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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, 19 June 15
U.S. WEEKLY COAL PRODUCTION UP SLIGHTLY COMPARED TO LAST WEEK; CONTINUES TO BE DOWN FROM LAST YEAR
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 15.4 million short ...
Friday, 19 June 15
INDONESIA'S COAL-TRAFFICKING PROBLEM REQUIRES IMPARTIAL INQUIRY - JAKARTA GLOBE
Indonesia, the leading supplier to the seaborne thermal coal market, produces 420 million tons of coal per year, according to its official tally.
...
Thursday, 18 June 15
DRY BULK SHIPPING: LOWEST FLEET GROWTH IN 10 YEARS MAY NOT PROVE ENOUGH AS DEMAND IS NOT KEEPING PACE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The demand side of things in the dry bulk market seems unable to keep pace with even the slightest fleet growth, a sign of the demise that the indu ...
Thursday, 18 June 15
THE FAR EAST HANDYSIZE, HANDYMAX, SUPRAMAX MARKET REMAINED STEADY LAST WEEK - INTERMODAL
COALspot.com: The Dry Bulk market closed off on Friday (last week) noting small gains on the back of stronger performance in the Panamax segment, w ...
Thursday, 18 June 15
MERCATOR'S KAMSARMAX FIXED WITH CLEARLAKE
COALspot.com: Mercator Lines (Singapore) Limited, a leading Indian-owned international dry bulk shipping company focused on markets such as India, ...
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- PNOC Exploration Corporation - Philippines
- Sree Jayajothi Cements Limited - India
- Bhushan Steel Limited - India
- Planning Commission, India
- Rio Tinto Coal - Australia
- GMR Energy Limited - India
- Thiess Contractors Indonesia
- Lanco Infratech Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Oldendorff Carriers - Singapore
- Central Java Power - Indonesia
- South Luzon Thermal Energy Corporation
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indonesian Coal Mining Association
- Sindya Power Generating Company Private Ltd
- Indika Energy - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bangladesh Power Developement Board
- Globalindo Alam Lestari - Indonesia
- Price Waterhouse Coopers - Russia
- Toyota Tsusho Corporation, Japan
- Latin American Coal - Colombia
- Semirara Mining and Power Corporation, Philippines
- Romanian Commodities Exchange
- Eastern Coal Council - USA
- Central Electricity Authority - India
- Coastal Gujarat Power Limited - India
- Singapore Mercantile Exchange
- McConnell Dowell - Australia
- Binh Thuan Hamico - Vietnam
- Simpson Spence & Young - Indonesia
- The University of Queensland
- Africa Commodities Group - South Africa
- Coal and Oil Company - UAE
- AsiaOL BioFuels Corp., Philippines
- Tamil Nadu electricity Board
- Parry Sugars Refinery, India
- PTC India Limited - India
- ICICI Bank Limited - India
- Gujarat Sidhee Cement - India
- Meenaskhi Energy Private Limited - India
- Intertek Mineral Services - Indonesia
- Anglo American - United Kingdom
- Renaissance Capital - South Africa
- Independent Power Producers Association of India
- Kobexindo Tractors - Indoneisa
- Siam City Cement - Thailand
- European Bulk Services B.V. - Netherlands
- Bukit Asam (Persero) Tbk - Indonesia
- Agrawal Coal Company - India
- Petron Corporation, Philippines
- VISA Power Limited - India
- Meralco Power Generation, Philippines
- Deloitte Consulting - India
- LBH Netherlands Bv - Netherlands
- PetroVietnam Power Coal Import and Supply Company
- Krishnapatnam Port Company Ltd. - India
- TNB Fuel Sdn Bhd - Malaysia
- Ministry of Transport, Egypt
- Karbindo Abesyapradhi - Indoneisa
- Chamber of Mines of South Africa
- Ministry of Mines - Canada
- Manunggal Multi Energi - Indonesia
- Minerals Council of Australia
- White Energy Company Limited
- Bayan Resources Tbk. - Indonesia
- Bulk Trading Sa - Switzerland
- Mjunction Services Limited - India
- Essar Steel Hazira Ltd - India
- Kepco SPC Power Corporation, Philippines
- Riau Bara Harum - Indonesia
- Kaltim Prima Coal - Indonesia
- Vizag Seaport Private Limited - India
- Neyveli Lignite Corporation Ltd, - India
- IHS Mccloskey Coal Group - USA
- ASAPP Information Group - India
- Economic Council, Georgia
- Kideco Jaya Agung - Indonesia
- SN Aboitiz Power Inc, Philippines
- Wilmar Investment Holdings
- GN Power Mariveles Coal Plant, Philippines
- CNBM International Corporation - China
- Global Business Power Corporation, Philippines
- Directorate General of MIneral and Coal - Indonesia
- Siam City Cement PLC, Thailand
- Heidelberg Cement - Germany
- Offshore Bulk Terminal Pte Ltd, Singapore
- Tata Chemicals Ltd - India
- Energy Development Corp, Philippines
- Marubeni Corporation - India
- Dalmia Cement Bharat India
- Rashtriya Ispat Nigam Limited - India
- Banpu Public Company Limited - Thailand
- Indian Oil Corporation Limited
- Aboitiz Power Corporation - Philippines
- Energy Link Ltd, New Zealand
- Semirara Mining Corp, Philippines
- Port Waratah Coal Services - Australia
- Savvy Resources Ltd - HongKong
- Merrill Lynch Commodities Europe
- GVK Power & Infra Limited - India
- Madhucon Powers Ltd - India
- Mintek Dendrill Indonesia
- Straits Asia Resources Limited - Singapore
- San Jose City I Power Corp, Philippines
- Larsen & Toubro Limited - India
- Timah Investasi Mineral - Indoneisa
- Bank of Tokyo Mitsubishi UFJ Ltd
- Goldman Sachs - Singapore
- London Commodity Brokers - England
- Kumho Petrochemical, South Korea
- Interocean Group of Companies - India
- Baramulti Group, Indonesia
- Pendopo Energi Batubara - Indonesia
- Global Green Power PLC Corporation, Philippines
- Australian Coal Association
- IEA Clean Coal Centre - UK
- Cement Manufacturers Association - India
- Sarangani Energy Corporation, Philippines
- Xindia Steels Limited - India
- Altura Mining Limited, Indonesia
- Ind-Barath Power Infra Limited - India
- Bukit Makmur.PT - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sakthi Sugars Limited - India
- Salva Resources Pvt Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Indogreen Group - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Thai Mozambique Logistica
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Eastern Energy - Thailand
- Directorate Of Revenue Intelligence - India
- The Treasury - Australian Government
- Australian Commodity Traders Exchange
- Coalindo Energy - Indonesia
- Parliament of New Zealand
- Bhatia International Limited - India
- India Bulls Power Limited - India
- Videocon Industries ltd - India
- Global Coal Blending Company Limited - Australia
- Jaiprakash Power Ventures ltd
- Edison Trading Spa - Italy
- Star Paper Mills Limited - India
- Indo Tambangraya Megah - Indonesia
- Grasim Industreis Ltd - India
- Ministry of Finance - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Makarim & Taira - Indonesia
- Formosa Plastics Group - Taiwan
- Sojitz Corporation - Japan
- Orica Australia Pty. Ltd.
- Jorong Barutama Greston.PT - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Carbofer General Trading SA - India
- Billiton Holdings Pty Ltd - Australia
- Wood Mackenzie - Singapore
- Maharashtra Electricity Regulatory Commission - India
- Jindal Steel & Power Ltd - India
- Iligan Light & Power Inc, Philippines
- Uttam Galva Steels Limited - India
- Samtan Co., Ltd - South Korea
- Ambuja Cements Ltd - India
- Posco Energy - South Korea
- Power Finance Corporation Ltd., India
- MS Steel International - UAE
- Chettinad Cement Corporation Ltd - India
- Bharathi Cement Corporation - India
- Borneo Indobara - Indonesia
- New Zealand Coal & Carbon
- Asmin Koalindo Tuhup - Indonesia
- Bhoruka Overseas - Indonesia
- Karaikal Port Pvt Ltd - India
- Malabar Cements Ltd - India
- CIMB Investment Bank - Malaysia
- Cigading International Bulk Terminal - Indonesia
- SMG Consultants - Indonesia
- Aditya Birla Group - India
- Commonwealth Bank - Australia
- TeaM Sual Corporation - Philippines
- Metalloyd Limited - United Kingdom
- Gujarat Mineral Development Corp Ltd - India
- Mercuria Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Petrochimia International Co. Ltd.- Taiwan
- Leighton Contractors Pty Ltd - Australia
- Maheswari Brothers Coal Limited - India
- Georgia Ports Authority, United States
- Medco Energi Mining Internasional
- The State Trading Corporation of India Ltd
- Indian Energy Exchange, India
- Barasentosa Lestari - Indonesia
- International Coal Ventures Pvt Ltd - India
- GAC Shipping (India) Pvt Ltd
- Mercator Lines Limited - India
- Antam Resourcindo - Indonesia
- Orica Mining Services - Indonesia
- Trasteel International SA, Italy
- PowerSource Philippines DevCo
- Alfred C Toepfer International GmbH - Germany
- Therma Luzon, Inc, Philippines
- Electricity Authority, New Zealand
- SMC Global Power, Philippines
- Electricity Generating Authority of Thailand
- Standard Chartered Bank - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Sical Logistics Limited - India
- Vedanta Resources Plc - India
- Kohat Cement Company Ltd. - Pakistan
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- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Attock Cement Pakistan Limited
- Holcim Trading Pte Ltd - Singapore
- Kartika Selabumi Mining - Indonesia
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