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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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Sunday, 12 July 15
SHIPYARD NOT LIABLE FOR ENGINE ROOM FIRE CAUSED BY OIL LEAKAGE - BIRCH WINDAHL
KNOWLEDGE TO ELEVATE
A Danish vessel owner requested a Danish shipyard to undertake repairs and maintenance works on its vessel. An agreement ...
Saturday, 11 July 15
MAJOR IRANIAN GAS EXPORTS WILL TAKE AT LEAST FIVE YEARS - FITCH
Iran has the long-term potential to become one of the world's top gas producers, thanks to its 34 trillion cubic meters (tcm) of natural gas re ...
Friday, 10 July 15
DRY BULK MARKET KEEPS POSITIVE MOMENTUM - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has kept its positive momentum over the course of the past few days, thanks to Panamax gains. During yesterday’s session ...
Friday, 10 July 15
U.S PRODUCED APPROXIMATELY TOTALED AN ESTIMATED 14.1 MMST WEEK OVER WEEK - EIA
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 14.1 million short ...
Thursday, 09 July 15
CPP MARKET : POSITIVE IN THE SHORT TERM - GEORGE VASTARDIS
Despite the traditionally quieter summer period, the clean tanker market has so far experienced healthy activity especially East of Suez. Increased ...
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- Oldendorff Carriers - Singapore
- Bukit Asam (Persero) Tbk - Indonesia
- Karaikal Port Pvt Ltd - India
- Wilmar Investment Holdings
- PetroVietnam Power Coal Import and Supply Company
- San Jose City I Power Corp, Philippines
- Coalindo Energy - Indonesia
- Semirara Mining Corp, Philippines
- Gujarat Sidhee Cement - India
- Holcim Trading Pte Ltd - Singapore
- Wood Mackenzie - Singapore
- MS Steel International - UAE
- Energy Development Corp, Philippines
- Energy Link Ltd, New Zealand
- Binh Thuan Hamico - Vietnam
- PTC India Limited - India
- Economic Council, Georgia
- Ministry of Finance - Indonesia
- TeaM Sual Corporation - Philippines
- Eastern Energy - Thailand
- Heidelberg Cement - Germany
- Eastern Coal Council - USA
- Goldman Sachs - Singapore
- Billiton Holdings Pty Ltd - Australia
- Anglo American - United Kingdom
- Grasim Industreis Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Carbofer General Trading SA - India
- Sojitz Corporation - Japan
- Baramulti Group, Indonesia
- Edison Trading Spa - Italy
- AsiaOL BioFuels Corp., Philippines
- Kumho Petrochemical, South Korea
- Krishnapatnam Port Company Ltd. - India
- Videocon Industries ltd - India
- IEA Clean Coal Centre - UK
- TNB Fuel Sdn Bhd - Malaysia
- Sical Logistics Limited - India
- International Coal Ventures Pvt Ltd - India
- Interocean Group of Companies - India
- Port Waratah Coal Services - Australia
- McConnell Dowell - Australia
- Mjunction Services Limited - India
- Tamil Nadu electricity Board
- Mercuria Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- Barasentosa Lestari - Indonesia
- Mintek Dendrill Indonesia
- Kapuas Tunggal Persada - Indonesia
- Bayan Resources Tbk. - Indonesia
- Meenaskhi Energy Private Limited - India
- Medco Energi Mining Internasional
- Kartika Selabumi Mining - Indonesia
- Makarim & Taira - Indonesia
- Rio Tinto Coal - Australia
- SN Aboitiz Power Inc, Philippines
- SMG Consultants - Indonesia
- Singapore Mercantile Exchange
- Antam Resourcindo - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Banpu Public Company Limited - Thailand
- Electricity Generating Authority of Thailand
- ICICI Bank Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Bukit Baiduri Energy - Indonesia
- Vedanta Resources Plc - India
- Star Paper Mills Limited - India
- Global Coal Blending Company Limited - Australia
- Riau Bara Harum - Indonesia
- Merrill Lynch Commodities Europe
- Independent Power Producers Association of India
- OPG Power Generation Pvt Ltd - India
- Deloitte Consulting - India
- Sree Jayajothi Cements Limited - India
- Toyota Tsusho Corporation, Japan
- Kepco SPC Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Thiess Contractors Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Siam City Cement PLC, Thailand
- Savvy Resources Ltd - HongKong
- Ambuja Cements Ltd - India
- Aditya Birla Group - India
- Globalindo Alam Lestari - Indonesia
- Simpson Spence & Young - Indonesia
- Romanian Commodities Exchange
- Therma Luzon, Inc, Philippines
- Leighton Contractors Pty Ltd - Australia
- Attock Cement Pakistan Limited
- Larsen & Toubro Limited - India
- Lanco Infratech Ltd - India
- Ministry of Mines - Canada
- Africa Commodities Group - South Africa
- Bharathi Cement Corporation - India
- Bulk Trading Sa - Switzerland
- GN Power Mariveles Coal Plant, Philippines
- Borneo Indobara - Indonesia
- Power Finance Corporation Ltd., India
- Timah Investasi Mineral - Indoneisa
- Uttam Galva Steels Limited - India
- Alfred C Toepfer International GmbH - Germany
- Marubeni Corporation - India
- Orica Australia Pty. Ltd.
- Pendopo Energi Batubara - Indonesia
- Kideco Jaya Agung - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Karbindo Abesyapradhi - Indoneisa
- Maharashtra Electricity Regulatory Commission - India
- Ministry of Transport, Egypt
- Coal and Oil Company - UAE
- Indian Oil Corporation Limited
- Malabar Cements Ltd - India
- South Luzon Thermal Energy Corporation
- Coastal Gujarat Power Limited - India
- Planning Commission, India
- India Bulls Power Limited - India
- Dalmia Cement Bharat India
- Iligan Light & Power Inc, Philippines
- Price Waterhouse Coopers - Russia
- Minerals Council of Australia
- CNBM International Corporation - China
- The Treasury - Australian Government
- Mercator Lines Limited - India
- Orica Mining Services - Indonesia
- Formosa Plastics Group - Taiwan
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Cigading International Bulk Terminal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Meralco Power Generation, Philippines
- Xindia Steels Limited - India
- Bhoruka Overseas - Indonesia
- Indonesian Coal Mining Association
- PowerSource Philippines DevCo
- Semirara Mining and Power Corporation, Philippines
- GVK Power & Infra Limited - India
- Cement Manufacturers Association - India
- Straits Asia Resources Limited - Singapore
- Essar Steel Hazira Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Bangladesh Power Developement Board
- SMC Global Power, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Aboitiz Power Corporation - Philippines
- Salva Resources Pvt Ltd - India
- Thai Mozambique Logistica
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Asmin Koalindo Tuhup - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Commonwealth Bank - Australia
- Madhucon Powers Ltd - India
- IHS Mccloskey Coal Group - USA
- LBH Netherlands Bv - Netherlands
- London Commodity Brokers - England
- Neyveli Lignite Corporation Ltd, - India
- Kobexindo Tractors - Indoneisa
- Chettinad Cement Corporation Ltd - India
- Metalloyd Limited - United Kingdom
- Bahari Cakrawala Sebuku - Indonesia
- Ind-Barath Power Infra Limited - India
- Parry Sugars Refinery, India
- The State Trading Corporation of India Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- White Energy Company Limited
- Jaiprakash Power Ventures ltd
- Renaissance Capital - South Africa
- Electricity Authority, New Zealand
- New Zealand Coal & Carbon
- Bhushan Steel Limited - India
- Australian Commodity Traders Exchange
- Parliament of New Zealand
- Bhatia International Limited - India
- ASAPP Information Group - India
- Petron Corporation, Philippines
- Intertek Mineral Services - Indonesia
- PNOC Exploration Corporation - Philippines
- Bukit Makmur.PT - Indonesia
- Siam City Cement - Thailand
- Central Java Power - Indonesia
- CIMB Investment Bank - Malaysia
- Trasteel International SA, Italy
- Kohat Cement Company Ltd. - Pakistan
- Miang Besar Coal Terminal - Indonesia
- GAC Shipping (India) Pvt Ltd
- Indika Energy - Indonesia
- Tata Chemicals Ltd - India
- Maheswari Brothers Coal Limited - India
- Sarangani Energy Corporation, Philippines
- VISA Power Limited - India
- Latin American Coal - Colombia
- Altura Mining Limited, Indonesia
- Agrawal Coal Company - India
- Directorate Of Revenue Intelligence - India
- European Bulk Services B.V. - Netherlands
- Sindya Power Generating Company Private Ltd
- Manunggal Multi Energi - Indonesia
- Chamber of Mines of South Africa
- Gujarat Electricity Regulatory Commission - India
- Samtan Co., Ltd - South Korea
- Standard Chartered Bank - UAE
- Indogreen Group - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Georgia Ports Authority, United States
- Bank of Tokyo Mitsubishi UFJ Ltd
- Australian Coal Association
- Posco Energy - South Korea
- GMR Energy Limited - India
- Indian Energy Exchange, India
- Indo Tambangraya Megah - Indonesia
- The University of Queensland
- Vizag Seaport Private Limited - India
- Jindal Steel & Power Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Global Business Power Corporation, Philippines
- Central Electricity Authority - India
- Kaltim Prima Coal - Indonesia
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