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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, 26 June 15
COAL PRODUCTION IN THE U.S ROSE 6.0% WEEK OVER WEEK, SAYS EIA
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 16.3 million short ...
Thursday, 25 June 15
THE PORT OF NEWCASTLE SHIPPED 13.31% MORE COAL IN MAY 2015 COMPARED TO APRIL 2015
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port, has shipped $1.18 billio ...
Thursday, 25 June 15
CAPESIZE: PERIOD INTEREST REMAINED STRONG FOR A SECOND WEEK - INTERMODAL
COALspot.com: Following those depressive last six months, the BDI closed off on last Friday noting a substantial weekly increase, which pushed the ...
Wednesday, 24 June 15
PANAMAXES: THE OUTLOOK REMAINS NEGATIVE AS DEMAND FOR COAL IS DIMINISHING - YANNIS OLZIERSKY
As we get closer to the end of June, we can safely say that the 1st half of the year is leaving the dry bulk market with a bitter taste that we all ...
Tuesday, 23 June 15
Q3 FOB INDONESIA COAL SWAP FALL $1.12 IN ONE 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 $ ...
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- Indika Energy - Indonesia
- Uttam Galva Steels Limited - India
- White Energy Company Limited
- San Jose City I Power Corp, Philippines
- Rio Tinto Coal - Australia
- Videocon Industries ltd - India
- Barasentosa Lestari - Indonesia
- Iligan Light & Power Inc, Philippines
- Makarim & Taira - Indonesia
- Global Business Power Corporation, Philippines
- Mercuria Energy - Indonesia
- Electricity Generating Authority of Thailand
- Salva Resources Pvt Ltd - India
- Central Java Power - Indonesia
- Bhushan Steel Limited - India
- Gujarat Sidhee Cement - India
- Energy Link Ltd, New Zealand
- Indo Tambangraya Megah - Indonesia
- Georgia Ports Authority, United States
- Chettinad Cement Corporation Ltd - India
- Malabar Cements Ltd - India
- Leighton Contractors Pty Ltd - Australia
- CIMB Investment Bank - Malaysia
- Oldendorff Carriers - Singapore
- Krishnapatnam Port Company Ltd. - India
- Orica Australia Pty. Ltd.
- Ministry of Finance - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Latin American Coal - Colombia
- PowerSource Philippines DevCo
- Carbofer General Trading SA - India
- Bulk Trading Sa - Switzerland
- The Treasury - Australian Government
- Kideco Jaya Agung - Indonesia
- CNBM International Corporation - China
- GMR Energy Limited - India
- Sakthi Sugars Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Kepco SPC Power Corporation, Philippines
- Manunggal Multi Energi - Indonesia
- London Commodity Brokers - England
- Madhucon Powers Ltd - India
- Indian Oil Corporation Limited
- Jindal Steel & Power Ltd - India
- Thiess Contractors Indonesia
- Kobexindo Tractors - Indoneisa
- AsiaOL BioFuels Corp., Philippines
- Meralco Power Generation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Posco Energy - South Korea
- The University of Queensland
- Cigading International Bulk Terminal - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Commonwealth Bank - Australia
- Aditya Birla Group - India
- New Zealand Coal & Carbon
- Kaltim Prima Coal - Indonesia
- Heidelberg Cement - Germany
- Trasteel International SA, Italy
- Lanco Infratech Ltd - India
- Xindia Steels Limited - India
- VISA Power Limited - India
- Independent Power Producers Association of India
- Intertek Mineral Services - Indonesia
- Standard Chartered Bank - UAE
- Kapuas Tunggal Persada - Indonesia
- Parry Sugars Refinery, India
- Agrawal Coal Company - India
- Gujarat Electricity Regulatory Commission - India
- Samtan Co., Ltd - South Korea
- Timah Investasi Mineral - Indoneisa
- Merrill Lynch Commodities Europe
- Ambuja Cements Ltd - India
- Anglo American - United Kingdom
- Ceylon Electricity Board - Sri Lanka
- Kalimantan Lumbung Energi - Indonesia
- MS Steel International - UAE
- SN Aboitiz Power Inc, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Thai Mozambique Logistica
- LBH Netherlands Bv - Netherlands
- Ind-Barath Power Infra Limited - India
- Bharathi Cement Corporation - India
- SMG Consultants - Indonesia
- Savvy Resources Ltd - HongKong
- Bayan Resources Tbk. - Indonesia
- Wilmar Investment Holdings
- Metalloyd Limited - United Kingdom
- Australian Commodity Traders Exchange
- Jorong Barutama Greston.PT - Indonesia
- Eastern Energy - Thailand
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhoruka Overseas - Indonesia
- Marubeni Corporation - India
- Electricity Authority, New Zealand
- Ministry of Mines - Canada
- Neyveli Lignite Corporation Ltd, - India
- Orica Mining Services - Indonesia
- Australian Coal Association
- Simpson Spence & Young - Indonesia
- Chamber of Mines of South Africa
- PNOC Exploration Corporation - Philippines
- Petron Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- Power Finance Corporation Ltd., India
- IHS Mccloskey Coal Group - USA
- Siam City Cement PLC, Thailand
- IEA Clean Coal Centre - UK
- Eastern Coal Council - USA
- Petrochimia International Co. Ltd.- Taiwan
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Star Paper Mills Limited - India
- Grasim Industreis Ltd - India
- Tamil Nadu electricity Board
- Tata Chemicals Ltd - India
- India Bulls Power Limited - India
- Jaiprakash Power Ventures ltd
- Mjunction Services Limited - India
- Binh Thuan Hamico - Vietnam
- Vizag Seaport Private Limited - India
- Cement Manufacturers Association - India
- Parliament of New Zealand
- Vedanta Resources Plc - India
- Altura Mining Limited, Indonesia
- South Luzon Thermal Energy Corporation
- Price Waterhouse Coopers - Russia
- Vijayanagar Sugar Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Riau Bara Harum - Indonesia
- Wood Mackenzie - Singapore
- PTC India Limited - India
- Dalmia Cement Bharat India
- Siam City Cement - Thailand
- European Bulk Services B.V. - Netherlands
- Ministry of Transport, Egypt
- Energy Development Corp, Philippines
- Central Electricity Authority - India
- Baramulti Group, Indonesia
- Kartika Selabumi Mining - Indonesia
- McConnell Dowell - Australia
- Minerals Council of Australia
- Larsen & Toubro Limited - India
- Economic Council, Georgia
- Sical Logistics Limited - India
- Rashtriya Ispat Nigam Limited - India
- Indian Energy Exchange, India
- Indogreen Group - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Karbindo Abesyapradhi - Indoneisa
- Edison Trading Spa - Italy
- Renaissance Capital - South Africa
- Interocean Group of Companies - India
- Indonesian Coal Mining Association
- Sojitz Corporation - Japan
- Sindya Power Generating Company Private Ltd
- Maheswari Brothers Coal Limited - India
- Coalindo Energy - Indonesia
- International Coal Ventures Pvt Ltd - India
- Deloitte Consulting - India
- Straits Asia Resources Limited - Singapore
- Bhatia International Limited - India
- Sree Jayajothi Cements Limited - India
- Semirara Mining and Power Corporation, Philippines
- Antam Resourcindo - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Pipit Mutiara Jaya. PT, Indonesia
- Coastal Gujarat Power Limited - India
- GVK Power & Infra Limited - India
- Therma Luzon, Inc, Philippines
- Miang Besar Coal Terminal - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Pendopo Energi Batubara - Indonesia
- Bukit Makmur.PT - Indonesia
- Attock Cement Pakistan Limited
- Port Waratah Coal Services - Australia
- Aboitiz Power Corporation - Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- TeaM Sual Corporation - Philippines
- Singapore Mercantile Exchange
- Essar Steel Hazira Ltd - India
- SMC Global Power, Philippines
- Africa Commodities Group - South Africa
- Planning Commission, India
- Romanian Commodities Exchange
- Bahari Cakrawala Sebuku - Indonesia
- Kumho Petrochemical, South Korea
- ICICI Bank Limited - India
- Mintek Dendrill Indonesia
- Toyota Tsusho Corporation, Japan
- OPG Power Generation Pvt Ltd - India
- Goldman Sachs - Singapore
- Bangladesh Power Developement Board
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Alfred C Toepfer International GmbH - Germany
- Global Coal Blending Company Limited - Australia
- Globalindo Alam Lestari - Indonesia
- Banpu Public Company Limited - Thailand
- Maharashtra Electricity Regulatory Commission - India
- Global Green Power PLC Corporation, Philippines
- Formosa Plastics Group - Taiwan
- Bukit Baiduri Energy - Indonesia
- Semirara Mining Corp, Philippines
- Coal and Oil Company - UAE
- The State Trading Corporation of India Ltd
- Medco Energi Mining Internasional
- GN Power Mariveles Coal Plant, Philippines
- GAC Shipping (India) Pvt Ltd
- Sarangani Energy Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Borneo Indobara - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Mercator Lines Limited - India
- ASAPP Information Group - India
- Billiton Holdings Pty Ltd - Australia
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