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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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Wednesday, 17 June 15
PANAMAX RATE AVERAGED $22.82 PMT IN THE FIRST 10 DAYS OF JUNE FOR THE GRAIN ROUTE FROM SANTOS, BRAZIL, TO QINGDAO, CHINA - INTERMODAL
This year, Brazil will be exporting a record 96 million tons of soybean crop and starting in August the country will begin shipping a second corn c ...
Tuesday, 16 June 15
MERS: POTENTIAL CHARTERPARTY IMPLICATIONS - CLYDE & CO
KNOWLEDGE TO ELEVATE
South Korea's current outbreak of Middle East Respiratory Syndrome (MERS) has been the focus of much international at ...
Tuesday, 16 June 15
Q3 FOB INDONESIA COAL SWAP PRICE DOWN 50 CENTS OVER PAST WEEK
COALspot.com: Indonesian coal swap for delivery Q3 2015 gains month on month but declined week over week, this past week.
The Q3 swap was clim ...
Tuesday, 16 June 15
FOB RICHARDS BAY COAL SWAPS: PRICES MOVED UP ON THE WEEK
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q3' 2015 rose month over month and week over week.
The Q3 swap was up US$ 1.70 ...
Monday, 15 June 15
API 5 FOB NEWCASTLE COAL SWAP: Q1'16 DELIVERY CLOSED 1.14% LOWER THAN Q4'15 DELIVERY PRICE
COALspot.com: API 5 FOB Newcastle Coal swap for Q3’ 2015 delivery up $ 1.10 per MT (2.47%) month over month to US$ 45.67 per mt. The swap ...
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- Meralco Power Generation, Philippines
- Electricity Generating Authority of Thailand
- Chettinad Cement Corporation Ltd - India
- Maheswari Brothers Coal Limited - India
- Antam Resourcindo - Indonesia
- Indonesian Coal Mining Association
- Kalimantan Lumbung Energi - Indonesia
- Australian Commodity Traders Exchange
- Eastern Energy - Thailand
- Larsen & Toubro Limited - India
- Baramulti Group, Indonesia
- Ministry of Mines - Canada
- Semirara Mining Corp, Philippines
- PNOC Exploration Corporation - Philippines
- Renaissance Capital - South Africa
- Madhucon Powers Ltd - India
- Posco Energy - South Korea
- Sinarmas Energy and Mining - Indonesia
- Mintek Dendrill Indonesia
- Wilmar Investment Holdings
- Timah Investasi Mineral - Indoneisa
- Aboitiz Power Corporation - Philippines
- Borneo Indobara - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Parry Sugars Refinery, India
- Mjunction Services Limited - India
- Global Business Power Corporation, Philippines
- Tamil Nadu electricity Board
- Wood Mackenzie - Singapore
- Samtan Co., Ltd - South Korea
- Gujarat Sidhee Cement - India
- Neyveli Lignite Corporation Ltd, - India
- Singapore Mercantile Exchange
- Interocean Group of Companies - India
- Manunggal Multi Energi - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mercator Lines Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- IHS Mccloskey Coal Group - USA
- GN Power Mariveles Coal Plant, Philippines
- London Commodity Brokers - England
- Bharathi Cement Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Simpson Spence & Young - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Star Paper Mills Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Straits Asia Resources Limited - Singapore
- Rashtriya Ispat Nigam Limited - India
- Oldendorff Carriers - Singapore
- Petrochimia International Co. Ltd.- Taiwan
- Karaikal Port Pvt Ltd - India
- Indian Oil Corporation Limited
- Directorate General of MIneral and Coal - Indonesia
- Kartika Selabumi Mining - Indonesia
- Xindia Steels Limited - India
- Metalloyd Limited - United Kingdom
- Kaltim Prima Coal - Indonesia
- Savvy Resources Ltd - HongKong
- SN Aboitiz Power Inc, Philippines
- Indogreen Group - Indonesia
- Sojitz Corporation - Japan
- Africa Commodities Group - South Africa
- Georgia Ports Authority, United States
- Coalindo Energy - Indonesia
- Sindya Power Generating Company Private Ltd
- Jindal Steel & Power Ltd - India
- Billiton Holdings Pty Ltd - Australia
- LBH Netherlands Bv - Netherlands
- Bhatia International Limited - India
- Goldman Sachs - Singapore
- Bukit Baiduri Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Barasentosa Lestari - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- The State Trading Corporation of India Ltd
- Globalindo Alam Lestari - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Jaiprakash Power Ventures ltd
- GVK Power & Infra Limited - India
- Binh Thuan Hamico - Vietnam
- Energy Development Corp, Philippines
- TeaM Sual Corporation - Philippines
- Energy Link Ltd, New Zealand
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Bangladesh Power Developement Board
- Krishnapatnam Port Company Ltd. - India
- Coastal Gujarat Power Limited - India
- GMR Energy Limited - India
- Orica Australia Pty. Ltd.
- Altura Mining Limited, Indonesia
- Parliament of New Zealand
- OPG Power Generation Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Leighton Contractors Pty Ltd - Australia
- Dalmia Cement Bharat India
- Indian Energy Exchange, India
- Pendopo Energi Batubara - Indonesia
- Intertek Mineral Services - Indonesia
- India Bulls Power Limited - India
- Anglo American - United Kingdom
- PetroVietnam Power Coal Import and Supply Company
- Asia Pacific Energy Resources Ventures Inc, Philippines
- SMC Global Power, Philippines
- Sakthi Sugars Limited - India
- Sical Logistics Limited - India
- Ministry of Transport, Egypt
- Kobexindo Tractors - Indoneisa
- Agrawal Coal Company - India
- Marubeni Corporation - India
- Holcim Trading Pte Ltd - Singapore
- Mercuria Energy - Indonesia
- ASAPP Information Group - India
- Eastern Coal Council - USA
- Power Finance Corporation Ltd., India
- Therma Luzon, Inc, Philippines
- CNBM International Corporation - China
- PowerSource Philippines DevCo
- Deloitte Consulting - India
- Salva Resources Pvt Ltd - India
- Thai Mozambique Logistica
- Electricity Authority, New Zealand
- Port Waratah Coal Services - Australia
- Trasteel International SA, Italy
- SMG Consultants - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- TNB Fuel Sdn Bhd - Malaysia
- Malabar Cements Ltd - India
- Standard Chartered Bank - UAE
- Ind-Barath Power Infra Limited - India
- Minerals Council of Australia
- Riau Bara Harum - Indonesia
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- South Luzon Thermal Energy Corporation
- Lanco Infratech Ltd - India
- Indo Tambangraya Megah - Indonesia
- Ambuja Cements Ltd - India
- Thiess Contractors Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Central Electricity Authority - India
- Bukit Makmur.PT - Indonesia
- Sree Jayajothi Cements Limited - India
- Coal and Oil Company - UAE
- Bayan Resources Tbk. - Indonesia
- Edison Trading Spa - Italy
- Independent Power Producers Association of India
- Directorate Of Revenue Intelligence - India
- MS Steel International - UAE
- Orica Mining Services - Indonesia
- Banpu Public Company Limited - Thailand
- San Jose City I Power Corp, Philippines
- Economic Council, Georgia
- Siam City Cement PLC, Thailand
- European Bulk Services B.V. - Netherlands
- Vizag Seaport Private Limited - India
- Price Waterhouse Coopers - Russia
- Australian Coal Association
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kepco SPC Power Corporation, Philippines
- Siam City Cement - Thailand
- Bhushan Steel Limited - India
- Formosa Plastics Group - Taiwan
- Ministry of Finance - Indonesia
- Heidelberg Cement - Germany
- Uttam Galva Steels Limited - India
- PTC India Limited - India
- Medco Energi Mining Internasional
- Gujarat Electricity Regulatory Commission - India
- GAC Shipping (India) Pvt Ltd
- AsiaOL BioFuels Corp., Philippines
- CIMB Investment Bank - Malaysia
- Latin American Coal - Colombia
- Essar Steel Hazira Ltd - India
- Commonwealth Bank - Australia
- Central Java Power - Indonesia
- Meenaskhi Energy Private Limited - India
- Sarangani Energy Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Grasim Industreis Ltd - India
- Chamber of Mines of South Africa
- Vedanta Resources Plc - India
- Rio Tinto Coal - Australia
- Kumho Petrochemical, South Korea
- Asmin Koalindo Tuhup - Indonesia
- VISA Power Limited - India
- The Treasury - Australian Government
- Tata Chemicals Ltd - India
- Videocon Industries ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Romanian Commodities Exchange
- White Energy Company Limited
- Bukit Asam (Persero) Tbk - Indonesia
- The University of Queensland
- Indika Energy - Indonesia
- New Zealand Coal & Carbon
- ICICI Bank Limited - India
- Toyota Tsusho Corporation, Japan
- Petron Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Alfred C Toepfer International GmbH - Germany
- Merrill Lynch Commodities Europe
- Cement Manufacturers Association - India
- Attock Cement Pakistan Limited
- Bhoruka Overseas - Indonesia
- Makarim & Taira - Indonesia
- Aditya Birla Group - India
- IEA Clean Coal Centre - UK
- Semirara Mining and Power Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- McConnell Dowell - Australia
- Kideco Jaya Agung - Indonesia
- Planning Commission, India
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