer General Trading SA - India
- PNOC Exploration Corporation - Philippines
- Central Java Power - Indonesia
- Borneo Indobara - Indonesia
- Straits Asia Resources Limited - Singapore
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sree Jayajothi Cements Limited - India
- Jaiprakash Power Ventures ltd
- Marubeni Corporation - India
- GN Power Mariveles Coal Plant, Philippines
- Krishnapatnam Port Company Ltd. - India
- Trasteel International SA, Italy
- Essar Steel Hazira Ltd - India
- Indo Tambangraya Megah - Indonesia
- Wood Mackenzie - Singapore
- Bhoruka Overseas - Indonesia
- GAC Shipping (India) Pvt Ltd
- ICICI Bank Limited - India
- Salva Resources Pvt Ltd - India
- Posco Energy - South Korea
- Bhushan Steel Limited - India
- Port Waratah Coal Services - Australia
- Aditya Birla Group - India
- Neyveli Lignite Corporation Ltd, - India
- Orica Mining Services - Indonesia
- Coalindo Energy - Indonesia
- TeaM Sual Corporation - Philippines
- Alfred C Toepfer International GmbH - Germany
- Romanian Commodities Exchange
- LBH Netherlands Bv - Netherlands
- Australian Coal Association
- Kideco Jaya Agung - Indonesia
- Siam City Cement - Thailand
- Karbindo Abesyapradhi - Indoneisa
- OPG Power Generation Pvt Ltd - India
- Savvy Resources Ltd - HongKong
- SMG Consultants - Indonesia
- Maheswari Brothers Coal Limited - India
- Global Business Power Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Kartika Selabumi Mining - Indonesia
- Sindya Power Generating Company Private Ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- Eastern Energy - Thailand
- Mjunction Services Limited - India
- Orica Australia Pty. Ltd.
- Thiess Contractors Indonesia
- Oldendorff Carriers - Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Economic Council, Georgia
- IEA Clean Coal Centre - UK
- Pipit Mutiara Jaya. PT, Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- India Bulls Power Limited - India
- Minerals Council of Australia
- Cement Manufacturers Association - India
- Indika Energy - Indonesia
- Riau Bara Harum - Indonesia
- Gujarat Sidhee Cement - India
- Baramulti Group, Indonesia
- Latin American Coal - Colombia
- Ministry of Finance - Indonesia
- Aboitiz Power Corporation - Philippines
- Sakthi Sugars Limited - India
- Gujarat Electricity Regulatory Commission - India
- Madhucon Powers Ltd - India
- Pendopo Energi Batubara - Indonesia
- AsiaOL BioFuels Corp., Philippines
- McConnell Dowell - Australia
- Ind-Barath Power Infra Limited - India
- Sical Logistics Limited - India
- PTC India Limited - India
- Agrawal Coal Company - India
- Malabar Cements Ltd - India
- Deloitte Consulting - India
- London Commodity Brokers - England
- Holcim Trading Pte Ltd - Singapore
- Miang Besar Coal Terminal - Indonesia
- Kaltim Prima Coal - Indonesia
- Larsen & Toubro Limited - India
- Coastal Gujarat Power Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Simpson Spence & Young - Indonesia
- Videocon Industries ltd - India
- Electricity Authority, New Zealand
- The University of Queensland
- Barasentosa Lestari - Indonesia
- SMC Global Power, Philippines
- Ministry of Transport, Egypt
- Vizag Seaport Private Limited - India
- Petron Corporation, Philippines
- Formosa Plastics Group - Taiwan
- Star Paper Mills Limited - India
- The State Trading Corporation of India Ltd
- Georgia Ports Authority, United States
- VISA Power Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- GVK Power & Infra Limited - India
- IHS Mccloskey Coal Group - USA
- Uttam Galva Steels Limited - India
- Iligan Light & Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Bulk Trading Sa - Switzerland
- Xindia Steels Limited - India
- GMR Energy Limited - India
- Standard Chartered Bank - UAE
- Independent Power Producers Association of India
- Tamil Nadu electricity Board
- Makarim & Taira - Indonesia
- Eastern Coal Council - USA
- Global Green Power PLC Corporation, Philippines
- Vedanta Resources Plc - India
- Edison Trading Spa - Italy
- White Energy Company Limited
- Binh Thuan Hamico - Vietnam
- Indian Oil Corporation Limited
- Mercator Lines Limited - India
- CNBM International Corporation - China
- Parry Sugars Refinery, India
- Jorong Barutama Greston.PT - Indonesia
- Bukit Baiduri Energy - Indonesia
- Intertek Mineral Services - Indonesia
- The Treasury - Australian Government
- Semirara Mining and Power Corporation, Philippines
- Toyota Tsusho Corporation, Japan
- PetroVietnam Power Coal Import and Supply Company
- Ministry of Mines - Canada
- Indian Energy Exchange, India
- Kobexindo Tractors - Indoneisa
- Goldman Sachs - Singapore
- Grasim Industreis Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- Merrill Lynch Commodities Europe
- European Bulk Services B.V. - Netherlands
- Energy Development Corp, Philippines
- Commonwealth Bank - Australia
- Bukit Makmur.PT - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Manunggal Multi Energi - Indonesia
- Heidelberg Cement - Germany
- Mercuria Energy - Indonesia
- CIMB Investment Bank - Malaysia
- International Coal Ventures Pvt Ltd - India
- Wilmar Investment Holdings
- Kohat Cement Company Ltd. - Pakistan
- Indogreen Group - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Billiton Holdings Pty Ltd - Australia
- Price Waterhouse Coopers - Russia
- Africa Commodities Group - South Africa
- Attock Cement Pakistan Limited
- Sarangani Energy Corporation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Leighton Contractors Pty Ltd - Australia
- SN Aboitiz Power Inc, Philippines
- Mintek Dendrill Indonesia
- Energy Link Ltd, New Zealand
- Bharathi Cement Corporation - India
- Therma Luzon, Inc, Philippines
- Electricity Generating Authority of Thailand
- Antam Resourcindo - Indonesia
- Sojitz Corporation - Japan
- Tata Chemicals Ltd - India
- Ambuja Cements Ltd - India
- Indonesian Coal Mining Association
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Parliament of New Zealand
- Medco Energi Mining Internasional
- Banpu Public Company Limited - Thailand
- Power Finance Corporation Ltd., India
- New Zealand Coal & Carbon
- Timah Investasi Mineral - Indoneisa
- Planning Commission, India
- San Jose City I Power Corp, Philippines
- South Luzon Thermal Energy Corporation
- Rashtriya Ispat Nigam Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Kepco SPC Power Corporation, Philippines
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