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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, 09 July 15
LACK OF FRESH BUSINESS IN THE PACIFIC LEFT CAPESIZE RATES MOVING SIDEWAYS - INTERMODAL
COALspot.com: Intermodal ship broker says in its weekly report that, a different picture from what we saw the previous week was painted during the ...
Wednesday, 08 July 15
RIO TINTO'S MODERNISED KITIMAT SMELTER BEGINS PRODUCTION; KITIMAT BECOMING ONE OF THE LOWEST COST SMELTERS IN THE WORLD
COALspot.com: Rio Tinto is preparing its first shipments of metal from its world-class Kitimat aluminium smelter in Canada following an extensive m ...
Wednesday, 08 July 15
Q3'15 INDONESIA COAL SWAP DECLINED 3.14% MONTH OVER MONTH
COALspot.com: Indonesian coal swap for delivery Q3 2015 declined month on month and week over week, this past week.
The Q3 swap was declined $ ...
Tuesday, 07 July 15
FOB RICHARDS BAY COAL SWAPS DECLINED WEEK OVER WEEK
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$ ...
Tuesday, 07 July 15
FOB NEWCASTLE COAL SWAP ADVANCED MONTH OVER MONTH
COALspot.com: API 5 FOB Newcastle Coal swap for Q3’ 2015 delivery up $ 0.28 per MT (-0.61%) month over month to US$ 45.85 per mt. The swap wa ...
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- Australian Commodity Traders Exchange
- Agrawal Coal Company - India
- Independent Power Producers Association of India
- Salva Resources Pvt Ltd - India
- Bangladesh Power Developement Board
- Riau Bara Harum - Indonesia
- Mjunction Services Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Tata Chemicals Ltd - India
- Standard Chartered Bank - UAE
- SN Aboitiz Power Inc, Philippines
- OPG Power Generation Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Indonesian Coal Mining Association
- Global Coal Blending Company Limited - Australia
- Karaikal Port Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- San Jose City I Power Corp, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- MS Steel International - UAE
- CNBM International Corporation - China
- Bank of Tokyo Mitsubishi UFJ Ltd
- Dalmia Cement Bharat India
- Jaiprakash Power Ventures ltd
- GVK Power & Infra Limited - India
- Toyota Tsusho Corporation, Japan
- LBH Netherlands Bv - Netherlands
- Videocon Industries ltd - India
- Banpu Public Company Limited - Thailand
- Directorate Of Revenue Intelligence - India
- Ministry of Transport, Egypt
- Ceylon Electricity Board - Sri Lanka
- Kideco Jaya Agung - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Karbindo Abesyapradhi - Indoneisa
- IHS Mccloskey Coal Group - USA
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Borneo Indobara - Indonesia
- Romanian Commodities Exchange
- Metalloyd Limited - United Kingdom
- Kohat Cement Company Ltd. - Pakistan
- Wilmar Investment Holdings
- Intertek Mineral Services - Indonesia
- Antam Resourcindo - Indonesia
- Barasentosa Lestari - Indonesia
- Uttam Galva Steels Limited - India
- Bhushan Steel Limited - India
- Manunggal Multi Energi - Indonesia
- Electricity Authority, New Zealand
- Ind-Barath Power Infra Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Thiess Contractors Indonesia
- Siam City Cement - Thailand
- Indian Oil Corporation Limited
- Asia Pacific Energy Resources Ventures Inc, Philippines
- VISA Power Limited - India
- Mercuria Energy - Indonesia
- Coalindo Energy - Indonesia
- Economic Council, Georgia
- Ambuja Cements Ltd - India
- Port Waratah Coal Services - Australia
- Sakthi Sugars Limited - India
- CIMB Investment Bank - Malaysia
- Bukit Makmur.PT - Indonesia
- Star Paper Mills Limited - India
- Bhatia International Limited - India
- Cement Manufacturers Association - India
- Attock Cement Pakistan Limited
- Neyveli Lignite Corporation Ltd, - India
- Minerals Council of Australia
- Thai Mozambique Logistica
- Semirara Mining Corp, Philippines
- SMC Global Power, Philippines
- Kapuas Tunggal Persada - Indonesia
- AsiaOL BioFuels Corp., Philippines
- GN Power Mariveles Coal Plant, Philippines
- Savvy Resources Ltd - HongKong
- Power Finance Corporation Ltd., India
- Chettinad Cement Corporation Ltd - India
- PNOC Exploration Corporation - Philippines
- Formosa Plastics Group - Taiwan
- Energy Development Corp, Philippines
- PTC India Limited - India
- GAC Shipping (India) Pvt Ltd
- New Zealand Coal & Carbon
- Renaissance Capital - South Africa
- Kumho Petrochemical, South Korea
- Billiton Holdings Pty Ltd - Australia
- The Treasury - Australian Government
- Global Green Power PLC Corporation, Philippines
- Mintek Dendrill Indonesia
- Indika Energy - Indonesia
- Oldendorff Carriers - Singapore
- Price Waterhouse Coopers - Russia
- Sical Logistics Limited - India
- Commonwealth Bank - Australia
- Indian Energy Exchange, India
- Altura Mining Limited, Indonesia
- Cigading International Bulk Terminal - Indonesia
- Meralco Power Generation, Philippines
- Ministry of Finance - Indonesia
- Interocean Group of Companies - India
- Malabar Cements Ltd - India
- Africa Commodities Group - South Africa
- Central Java Power - Indonesia
- Indogreen Group - Indonesia
- Grasim Industreis Ltd - India
- Timah Investasi Mineral - Indoneisa
- Samtan Co., Ltd - South Korea
- Maheswari Brothers Coal Limited - India
- Therma Luzon, Inc, Philippines
- Latin American Coal - Colombia
- Bulk Trading Sa - Switzerland
- Trasteel International SA, Italy
- Parry Sugars Refinery, India
- Bharathi Cement Corporation - India
- Electricity Generating Authority of Thailand
- Planning Commission, India
- Iligan Light & Power Inc, Philippines
- Goldman Sachs - Singapore
- Global Business Power Corporation, Philippines
- South Luzon Thermal Energy Corporation
- Chamber of Mines of South Africa
- Sojitz Corporation - Japan
- Siam City Cement PLC, Thailand
- Edison Trading Spa - Italy
- Simpson Spence & Young - Indonesia
- Sindya Power Generating Company Private Ltd
- Asmin Koalindo Tuhup - Indonesia
- Makarim & Taira - Indonesia
- White Energy Company Limited
- Posco Energy - South Korea
- Kaltim Prima Coal - Indonesia
- Carbofer General Trading SA - India
- Rashtriya Ispat Nigam Limited - India
- GMR Energy Limited - India
- Kartika Selabumi Mining - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Marubeni Corporation - India
- Binh Thuan Hamico - Vietnam
- Straits Asia Resources Limited - Singapore
- Baramulti Group, Indonesia
- SMG Consultants - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Xindia Steels Limited - India
- Heidelberg Cement - Germany
- Essar Steel Hazira Ltd - India
- Orica Mining Services - Indonesia
- Eastern Coal Council - USA
- Singapore Mercantile Exchange
- Wood Mackenzie - Singapore
- Anglo American - United Kingdom
- McConnell Dowell - Australia
- Coastal Gujarat Power Limited - India
- Petron Corporation, Philippines
- Bukit Baiduri Energy - Indonesia
- Eastern Energy - Thailand
- Merrill Lynch Commodities Europe
- Kepco SPC Power Corporation, Philippines
- Rio Tinto Coal - Australia
- Parliament of New Zealand
- Indo Tambangraya Megah - Indonesia
- Vedanta Resources Plc - India
- Madhucon Powers Ltd - India
- Meenaskhi Energy Private Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Tamil Nadu electricity Board
- Deloitte Consulting - India
- PowerSource Philippines DevCo
- Sree Jayajothi Cements Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Medco Energi Mining Internasional
- Kobexindo Tractors - Indoneisa
- Directorate General of MIneral and Coal - Indonesia
- Coal and Oil Company - UAE
- Ministry of Mines - Canada
- Semirara Mining and Power Corporation, Philippines
- Georgia Ports Authority, United States
- Petrochimia International Co. Ltd.- Taiwan
- Leighton Contractors Pty Ltd - Australia
- Lanco Infratech Ltd - India
- TeaM Sual Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- European Bulk Services B.V. - Netherlands
- Gujarat Electricity Regulatory Commission - India
- Orica Australia Pty. Ltd.
- Vijayanagar Sugar Pvt Ltd - India
- Australian Coal Association
- The University of Queensland
- TNB Fuel Sdn Bhd - Malaysia
- Aditya Birla Group - India
- India Bulls Power Limited - India
- Miang Besar Coal Terminal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- London Commodity Brokers - England
- ASAPP Information Group - India
- Aboitiz Power Corporation - Philippines
- Bayan Resources Tbk. - Indonesia
- Central Electricity Authority - India
- Krishnapatnam Port Company Ltd. - India
- Larsen & Toubro Limited - India
- Jindal Steel & Power Ltd - India
- Gujarat Sidhee Cement - India
- Sarangani Energy Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- IEA Clean Coal Centre - UK
- Mercator Lines Limited - India
- International Coal Ventures Pvt Ltd - India
- Maharashtra Electricity Regulatory Commission - India
- ICICI Bank Limited - India
- The State Trading Corporation of India Ltd
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