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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, 03 July 15
SHIPPING CONFIDENCE EQUALS SEVEN-YEAR LOW - MOORE STEPHENS
Overall confidence levels in the shipping industry fell during the three months to May 2015 to a level equal to the lowest rating recorded in the p ...
Thursday, 02 July 15
TECHNOLOGY AND INNOVATION IN MINING 2015 - IXG
Information Exchange Group’s Technology and Innovation in Mining 2015- International Summit on Mining
Press Release: The inaugural editi ...
Thursday, 02 July 15
THE PERFORMANCE OF THE CAPESIZE SEGMENT PUSHED DRY BULK MARKET TO UPWARD LAST WEEK
COALspot.com: The Dry Bulk market continued its upward movement last week, with the BDI closing off on Friday (26 June) in excess of 800 points, wh ...
Wednesday, 01 July 15
Q4'15 AND Q1'16 FOB RICHARDS BAY COAL SWAPS ROSE W-O-W AND M-O-M
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q3' 2015 rose month over month and down week over week.
The Q3 swap was up US$ ...
Wednesday, 01 July 15
BEIJING HAS OFFICIALLY EXTENDED BY TWO YEARS ITS SUBSIDY PROGRAM TO SUPPORT LOCAL SHIPPING COMPANIES IN SCRAPPING THEIR OLD TONNAGE - INTERMODAL
Last week, Beijing has officially extended by two years its subsidy program to support local shipping companies in scrapping their old tonnage in w ...
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- Manunggal Multi Energi - Indonesia
- Independent Power Producers Association of India
- San Jose City I Power Corp, Philippines
- Eastern Energy - Thailand
- Agrawal Coal Company - India
- Coalindo Energy - Indonesia
- Iligan Light & Power Inc, Philippines
- Kobexindo Tractors - Indoneisa
- Essar Steel Hazira Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- International Coal Ventures Pvt Ltd - India
- Dalmia Cement Bharat India
- Videocon Industries ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Edison Trading Spa - Italy
- Ambuja Cements Ltd - India
- CIMB Investment Bank - Malaysia
- Banpu Public Company Limited - Thailand
- Cigading International Bulk Terminal - Indonesia
- Petron Corporation, Philippines
- Energy Link Ltd, New Zealand
- Neyveli Lignite Corporation Ltd, - India
- Directorate Of Revenue Intelligence - India
- Bukit Baiduri Energy - Indonesia
- Sical Logistics Limited - India
- OPG Power Generation Pvt Ltd - India
- Billiton Holdings Pty Ltd - Australia
- Cement Manufacturers Association - India
- Sindya Power Generating Company Private Ltd
- ASAPP Information Group - India
- Central Electricity Authority - India
- Anglo American - United Kingdom
- Globalindo Alam Lestari - Indonesia
- ICICI Bank Limited - India
- Bhatia International Limited - India
- Uttam Galva Steels Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Australian Coal Association
- Toyota Tsusho Corporation, Japan
- Posco Energy - South Korea
- New Zealand Coal & Carbon
- VISA Power Limited - India
- Altura Mining Limited, Indonesia
- Intertek Mineral Services - Indonesia
- South Luzon Thermal Energy Corporation
- Sree Jayajothi Cements Limited - India
- Aboitiz Power Corporation - Philippines
- Kalimantan Lumbung Energi - Indonesia
- Indian Oil Corporation Limited
- Energy Development Corp, Philippines
- SMC Global Power, Philippines
- Planning Commission, India
- SMG Consultants - Indonesia
- Bukit Makmur.PT - Indonesia
- Tata Chemicals Ltd - India
- Georgia Ports Authority, United States
- Bahari Cakrawala Sebuku - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Savvy Resources Ltd - HongKong
- Port Waratah Coal Services - Australia
- Indonesian Coal Mining Association
- Binh Thuan Hamico - Vietnam
- Carbofer General Trading SA - India
- Siam City Cement - Thailand
- Meenaskhi Energy Private Limited - India
- Ceylon Electricity Board - Sri Lanka
- Ind-Barath Power Infra Limited - India
- Makarim & Taira - Indonesia
- Antam Resourcindo - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Borneo Indobara - Indonesia
- Thiess Contractors Indonesia
- Sarangani Energy Corporation, Philippines
- Goldman Sachs - Singapore
- GMR Energy Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Global Green Power PLC Corporation, Philippines
- Parliament of New Zealand
- Price Waterhouse Coopers - Russia
- Samtan Co., Ltd - South Korea
- Riau Bara Harum - Indonesia
- MS Steel International - UAE
- Mintek Dendrill Indonesia
- Mercator Lines Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bangladesh Power Developement Board
- CNBM International Corporation - China
- Wilmar Investment Holdings
- European Bulk Services B.V. - Netherlands
- Kepco SPC Power Corporation, Philippines
- Mercuria Energy - Indonesia
- Australian Commodity Traders Exchange
- Thai Mozambique Logistica
- Bayan Resources Tbk. - Indonesia
- Indo Tambangraya Megah - Indonesia
- Ministry of Transport, Egypt
- Electricity Authority, New Zealand
- Asmin Koalindo Tuhup - Indonesia
- Aditya Birla Group - India
- Sinarmas Energy and Mining - Indonesia
- Jindal Steel & Power Ltd - India
- Bhushan Steel Limited - India
- Siam City Cement PLC, Thailand
- Heidelberg Cement - Germany
- Baramulti Group, Indonesia
- Kideco Jaya Agung - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Rio Tinto Coal - Australia
- Maharashtra Electricity Regulatory Commission - India
- Simpson Spence & Young - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Semirara Mining Corp, Philippines
- Bulk Trading Sa - Switzerland
- Timah Investasi Mineral - Indoneisa
- GAC Shipping (India) Pvt Ltd
- Barasentosa Lestari - Indonesia
- Coastal Gujarat Power Limited - India
- Singapore Mercantile Exchange
- Salva Resources Pvt Ltd - India
- Formosa Plastics Group - Taiwan
- Oldendorff Carriers - Singapore
- Chamber of Mines of South Africa
- Interocean Group of Companies - India
- PetroVietnam Power Coal Import and Supply Company
- Trasteel International SA, Italy
- Bharathi Cement Corporation - India
- Vijayanagar Sugar Pvt Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Meralco Power Generation, Philippines
- Xindia Steels Limited - India
- Economic Council, Georgia
- White Energy Company Limited
- Sakthi Sugars Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Kohat Cement Company Ltd. - Pakistan
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Minerals Council of Australia
- Star Paper Mills Limited - India
- Indogreen Group - Indonesia
- Ministry of Mines - Canada
- Tamil Nadu electricity Board
- IHS Mccloskey Coal Group - USA
- McConnell Dowell - Australia
- Petrochimia International Co. Ltd.- Taiwan
- Coal and Oil Company - UAE
- Romanian Commodities Exchange
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Global Business Power Corporation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Eastern Coal Council - USA
- Africa Commodities Group - South Africa
- Metalloyd Limited - United Kingdom
- Ministry of Finance - Indonesia
- Wood Mackenzie - Singapore
- PNOC Exploration Corporation - Philippines
- India Bulls Power Limited - India
- Sojitz Corporation - Japan
- Global Coal Blending Company Limited - Australia
- Vedanta Resources Plc - India
- Orica Mining Services - Indonesia
- AsiaOL BioFuels Corp., Philippines
- The State Trading Corporation of India Ltd
- LBH Netherlands Bv - Netherlands
- Vizag Seaport Private Limited - India
- Kaltim Prima Coal - Indonesia
- TeaM Sual Corporation - Philippines
- Standard Chartered Bank - UAE
- PowerSource Philippines DevCo
- Therma Luzon, Inc, Philippines
- Electricity Generating Authority of Thailand
- Chettinad Cement Corporation Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Renaissance Capital - South Africa
- The Treasury - Australian Government
- Indian Energy Exchange, India
- SN Aboitiz Power Inc, Philippines
- Jaiprakash Power Ventures ltd
- Parry Sugars Refinery, India
- Karaikal Port Pvt Ltd - India
- Marubeni Corporation - India
- The University of Queensland
- Central Java Power - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Kartika Selabumi Mining - Indonesia
- Deloitte Consulting - India
- Medco Energi Mining Internasional
- Straits Asia Resources Limited - Singapore
- Orica Australia Pty. Ltd.
- Grasim Industreis Ltd - India
- Indika Energy - Indonesia
- Maheswari Brothers Coal Limited - India
- Mjunction Services Limited - India
- Commonwealth Bank - Australia
- IEA Clean Coal Centre - UK
- Rashtriya Ispat Nigam Limited - India
- Merrill Lynch Commodities Europe
- Madhucon Powers Ltd - India
- Latin American Coal - Colombia
- PTC India Limited - India
- Larsen & Toubro Limited - India
- Pendopo Energi Batubara - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Malabar Cements Ltd - India
- Attock Cement Pakistan Limited
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Lanco Infratech Ltd - India
- London Commodity Brokers - England
- Bukit Asam (Persero) Tbk - Indonesia
- Bhoruka Overseas - Indonesia
- GVK Power & Infra Limited - India
- Power Finance Corporation Ltd., India
- Gujarat Sidhee Cement - India
- Kumho Petrochemical, South Korea
- Kapuas Tunggal Persada - Indonesia
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