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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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Monday, 17 August 15
CFR SOUTH CHINA COAL SWAPS CONTINUE TO HEAD SOUTH
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined just US cents 40 (1.05%) per MT month over month.
A commodi ...
Sunday, 16 August 15
INDONESIA TO INDIA FREIGHT RATES ARE EXPECTED TO STEADY NEXT WEEK
COALspot.com: The BDI softened 12.08 per cent to 1055 points this week due to weakening of cape index which was fell 25 per cent week over week to ...
Friday, 14 August 15
FOB INDONESIA COAL SWAP SHOWING NO MOVEMENT THIS PAST WEEK
COALspot.com: Indonesian coal swap for delivery 4Q 2015 declined month on month and week over week, this past week.
The 4Q swap was declined $ ...
Friday, 14 August 15
U.S. COAL PRODUCTION UP 2.9 PER CENT THIS WEEK
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 18.2 million shor ...
Friday, 14 August 15
CONDITIONS AND COMPLEXITIES IN A TRIPARTITE AGREEMENT: BE SPECIFIC! - INCE & CO
KNOWLEDGE TO ELEVATE
A tripartite agreement reached between the Owners, the Shippers and the Receivers provided that demurrage be paid to the ...
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- Simpson Spence & Young - Indonesia
- SMG Consultants - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- South Luzon Thermal Energy Corporation
- Directorate Of Revenue Intelligence - India
- Romanian Commodities Exchange
- Metalloyd Limited - United Kingdom
- Jaiprakash Power Ventures ltd
- Latin American Coal - Colombia
- Sojitz Corporation - Japan
- Bulk Trading Sa - Switzerland
- Posco Energy - South Korea
- Madhucon Powers Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Aditya Birla Group - India
- Leighton Contractors Pty Ltd - Australia
- Videocon Industries ltd - India
- Jorong Barutama Greston.PT - Indonesia
- LBH Netherlands Bv - Netherlands
- Gujarat Mineral Development Corp Ltd - India
- Electricity Generating Authority of Thailand
- Ministry of Transport, Egypt
- Mintek Dendrill Indonesia
- GVK Power & Infra Limited - India
- Cement Manufacturers Association - India
- Sarangani Energy Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Formosa Plastics Group - Taiwan
- Carbofer General Trading SA - India
- Ambuja Cements Ltd - India
- Meenaskhi Energy Private Limited - India
- Kobexindo Tractors - Indoneisa
- ICICI Bank Limited - India
- Standard Chartered Bank - UAE
- McConnell Dowell - Australia
- Merrill Lynch Commodities Europe
- London Commodity Brokers - England
- GAC Shipping (India) Pvt Ltd
- Indian Energy Exchange, India
- OPG Power Generation Pvt Ltd - India
- Trasteel International SA, Italy
- Bukit Asam (Persero) Tbk - Indonesia
- IHS Mccloskey Coal Group - USA
- Central Java Power - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Petrochimia International Co. Ltd.- Taiwan
- Meralco Power Generation, Philippines
- Therma Luzon, Inc, Philippines
- Indonesian Coal Mining Association
- CIMB Investment Bank - Malaysia
- Electricity Authority, New Zealand
- Toyota Tsusho Corporation, Japan
- New Zealand Coal & Carbon
- Bhoruka Overseas - Indonesia
- Savvy Resources Ltd - HongKong
- Coalindo Energy - Indonesia
- Barasentosa Lestari - Indonesia
- Dalmia Cement Bharat India
- Miang Besar Coal Terminal - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sical Logistics Limited - India
- Interocean Group of Companies - India
- Price Waterhouse Coopers - Russia
- Samtan Co., Ltd - South Korea
- Mjunction Services Limited - India
- Eastern Energy - Thailand
- Kohat Cement Company Ltd. - Pakistan
- Manunggal Multi Energi - Indonesia
- TeaM Sual Corporation - Philippines
- Anglo American - United Kingdom
- Coal and Oil Company - UAE
- Essar Steel Hazira Ltd - India
- Gujarat Sidhee Cement - India
- Bhushan Steel Limited - India
- Vizag Seaport Private Limited - India
- Siam City Cement PLC, Thailand
- Parry Sugars Refinery, India
- The University of Queensland
- Africa Commodities Group - South Africa
- Kumho Petrochemical, South Korea
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Malabar Cements Ltd - India
- Edison Trading Spa - Italy
- Power Finance Corporation Ltd., India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bharathi Cement Corporation - India
- Energy Link Ltd, New Zealand
- Indian Oil Corporation Limited
- Georgia Ports Authority, United States
- Renaissance Capital - South Africa
- Baramulti Group, Indonesia
- Grasim Industreis Ltd - India
- MS Steel International - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Bukit Makmur.PT - Indonesia
- Ind-Barath Power Infra Limited - India
- Indogreen Group - Indonesia
- Ministry of Mines - Canada
- Holcim Trading Pte Ltd - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- European Bulk Services B.V. - Netherlands
- Chettinad Cement Corporation Ltd - India
- Antam Resourcindo - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Planning Commission, India
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- Neyveli Lignite Corporation Ltd, - India
- SMC Global Power, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- SN Aboitiz Power Inc, Philippines
- Parliament of New Zealand
- Indo Tambangraya Megah - Indonesia
- Economic Council, Georgia
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- Cigading International Bulk Terminal - Indonesia
- Global Business Power Corporation, Philippines
- Ministry of Finance - Indonesia
- Global Green Power PLC Corporation, Philippines
- PTC India Limited - India
- Jindal Steel & Power Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Billiton Holdings Pty Ltd - Australia
- Indika Energy - Indonesia
- Sree Jayajothi Cements Limited - India
- Uttam Galva Steels Limited - India
- Deloitte Consulting - India
- Petron Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Tata Chemicals Ltd - India
- White Energy Company Limited
- Pendopo Energi Batubara - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Medco Energi Mining Internasional
- Salva Resources Pvt Ltd - India
- Rio Tinto Coal - Australia
- Agrawal Coal Company - India
- Karaikal Port Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- Bayan Resources Tbk. - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Heidelberg Cement - Germany
- PowerSource Philippines DevCo
- Orica Mining Services - Indonesia
- Globalindo Alam Lestari - Indonesia
- India Bulls Power Limited - India
- Thai Mozambique Logistica
- Iligan Light & Power Inc, Philippines
- Rashtriya Ispat Nigam Limited - India
- Goldman Sachs - Singapore
- Bhatia International Limited - India
- Port Waratah Coal Services - Australia
- Makarim & Taira - Indonesia
- Orica Australia Pty. Ltd.
- Lanco Infratech Ltd - India
- Australian Coal Association
- Xindia Steels Limited - India
- Maheswari Brothers Coal Limited - India
- Wilmar Investment Holdings
- Sakthi Sugars Limited - India
- Bukit Baiduri Energy - Indonesia
- Independent Power Producers Association of India
- VISA Power Limited - India
- Thiess Contractors Indonesia
- Bangladesh Power Developement Board
- PetroVietnam Power Coal Import and Supply Company
- PNOC Exploration Corporation - Philippines
- Intertek Mineral Services - Indonesia
- Sindya Power Generating Company Private Ltd
- Mercator Lines Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Eastern Coal Council - USA
- Gujarat Electricity Regulatory Commission - India
- Oldendorff Carriers - Singapore
- IEA Clean Coal Centre - UK
- Chamber of Mines of South Africa
- The Treasury - Australian Government
- Riau Bara Harum - Indonesia
- Wood Mackenzie - Singapore
- Tamil Nadu electricity Board
- Borneo Indobara - Indonesia
- Minerals Council of Australia
- Altura Mining Limited, Indonesia
- Kaltim Prima Coal - Indonesia
- Straits Asia Resources Limited - Singapore
- Commonwealth Bank - Australia
- Larsen & Toubro Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Coastal Gujarat Power Limited - India
- Krishnapatnam Port Company Ltd. - India
- Global Coal Blending Company Limited - Australia
- Australian Commodity Traders Exchange
- Energy Development Corp, Philippines
- Central Electricity Authority - India
- Star Paper Mills Limited - India
- Siam City Cement - Thailand
- Semirara Mining and Power Corporation, Philippines
- Timah Investasi Mineral - Indoneisa
- Mercuria Energy - Indonesia
- Semirara Mining Corp, Philippines
- Sinarmas Energy and Mining - Indonesia
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- The State Trading Corporation of India Ltd
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