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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, 03 August 15
NEWCASTLE COAL SWAPS DECLINE FURTHER THIS PAST WEEK
COALspot.com: API 5 FOB Newcastle Coal swap for 4Q’ 2015 delivery down $ 1.92 per MT (-4.22%) month over month to US$ 43.58 per mt. The swap ...
Monday, 03 August 15
CFR SOUTH CHINA COAL SWAPS SLIDE THIS WEEK
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery declined US$ 1.64 (3.14%) per MT month over month.
A commodity swap ...
Sunday, 02 August 15
CAPESIZE RATES PUSH BDI UPWARD
COALspot.com: The freight market was buoyant this week as BDI rose 4.14 pct to 1131 points. The cape index was also increased 16.50 pct 2209 points ...
Saturday, 01 August 15
DRY BULK MARKET KEEPS ITS MOMENTUM, AS OUTLOOK IMPROVES - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Although conditions remain more than challenging, especially from an economic point of view (aka China’s stock worries), the dry bulk market ...
Friday, 31 July 15
CAPE'S PAPER MARKET REMAINS FIRM - INTERMODAL
COALspot.com: The positive sentiment that the Dry Bulk market has been enjoying as of the previous month, was carried through last week as well, bu ...
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- PTC India Limited - India
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- Bukit Baiduri Energy - Indonesia
- MS Steel International - UAE
- Commonwealth Bank - Australia
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- Directorate Of Revenue Intelligence - India
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- Wood Mackenzie - Singapore
- Leighton Contractors Pty Ltd - Australia
- Kobexindo Tractors - Indoneisa
- Anglo American - United Kingdom
- Bukit Asam (Persero) Tbk - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Rashtriya Ispat Nigam Limited - India
- IEA Clean Coal Centre - UK
- Georgia Ports Authority, United States
- Ambuja Cements Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- SMC Global Power, Philippines
- Bangladesh Power Developement Board
- Energy Link Ltd, New Zealand
- TNB Fuel Sdn Bhd - Malaysia
- McConnell Dowell - Australia
- Makarim & Taira - Indonesia
- Central Electricity Authority - India
- Kapuas Tunggal Persada - Indonesia
- Holcim Trading Pte Ltd - Singapore
- European Bulk Services B.V. - Netherlands
- Marubeni Corporation - India
- Trasteel International SA, Italy
- Simpson Spence & Young - Indonesia
- Indika Energy - Indonesia
- Coastal Gujarat Power Limited - India
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- Bhushan Steel Limited - India
- Lanco Infratech Ltd - India
- Cement Manufacturers Association - India
- Bayan Resources Tbk. - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Kideco Jaya Agung - Indonesia
- Ministry of Finance - Indonesia
- Electricity Generating Authority of Thailand
- Port Waratah Coal Services - Australia
- Heidelberg Cement - Germany
- Minerals Council of Australia
- Vedanta Resources Plc - India
- Baramulti Group, Indonesia
- Iligan Light & Power Inc, Philippines
- Indonesian Coal Mining Association
- Savvy Resources Ltd - HongKong
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- Dalmia Cement Bharat India
- PNOC Exploration Corporation - Philippines
- GAC Shipping (India) Pvt Ltd
- Eastern Energy - Thailand
- Manunggal Multi Energi - Indonesia
- Indian Energy Exchange, India
- Bharathi Cement Corporation - India
- Grasim Industreis Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Metalloyd Limited - United Kingdom
- Indogreen Group - Indonesia
- Price Waterhouse Coopers - Russia
- India Bulls Power Limited - India
- Salva Resources Pvt Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Latin American Coal - Colombia
- Interocean Group of Companies - India
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- Siam City Cement - Thailand
- Jaiprakash Power Ventures ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Singapore Mercantile Exchange
- Bahari Cakrawala Sebuku - Indonesia
- Sojitz Corporation - Japan
- SMG Consultants - Indonesia
- Coalindo Energy - Indonesia
- Semirara Mining Corp, Philippines
- Ministry of Mines - Canada
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- San Jose City I Power Corp, Philippines
- Siam City Cement PLC, Thailand
- CIMB Investment Bank - Malaysia
- Maheswari Brothers Coal Limited - India
- Australian Commodity Traders Exchange
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Global Business Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Therma Luzon, Inc, Philippines
- Energy Development Corp, Philippines
- Chettinad Cement Corporation Ltd - India
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- Straits Asia Resources Limited - Singapore
- Essar Steel Hazira Ltd - India
- Ministry of Transport, Egypt
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- ICICI Bank Limited - India
- Meralco Power Generation, Philippines
- Mercator Lines Limited - India
- Coal and Oil Company - UAE
- Billiton Holdings Pty Ltd - Australia
- Sindya Power Generating Company Private Ltd
- Uttam Galva Steels Limited - India
- Thai Mozambique Logistica
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- Global Coal Blending Company Limited - Australia
- GMR Energy Limited - India
- Eastern Coal Council - USA
- Star Paper Mills Limited - India
- Altura Mining Limited, Indonesia
- Banpu Public Company Limited - Thailand
- Antam Resourcindo - Indonesia
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- Barasentosa Lestari - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Tamil Nadu electricity Board
- SN Aboitiz Power Inc, Philippines
- White Energy Company Limited
- Aditya Birla Group - India
- GVK Power & Infra Limited - India
- Pendopo Energi Batubara - Indonesia
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- Wilmar Investment Holdings
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- Oldendorff Carriers - Singapore
- Xindia Steels Limited - India
- Intertek Mineral Services - Indonesia
- Mercuria Energy - Indonesia
- Rio Tinto Coal - Australia
- Ceylon Electricity Board - Sri Lanka
- Indo Tambangraya Megah - Indonesia
- Deloitte Consulting - India
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- Karaikal Port Pvt Ltd - India
- Videocon Industries ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kaltim Prima Coal - Indonesia
- New Zealand Coal & Carbon
- Neyveli Lignite Corporation Ltd, - India
- Gujarat Electricity Regulatory Commission - India
- Formosa Plastics Group - Taiwan
- Orica Mining Services - Indonesia
- Standard Chartered Bank - UAE
- Timah Investasi Mineral - Indoneisa
- Gujarat Sidhee Cement - India
- PetroVietnam Power Coal Import and Supply Company
- Carbofer General Trading SA - India
- TeaM Sual Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- PowerSource Philippines DevCo
- Asmin Koalindo Tuhup - Indonesia
- Toyota Tsusho Corporation, Japan
- Agrawal Coal Company - India
- Independent Power Producers Association of India
- International Coal Ventures Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- Kartika Selabumi Mining - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- VISA Power Limited - India
- Tata Chemicals Ltd - India
- CNBM International Corporation - China
- Kepco SPC Power Corporation, Philippines
- The State Trading Corporation of India Ltd
- Planning Commission, India
- Parliament of New Zealand
- Mjunction Services Limited - India
- Thiess Contractors Indonesia
- Bukit Makmur.PT - Indonesia
- Sical Logistics Limited - India
- Bhoruka Overseas - Indonesia
- Edison Trading Spa - Italy
- Merrill Lynch Commodities Europe
- Chamber of Mines of South Africa
- Goldman Sachs - Singapore
- Orica Australia Pty. Ltd.
- Power Finance Corporation Ltd., India
- Electricity Authority, New Zealand
- South Luzon Thermal Energy Corporation
- AsiaOL BioFuels Corp., Philippines
- Parry Sugars Refinery, India
- Economic Council, Georgia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Africa Commodities Group - South Africa
- Mintek Dendrill Indonesia
- Renaissance Capital - South Africa
- Samtan Co., Ltd - South Korea
- Maharashtra Electricity Regulatory Commission - India
- Vizag Seaport Private Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Kumho Petrochemical, South Korea
- Alfred C Toepfer International GmbH - Germany
- Binh Thuan Hamico - Vietnam
- Attock Cement Pakistan Limited
- Globalindo Alam Lestari - Indonesia
- Cigading International Bulk Terminal - Indonesia
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- Romanian Commodities Exchange
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- Petron Corporation, Philippines
- Posco Energy - South Korea
- Karbindo Abesyapradhi - Indoneisa
- London Commodity Brokers - England
- Indian Oil Corporation Limited
- Bulk Trading Sa - Switzerland
- Australian Coal Association
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- Kohat Cement Company Ltd. - Pakistan
- The University of Queensland
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