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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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Monday, 08 June 15
SHIPPING FLEET GROWTH HAS STARTED TO SLOW DOWN, AS NEWBUILDINGS AMOUNT TO JUST 329 SHIPS OF ALL TYPES SINCE THE START OF 2015 - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Challenging market conditions have led to the inevitable reconsideration of ship owners’ priorities. Uncertainty has been the norm over the p ...
Monday, 08 June 15
API 5 FOB NEWCASTLE COAL SWAPS ADVANCED M-O-M AND W-O-W
COALspot.com: API 5 FOB Newcastle Coal swap for Q3’ 2015 delivery increased US$ 0.65 per MT (1.44%) month over month to US$ 45.65 per mt. The ...
Monday, 08 June 15
Q3'15 CFR SOUTH CHINA COAL SWAP ADVANCED 3.51% TO $52.48 PMT THIS PAST WEEK
COALspot.com: API 8 CFR South China Coal swap for Q3’ 2015 delivery rose US$ 1.78 (3.51%) per MT month over month.
A commodity swap is a ...
Sunday, 07 June 15
PANAMAX INDEX ROSE OVER 13% THIS WEEK
COALspot.com: The freight market was up on all segments this past week. The BDI was advanced 3.56% and closed at 610 points. The Cape Index was cli ...
Friday, 05 June 15
U.S PRODUCED 15.1 MMST OF COAL THIS PAST WEEK; LESS 20.7% COMPARED TO SAME PERIOD IN 2014
COALspot.com – United States the second largest coal producer in the world has produced approximately totalled an estimated 15.1 million shor ...
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- VISA Power Limited - India
- Siam City Cement - Thailand
- Global Green Power PLC Corporation, Philippines
- Gujarat Electricity Regulatory Commission - India
- Star Paper Mills Limited - India
- Karaikal Port Pvt Ltd - India
- Edison Trading Spa - Italy
- Port Waratah Coal Services - Australia
- Bukit Asam (Persero) Tbk - Indonesia
- MS Steel International - UAE
- Manunggal Multi Energi - Indonesia
- Tata Chemicals Ltd - India
- London Commodity Brokers - England
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Carbofer General Trading SA - India
- Salva Resources Pvt Ltd - India
- GVK Power & Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Romanian Commodities Exchange
- Sakthi Sugars Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Globalindo Alam Lestari - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Coastal Gujarat Power Limited - India
- SN Aboitiz Power Inc, Philippines
- Straits Asia Resources Limited - Singapore
- Orica Australia Pty. Ltd.
- Sarangani Energy Corporation, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Global Business Power Corporation, Philippines
- Trasteel International SA, Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bank of Tokyo Mitsubishi UFJ Ltd
- Agrawal Coal Company - India
- Alfred C Toepfer International GmbH - Germany
- Indogreen Group - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Economic Council, Georgia
- Indian Oil Corporation Limited
- Jorong Barutama Greston.PT - Indonesia
- Bayan Resources Tbk. - Indonesia
- Malabar Cements Ltd - India
- Merrill Lynch Commodities Europe
- Wood Mackenzie - Singapore
- Iligan Light & Power Inc, Philippines
- Aditya Birla Group - India
- Bhoruka Overseas - Indonesia
- New Zealand Coal & Carbon
- Ceylon Electricity Board - Sri Lanka
- Singapore Mercantile Exchange
- Mercuria Energy - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Bhatia International Limited - India
- GN Power Mariveles Coal Plant, Philippines
- India Bulls Power Limited - India
- Deloitte Consulting - India
- Ind-Barath Power Infra Limited - India
- Minerals Council of Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- IEA Clean Coal Centre - UK
- TeaM Sual Corporation - Philippines
- PTC India Limited - India
- Sree Jayajothi Cements Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Savvy Resources Ltd - HongKong
- Standard Chartered Bank - UAE
- Metalloyd Limited - United Kingdom
- Miang Besar Coal Terminal - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Rashtriya Ispat Nigam Limited - India
- Bhushan Steel Limited - India
- Interocean Group of Companies - India
- Bharathi Cement Corporation - India
- Madhucon Powers Ltd - India
- Jaiprakash Power Ventures ltd
- Petron Corporation, Philippines
- Baramulti Group, Indonesia
- Sindya Power Generating Company Private Ltd
- Medco Energi Mining Internasional
- IHS Mccloskey Coal Group - USA
- Indian Energy Exchange, India
- Renaissance Capital - South Africa
- San Jose City I Power Corp, Philippines
- Riau Bara Harum - Indonesia
- Dalmia Cement Bharat India
- Parry Sugars Refinery, India
- Power Finance Corporation Ltd., India
- Orica Mining Services - Indonesia
- Aboitiz Power Corporation - Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- CIMB Investment Bank - Malaysia
- Wilmar Investment Holdings
- The University of Queensland
- The Treasury - Australian Government
- PNOC Exploration Corporation - Philippines
- Toyota Tsusho Corporation, Japan
- Videocon Industries ltd - India
- Maheswari Brothers Coal Limited - India
- Siam City Cement PLC, Thailand
- McConnell Dowell - Australia
- Ministry of Transport, Egypt
- Kapuas Tunggal Persada - Indonesia
- Jindal Steel & Power Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Global Coal Blending Company Limited - Australia
- Kobexindo Tractors - Indoneisa
- SMG Consultants - Indonesia
- Thai Mozambique Logistica
- Thiess Contractors Indonesia
- Latin American Coal - Colombia
- Energy Link Ltd, New Zealand
- Intertek Mineral Services - Indonesia
- Central Java Power - Indonesia
- Grasim Industreis Ltd - India
- Electricity Generating Authority of Thailand
- Coal and Oil Company - UAE
- Sojitz Corporation - Japan
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- LBH Netherlands Bv - Netherlands
- South Luzon Thermal Energy Corporation
- Mintek Dendrill Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Marubeni Corporation - India
- Therma Luzon, Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Pendopo Energi Batubara - Indonesia
- Ministry of Finance - Indonesia
- Borneo Indobara - Indonesia
- SMC Global Power, Philippines
- Australian Commodity Traders Exchange
- Kepco SPC Power Corporation, Philippines
- Australian Coal Association
- Central Electricity Authority - India
- CNBM International Corporation - China
- Vizag Seaport Private Limited - India
- Samtan Co., Ltd - South Korea
- Attock Cement Pakistan Limited
- PetroVietnam Power Coal Import and Supply Company
- Chettinad Cement Corporation Ltd - India
- Independent Power Producers Association of India
- PowerSource Philippines DevCo
- Antam Resourcindo - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Planning Commission, India
- Semirara Mining and Power Corporation, Philippines
- Cigading International Bulk Terminal - Indonesia
- ASAPP Information Group - India
- Gujarat Sidhee Cement - India
- GAC Shipping (India) Pvt Ltd
- Mercator Lines Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Goldman Sachs - Singapore
- Essar Steel Hazira Ltd - India
- ICICI Bank Limited - India
- Eastern Energy - Thailand
- Mjunction Services Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Commonwealth Bank - Australia
- Makarim & Taira - Indonesia
- Directorate Of Revenue Intelligence - India
- Semirara Mining Corp, Philippines
- Xindia Steels Limited - India
- Lanco Infratech Ltd - India
- Kumho Petrochemical, South Korea
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kartika Selabumi Mining - Indonesia
- Anglo American - United Kingdom
- Binh Thuan Hamico - Vietnam
- Bulk Trading Sa - Switzerland
- Karbindo Abesyapradhi - Indoneisa
- Vedanta Resources Plc - India
- Tamil Nadu electricity Board
- Chamber of Mines of South Africa
- Cement Manufacturers Association - India
- Sical Logistics Limited - India
- Meralco Power Generation, Philippines
- Uttam Galva Steels Limited - India
- Oldendorff Carriers - Singapore
- Eastern Coal Council - USA
- Rio Tinto Coal - Australia
- Parliament of New Zealand
- Meenaskhi Energy Private Limited - India
- Posco Energy - South Korea
- Energy Development Corp, Philippines
- White Energy Company Limited
- International Coal Ventures Pvt Ltd - India
- Electricity Authority, New Zealand
- Indonesian Coal Mining Association
- Ministry of Mines - Canada
- AsiaOL BioFuels Corp., Philippines
- Banpu Public Company Limited - Thailand
- Heidelberg Cement - Germany
- Billiton Holdings Pty Ltd - Australia
- The State Trading Corporation of India Ltd
- Timah Investasi Mineral - Indoneisa
- Price Waterhouse Coopers - Russia
- Altura Mining Limited, Indonesia
- Coalindo Energy - Indonesia
- Indika Energy - Indonesia
- Formosa Plastics Group - Taiwan
- Indo Tambangraya Megah - Indonesia
- Bangladesh Power Developement Board
- TNB Fuel Sdn Bhd - Malaysia
- GMR Energy Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Leighton Contractors Pty Ltd - Australia
- Bukit Makmur.PT - Indonesia
- Larsen & Toubro Limited - India
- Ambuja Cements Ltd - India
- European Bulk Services B.V. - Netherlands
- Barasentosa Lestari - Indonesia
- Africa Commodities Group - South Africa
- Simpson Spence & Young - Indonesia
- Georgia Ports Authority, United States
- Kideco Jaya Agung - Indonesia
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