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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, 10 June 15
TANKER MARKET INSIGHT - STELIOS KOLLINTZAS
As we go through the end of the 2nd quarter of the year it is evident that the tanker shipping markets have been rewarding and definitely been show ...
Wednesday, 10 June 15
WORLD COAL MARKET HEADING TO NEW EQUILIBRIUM: MINISTER - JAKARTA POST
Energy and Mineral Resources Minister Sudirman Said has said the world’s coal market is heading towards a new balance, which will make Indone ...
Wednesday, 10 June 15
FOB INDONESIA COAL SWAP ROSE W-O-W AND M-O-M
COALspot.com: Indonesian coal swap for delivery Q3 2015 gains month on month and week over week, this past week.
The Q3 swap was climbed by $ ...
Tuesday, 09 June 15
GLOBALCOAL IMPLEMENTS VOLUMETRIC SIZE LIMITS IN RICHARDS BAY MARKET
COALspot.com: globalCOAL today announced that following recent market consultation, it will limit bids, offers and trades in the fixed price Phys R ...
Tuesday, 09 June 15
FOB RICHARDS BAY COAL SWAPS DECLINED M-O-M, W-O-W
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q3' 2015 declined month over month and week over week.
The Q3 swap was fell US$ ...
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- London Commodity Brokers - England
- Siam City Cement PLC, Thailand
- Australian Commodity Traders Exchange
- Videocon Industries ltd - India
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- Kepco SPC Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Jorong Barutama Greston.PT - Indonesia
- Medco Energi Mining Internasional
- Karaikal Port Pvt Ltd - India
- Indian Energy Exchange, India
- Manunggal Multi Energi - Indonesia
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- Therma Luzon, Inc, Philippines
- Eastern Coal Council - USA
- Pipit Mutiara Jaya. PT, Indonesia
- Madhucon Powers Ltd - India
- Xindia Steels Limited - India
- Heidelberg Cement - Germany
- Jaiprakash Power Ventures ltd
- Siam City Cement - Thailand
- GN Power Mariveles Coal Plant, Philippines
- Trasteel International SA, Italy
- Chamber of Mines of South Africa
- Wilmar Investment Holdings
- Thiess Contractors Indonesia
- Salva Resources Pvt Ltd - India
- Binh Thuan Hamico - Vietnam
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- Central Electricity Authority - India
- GAC Shipping (India) Pvt Ltd
- IHS Mccloskey Coal Group - USA
- San Jose City I Power Corp, Philippines
- Latin American Coal - Colombia
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- Eastern Energy - Thailand
- New Zealand Coal & Carbon
- Planning Commission, India
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- Global Business Power Corporation, Philippines
- Sojitz Corporation - Japan
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Petron Corporation, Philippines
- Orica Mining Services - Indonesia
- Carbofer General Trading SA - India
- Commonwealth Bank - Australia
- Goldman Sachs - Singapore
- Gujarat Mineral Development Corp Ltd - India
- SMG Consultants - Indonesia
- Indika Energy - Indonesia
- Sinarmas Energy and Mining - Indonesia
- The University of Queensland
- CIMB Investment Bank - Malaysia
- Borneo Indobara - Indonesia
- Independent Power Producers Association of India
- Minerals Council of Australia
- Standard Chartered Bank - UAE
- Altura Mining Limited, Indonesia
- Sakthi Sugars Limited - India
- Holcim Trading Pte Ltd - Singapore
- Barasentosa Lestari - Indonesia
- Lanco Infratech Ltd - India
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- Globalindo Alam Lestari - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Mercator Lines Limited - India
- Kideco Jaya Agung - Indonesia
- Baramulti Group, Indonesia
- Mjunction Services Limited - India
- Anglo American - United Kingdom
- Bhoruka Overseas - Indonesia
- Deloitte Consulting - India
- Bhatia International Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Aditya Birla Group - India
- Karbindo Abesyapradhi - Indoneisa
- Posco Energy - South Korea
- Attock Cement Pakistan Limited
- Ambuja Cements Ltd - India
- European Bulk Services B.V. - Netherlands
- Grasim Industreis Ltd - India
- Mercuria Energy - Indonesia
- Thai Mozambique Logistica
- Sree Jayajothi Cements Limited - India
- McConnell Dowell - Australia
- PetroVietnam Power Coal Import and Supply Company
- OPG Power Generation Pvt Ltd - India
- Central Java Power - Indonesia
- Malabar Cements Ltd - India
- Electricity Authority, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Sindya Power Generating Company Private Ltd
- Parliament of New Zealand
- Billiton Holdings Pty Ltd - Australia
- Kumho Petrochemical, South Korea
- Bharathi Cement Corporation - India
- Gujarat Electricity Regulatory Commission - India
- Cigading International Bulk Terminal - Indonesia
- ICICI Bank Limited - India
- Metalloyd Limited - United Kingdom
- Economic Council, Georgia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Indo Tambangraya Megah - Indonesia
- Oldendorff Carriers - Singapore
- Electricity Generating Authority of Thailand
- Coal and Oil Company - UAE
- Global Green Power PLC Corporation, Philippines
- Rashtriya Ispat Nigam Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- PowerSource Philippines DevCo
- VISA Power Limited - India
- Romanian Commodities Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Directorate Of Revenue Intelligence - India
- TeaM Sual Corporation - Philippines
- Bangladesh Power Developement Board
- Essar Steel Hazira Ltd - India
- White Energy Company Limited
- Orica Australia Pty. Ltd.
- Intertek Mineral Services - Indonesia
- Ministry of Mines - Canada
- Larsen & Toubro Limited - India
- Samtan Co., Ltd - South Korea
- Edison Trading Spa - Italy
- International Coal Ventures Pvt Ltd - India
- Meralco Power Generation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Bulk Trading Sa - Switzerland
- CNBM International Corporation - China
- Bukit Baiduri Energy - Indonesia
- Meenaskhi Energy Private Limited - India
- MS Steel International - UAE
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Simpson Spence & Young - Indonesia
- Riau Bara Harum - Indonesia
- Energy Link Ltd, New Zealand
- Vizag Seaport Private Limited - India
- Coalindo Energy - Indonesia
- Bhushan Steel Limited - India
- Bukit Makmur.PT - Indonesia
- Tamil Nadu electricity Board
- Global Coal Blending Company Limited - Australia
- Ministry of Transport, Egypt
- Kartika Selabumi Mining - Indonesia
- Ministry of Finance - Indonesia
- Mintek Dendrill Indonesia
- Ind-Barath Power Infra Limited - India
- Aboitiz Power Corporation - Philippines
- Renaissance Capital - South Africa
- Price Waterhouse Coopers - Russia
- Vijayanagar Sugar Pvt Ltd - India
- Coastal Gujarat Power Limited - India
- Miang Besar Coal Terminal - Indonesia
- Australian Coal Association
- SN Aboitiz Power Inc, Philippines
- PTC India Limited - India
- Marubeni Corporation - India
- Alfred C Toepfer International GmbH - Germany
- Krishnapatnam Port Company Ltd. - India
- Star Paper Mills Limited - India
- South Luzon Thermal Energy Corporation
- Savvy Resources Ltd - HongKong
- Uttam Galva Steels Limited - India
- GMR Energy Limited - India
- Indian Oil Corporation Limited
- Semirara Mining Corp, Philippines
- Timah Investasi Mineral - Indoneisa
- Africa Commodities Group - South Africa
- Cement Manufacturers Association - India
- Pendopo Energi Batubara - Indonesia
- Formosa Plastics Group - Taiwan
- Tata Chemicals Ltd - India
- Parry Sugars Refinery, India
- Bukit Asam (Persero) Tbk - Indonesia
- AsiaOL BioFuels Corp., Philippines
- India Bulls Power Limited - India
- ASAPP Information Group - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Banpu Public Company Limited - Thailand
- Jindal Steel & Power Ltd - India
- Vedanta Resources Plc - India
- Maheswari Brothers Coal Limited - India
- Port Waratah Coal Services - Australia
- Indonesian Coal Mining Association
- IEA Clean Coal Centre - UK
- Bayan Resources Tbk. - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Wood Mackenzie - Singapore
- Dalmia Cement Bharat India
- Kohat Cement Company Ltd. - Pakistan
- PNOC Exploration Corporation - Philippines
- Kaltim Prima Coal - Indonesia
- Singapore Mercantile Exchange
- Straits Asia Resources Limited - Singapore
- Georgia Ports Authority, United States
- SMC Global Power, Philippines
- Toyota Tsusho Corporation, Japan
- Petrochimia International Co. Ltd.- Taiwan
- Agrawal Coal Company - India
- GVK Power & Infra Limited - India
- The State Trading Corporation of India Ltd
- Merrill Lynch Commodities Europe
- Gujarat Sidhee Cement - India
- Kapuas Tunggal Persada - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Bahari Cakrawala Sebuku - Indonesia
- Energy Development Corp, Philippines
- Power Finance Corporation Ltd., India
- Sical Logistics Limited - India
- Iligan Light & Power Inc, Philippines
- Chettinad Cement Corporation Ltd - India
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