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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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Thursday, 16 July 15
INDONESIA'S HBA HITS ALL-TIME LOW OF $59.16 PER METRIC TON IN JULY 2015
COALspot.com - The Director General of Mineral and Coal of Indonesia revised down Indonesian coal benchmark price once again to US$ 59.16 pe ...
Thursday, 16 July 15
FOB RICHARDS BAY COAL SWAPS DECLINE W-O-W, M-O-M
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q3' 2015 declined month over month and week over week.
The Q3 swap was down US$ ...
Wednesday, 15 July 15
WEEKLY SHIPPING MARKET INSIGHT - INTERMODAL
The last few weeks have been rather strenuous for Greece and China, each for their own reasons, affecting most markets around the world. In Greece ...
Wednesday, 15 July 15
IRAN OIL RECOVERY TO TAKE YEARS, BUT COULD START IN 2016 - FITCH
Iranian crude oil production is likely to increase in 2016 but will take a number of years to reach its previous peak, Fitch Ratings says.
The ...
Wednesday, 15 July 15
SAS TO BUILD 108 KM ROAD FOR COAL IN JAMBI, SAYS JAKARTA POST
Jambi Governor Hasan Basri Agus said on Sunday that mining company PT Sinar Anugerah Sukses (SAS) would develop a 108-kilometer road with a width o ...
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- Straits Asia Resources Limited - Singapore
- Meralco Power Generation, Philippines
- Videocon Industries ltd - India
- International Coal Ventures Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Thai Mozambique Logistica
- London Commodity Brokers - England
- Kepco SPC Power Corporation, Philippines
- Africa Commodities Group - South Africa
- MS Steel International - UAE
- Jaiprakash Power Ventures ltd
- TeaM Sual Corporation - Philippines
- Petron Corporation, Philippines
- The Treasury - Australian Government
- Port Waratah Coal Services - Australia
- Krishnapatnam Port Company Ltd. - India
- Indogreen Group - Indonesia
- Malabar Cements Ltd - India
- Bhoruka Overseas - Indonesia
- Toyota Tsusho Corporation, Japan
- Bulk Trading Sa - Switzerland
- Vizag Seaport Private Limited - India
- Globalindo Alam Lestari - Indonesia
- Sakthi Sugars Limited - India
- Australian Coal Association
- Carbofer General Trading SA - India
- Sarangani Energy Corporation, Philippines
- Larsen & Toubro Limited - India
- Bukit Baiduri Energy - Indonesia
- San Jose City I Power Corp, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Orica Mining Services - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Directorate Of Revenue Intelligence - India
- New Zealand Coal & Carbon
- Mercator Lines Limited - India
- Madhucon Powers Ltd - India
- White Energy Company Limited
- Xindia Steels Limited - India
- Indian Oil Corporation Limited
- Bukit Asam (Persero) Tbk - Indonesia
- Aditya Birla Group - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Eastern Energy - Thailand
- Attock Cement Pakistan Limited
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Economic Council, Georgia
- Kartika Selabumi Mining - Indonesia
- Marubeni Corporation - India
- CIMB Investment Bank - Malaysia
- Sical Logistics Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Dalmia Cement Bharat India
- Merrill Lynch Commodities Europe
- Georgia Ports Authority, United States
- Singapore Mercantile Exchange
- Siam City Cement PLC, Thailand
- Billiton Holdings Pty Ltd - Australia
- Uttam Galva Steels Limited - India
- Ceylon Electricity Board - Sri Lanka
- Maheswari Brothers Coal Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Antam Resourcindo - Indonesia
- Ministry of Transport, Egypt
- Bangladesh Power Developement Board
- Eastern Coal Council - USA
- Mintek Dendrill Indonesia
- GN Power Mariveles Coal Plant, Philippines
- IHS Mccloskey Coal Group - USA
- Lanco Infratech Ltd - India
- Chettinad Cement Corporation Ltd - India
- Meenaskhi Energy Private Limited - India
- Sree Jayajothi Cements Limited - India
- Wilmar Investment Holdings
- Ambuja Cements Ltd - India
- Bhushan Steel Limited - India
- Rio Tinto Coal - Australia
- ASAPP Information Group - India
- Sinarmas Energy and Mining - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Planning Commission, India
- Sindya Power Generating Company Private Ltd
- Riau Bara Harum - Indonesia
- PowerSource Philippines DevCo
- Manunggal Multi Energi - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- European Bulk Services B.V. - Netherlands
- Parry Sugars Refinery, India
- Tata Chemicals Ltd - India
- Indo Tambangraya Megah - Indonesia
- Barasentosa Lestari - Indonesia
- Tamil Nadu electricity Board
- Alfred C Toepfer International GmbH - Germany
- Global Coal Blending Company Limited - Australia
- The University of Queensland
- Semirara Mining Corp, Philippines
- SN Aboitiz Power Inc, Philippines
- Simpson Spence & Young - Indonesia
- Intertek Mineral Services - Indonesia
- McConnell Dowell - Australia
- Siam City Cement - Thailand
- Ind-Barath Power Infra Limited - India
- Indonesian Coal Mining Association
- Interocean Group of Companies - India
- Anglo American - United Kingdom
- TNB Fuel Sdn Bhd - Malaysia
- Electricity Generating Authority of Thailand
- Kumho Petrochemical, South Korea
- Bank of Tokyo Mitsubishi UFJ Ltd
- Samtan Co., Ltd - South Korea
- AsiaOL BioFuels Corp., Philippines
- Leighton Contractors Pty Ltd - Australia
- South Luzon Thermal Energy Corporation
- Star Paper Mills Limited - India
- GMR Energy Limited - India
- Thiess Contractors Indonesia
- LBH Netherlands Bv - Netherlands
- Price Waterhouse Coopers - Russia
- Jindal Steel & Power Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- India Bulls Power Limited - India
- Baramulti Group, Indonesia
- Global Green Power PLC Corporation, Philippines
- Gujarat Electricity Regulatory Commission - India
- Coastal Gujarat Power Limited - India
- Kapuas Tunggal Persada - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Formosa Plastics Group - Taiwan
- Wood Mackenzie - Singapore
- Trasteel International SA, Italy
- OPG Power Generation Pvt Ltd - India
- Medco Energi Mining Internasional
- Offshore Bulk Terminal Pte Ltd, Singapore
- Coal and Oil Company - UAE
- Timah Investasi Mineral - Indoneisa
- Salva Resources Pvt Ltd - India
- Gujarat Sidhee Cement - India
- Savvy Resources Ltd - HongKong
- Therma Luzon, Inc, Philippines
- Orica Australia Pty. Ltd.
- Iligan Light & Power Inc, Philippines
- Latin American Coal - Colombia
- Mjunction Services Limited - India
- Sojitz Corporation - Japan
- ICICI Bank Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Agrawal Coal Company - India
- Kaltim Prima Coal - Indonesia
- Posco Energy - South Korea
- Chamber of Mines of South Africa
- Binh Thuan Hamico - Vietnam
- Mercuria Energy - Indonesia
- The State Trading Corporation of India Ltd
- SMC Global Power, Philippines
- Semirara Mining and Power Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Vedanta Resources Plc - India
- PTC India Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Commonwealth Bank - Australia
- Energy Development Corp, Philippines
- Aboitiz Power Corporation - Philippines
- Power Finance Corporation Ltd., India
- Australian Commodity Traders Exchange
- Romanian Commodities Exchange
- Minerals Council of Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Ministry of Finance - Indonesia
- Heidelberg Cement - Germany
- Pendopo Energi Batubara - Indonesia
- CNBM International Corporation - China
- Altura Mining Limited, Indonesia
- SMG Consultants - Indonesia
- VISA Power Limited - India
- Cigading International Bulk Terminal - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Parliament of New Zealand
- Cement Manufacturers Association - India
- Borneo Indobara - Indonesia
- Central Java Power - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- PNOC Exploration Corporation - Philippines
- Electricity Authority, New Zealand
- Independent Power Producers Association of India
- Miang Besar Coal Terminal - Indonesia
- Kideco Jaya Agung - Indonesia
- Kobexindo Tractors - Indoneisa
- Indika Energy - Indonesia
- Goldman Sachs - Singapore
- Renaissance Capital - South Africa
- Ministry of Mines - Canada
- Maharashtra Electricity Regulatory Commission - India
- Bukit Makmur.PT - Indonesia
- GVK Power & Infra Limited - India
- Central Electricity Authority - India
- Standard Chartered Bank - UAE
- Edison Trading Spa - Italy
- IEA Clean Coal Centre - UK
- Metalloyd Limited - United Kingdom
- Bharathi Cement Corporation - India
- Deloitte Consulting - India
- Grasim Industreis Ltd - India
- Global Business Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Karaikal Port Pvt Ltd - India
- Coalindo Energy - Indonesia
- Essar Steel Hazira Ltd - India
- Bhatia International Limited - India
- Makarim & Taira - Indonesia
- Energy Link Ltd, New Zealand
- GAC Shipping (India) Pvt Ltd
- Bayan Resources Tbk. - Indonesia
- Indian Energy Exchange, India
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