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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, 07 August 15
U.S. YEAR-TO-DATE COAL PRODUCTION TOTALED 528.1 MMST; DOWN 8.7% Y/Y - EIA
COALspot.com – United States the world’s second largest coal producer has produced approximately totaled an estimated 17.7 million shor ...
Thursday, 06 August 15
THE RATES FOR CAPES SHOOT UP LAST WEEK; GIVING THIS RECENT RALLY SOME MUCH NEEDED LEGS - INTERMODAL
COALspot.com: The Dry Bulk market noted another positive closing last week, entirely supported by Capesize performance, which managed to balance th ...
Thursday, 06 August 15
HARD COAL AND COKE IMPORTS TO GERMANY REACH NEW ALL-TIME HIGH OF 56.2M TONES IN 2014
Demand for German and imported hard coal In 2014, in 2014 fell by almost 8%, or 4.8m TCE, to 56.2m TCE.
According to German Coal Importer ...
Thursday, 06 August 15
SEABORNE WORLD TRADE IN STEAM COAL GROWS BY 3% YOY - GERMAN COAL IMPORTER ASSOCIATION
Global trade with hard coal, at 1,272m tones in 2014, increased by 35m tonnes or 3% in comparison with the previous year.
According to associa ...
Wednesday, 05 August 15
SHIPPING MARKET INSIGHT - KATERINA RESTIS
On July 14th, 2015 a historical consensus was reached in Vienna between Iran and the five permanent members of the U.N. Security Council, plus Germ ...
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- Bank of Tokyo Mitsubishi UFJ Ltd
- Kalimantan Lumbung Energi - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Oldendorff Carriers - Singapore
- Australian Coal Association
- Central Java Power - Indonesia
- Bukit Makmur.PT - Indonesia
- Thiess Contractors Indonesia
- LBH Netherlands Bv - Netherlands
- Trasteel International SA, Italy
- Independent Power Producers Association of India
- Xindia Steels Limited - India
- Savvy Resources Ltd - HongKong
- London Commodity Brokers - England
- Heidelberg Cement - Germany
- Commonwealth Bank - Australia
- Bhushan Steel Limited - India
- Jaiprakash Power Ventures ltd
- Pipit Mutiara Jaya. PT, Indonesia
- Kumho Petrochemical, South Korea
- Parliament of New Zealand
- PTC India Limited - India
- Lanco Infratech Ltd - India
- Bhatia International Limited - India
- Cement Manufacturers Association - India
- Global Coal Blending Company Limited - Australia
- Gujarat Electricity Regulatory Commission - India
- Ministry of Finance - Indonesia
- Bayan Resources Tbk. - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Renaissance Capital - South Africa
- Ceylon Electricity Board - Sri Lanka
- Simpson Spence & Young - Indonesia
- Timah Investasi Mineral - Indoneisa
- Formosa Plastics Group - Taiwan
- Chettinad Cement Corporation Ltd - India
- SMC Global Power, Philippines
- Edison Trading Spa - Italy
- Kideco Jaya Agung - Indonesia
- SMG Consultants - Indonesia
- Altura Mining Limited, Indonesia
- Bharathi Cement Corporation - India
- Attock Cement Pakistan Limited
- Singapore Mercantile Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Coastal Gujarat Power Limited - India
- Globalindo Alam Lestari - Indonesia
- Leighton Contractors Pty Ltd - Australia
- TeaM Sual Corporation - Philippines
- Jorong Barutama Greston.PT - Indonesia
- Makarim & Taira - Indonesia
- Africa Commodities Group - South Africa
- Grasim Industreis Ltd - India
- CIMB Investment Bank - Malaysia
- ICICI Bank Limited - India
- Binh Thuan Hamico - Vietnam
- GVK Power & Infra Limited - India
- Posco Energy - South Korea
- Sree Jayajothi Cements Limited - India
- Metalloyd Limited - United Kingdom
- Wilmar Investment Holdings
- Tata Chemicals Ltd - India
- SN Aboitiz Power Inc, Philippines
- Global Business Power Corporation, Philippines
- Standard Chartered Bank - UAE
- Samtan Co., Ltd - South Korea
- Latin American Coal - Colombia
- Therma Luzon, Inc, Philippines
- Iligan Light & Power Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- The State Trading Corporation of India Ltd
- Indian Energy Exchange, India
- Ambuja Cements Ltd - India
- Romanian Commodities Exchange
- Videocon Industries ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Coalindo Energy - Indonesia
- Interocean Group of Companies - India
- Uttam Galva Steels Limited - India
- San Jose City I Power Corp, Philippines
- Essar Steel Hazira Ltd - India
- Kobexindo Tractors - Indoneisa
- McConnell Dowell - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Merrill Lynch Commodities Europe
- GMR Energy Limited - India
- Straits Asia Resources Limited - Singapore
- Global Green Power PLC Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- Meenaskhi Energy Private Limited - India
- ASAPP Information Group - India
- AsiaOL BioFuels Corp., Philippines
- Karaikal Port Pvt Ltd - India
- India Bulls Power Limited - India
- Sakthi Sugars Limited - India
- Salva Resources Pvt Ltd - India
- Parry Sugars Refinery, India
- Neyveli Lignite Corporation Ltd, - India
- Dalmia Cement Bharat India
- Kartika Selabumi Mining - Indonesia
- Ministry of Mines - Canada
- Mercator Lines Limited - India
- Siam City Cement PLC, Thailand
- Minerals Council of Australia
- Sical Logistics Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Vizag Seaport Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Bangladesh Power Developement Board
- PowerSource Philippines DevCo
- Mjunction Services Limited - India
- Alfred C Toepfer International GmbH - Germany
- Planning Commission, India
- Petrochimia International Co. Ltd.- Taiwan
- Madhucon Powers Ltd - India
- Petron Corporation, Philippines
- The Treasury - Australian Government
- South Luzon Thermal Energy Corporation
- Energy Link Ltd, New Zealand
- Aditya Birla Group - India
- Banpu Public Company Limited - Thailand
- Sojitz Corporation - Japan
- Holcim Trading Pte Ltd - Singapore
- GAC Shipping (India) Pvt Ltd
- Orica Australia Pty. Ltd.
- Semirara Mining Corp, Philippines
- Energy Development Corp, Philippines
- IHS Mccloskey Coal Group - USA
- Agrawal Coal Company - India
- TNB Fuel Sdn Bhd - Malaysia
- Indian Oil Corporation Limited
- Directorate General of MIneral and Coal - Indonesia
- Bukit Baiduri Energy - Indonesia
- Carbofer General Trading SA - India
- Tamil Nadu electricity Board
- Larsen & Toubro Limited - India
- Ind-Barath Power Infra Limited - India
- Australian Commodity Traders Exchange
- Indonesian Coal Mining Association
- Riau Bara Harum - Indonesia
- Mintek Dendrill Indonesia
- White Energy Company Limited
- Baramulti Group, Indonesia
- Goldman Sachs - Singapore
- Eastern Coal Council - USA
- Sindya Power Generating Company Private Ltd
- MS Steel International - UAE
- Vedanta Resources Plc - India
- The University of Queensland
- Borneo Indobara - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Bulk Trading Sa - Switzerland
- Miang Besar Coal Terminal - Indonesia
- VISA Power Limited - India
- Jindal Steel & Power Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Indogreen Group - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Intertek Mineral Services - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Cigading International Bulk Terminal - Indonesia
- Coal and Oil Company - UAE
- IEA Clean Coal Centre - UK
- Billiton Holdings Pty Ltd - Australia
- Barasentosa Lestari - Indonesia
- Meralco Power Generation, Philippines
- Mercuria Energy - Indonesia
- PNOC Exploration Corporation - Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kaltim Prima Coal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Deloitte Consulting - India
- Electricity Authority, New Zealand
- Toyota Tsusho Corporation, Japan
- Maheswari Brothers Coal Limited - India
- Thai Mozambique Logistica
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Siam City Cement - Thailand
- Central Electricity Authority - India
- European Bulk Services B.V. - Netherlands
- Marubeni Corporation - India
- CNBM International Corporation - China
- Wood Mackenzie - Singapore
- Bukit Asam (Persero) Tbk - Indonesia
- International Coal Ventures Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Vijayanagar Sugar Pvt Ltd - India
- Eastern Energy - Thailand
- Pendopo Energi Batubara - Indonesia
- Chamber of Mines of South Africa
- Anglo American - United Kingdom
- Krishnapatnam Port Company Ltd. - India
- Bhoruka Overseas - Indonesia
- Aboitiz Power Corporation - Philippines
- Malabar Cements Ltd - India
- Power Finance Corporation Ltd., India
- Star Paper Mills Limited - India
- Indika Energy - Indonesia
- Kepco SPC Power Corporation, Philippines
- Georgia Ports Authority, United States
- Ministry of Transport, Egypt
- PetroVietnam Power Coal Import and Supply Company
- Medco Energi Mining Internasional
- Semirara Mining and Power Corporation, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Price Waterhouse Coopers - Russia
- Gujarat Sidhee Cement - India
- Sarangani Energy Corporation, Philippines
- Directorate Of Revenue Intelligence - India
- Economic Council, Georgia
- Rio Tinto Coal - Australia
- New Zealand Coal & Carbon
- Kapuas Tunggal Persada - Indonesia
- Electricity Generating Authority of Thailand
- Orica Mining Services - Indonesia
- Indo Tambangraya Megah - Indonesia
- Antam Resourcindo - Indonesia
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