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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, 29 May 15
SOUTH KOREAN STATE-OWNED UTILITY KOREA MIDLAND POWER INVITES BIDS FOR 780K MT OF COAL FOR H2' 15
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender to buy total 780K Metric Tons (MT) of HCV and LCV ...
Thursday, 28 May 15
TIMEBAR FOR DEMURRAGE CLAIMS - SKULD
KNOWLEDGE TO ELEVATE
English law has traditionally had a strict approach to contractually agreed time bars between commercial parties as well ...
Wednesday, 27 May 15
MARKET INSIGHT - TIMOS PAPADIMITRIOU
Earlier in the year I looked at how the market was reacting to the prolonged fall of the price of oil. Back then it was still unclear if the fallin ...
Tuesday, 26 May 15
HOW HAS THE DROP IN OIL PRICES AFFECTED OTHER COMMODITIES? - CLYDE & CO
KNOWLEDGE TO ELEVATE
The effects of the dramatic drop in the price of both Ice March Brent, the international oil marker, and its US counterpa ...
Tuesday, 26 May 15
MINING ASSOCIATION PERHAPI PUSHES FOR 35,000 MEGAWATT ELECTRICITY PROGRAM - JG
The Indonesian Mining Professionals Association, or Perhapi, has announced its support for a 35,000-megawatt national electricity program, saying i ...
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- Kalimantan Lumbung Energi - Indonesia
- Carbofer General Trading SA - India
- Parliament of New Zealand
- Price Waterhouse Coopers - Russia
- Georgia Ports Authority, United States
- London Commodity Brokers - England
- Ministry of Finance - Indonesia
- Eastern Energy - Thailand
- Global Business Power Corporation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- SMG Consultants - Indonesia
- Rio Tinto Coal - Australia
- Gujarat Electricity Regulatory Commission - India
- Deloitte Consulting - India
- Siam City Cement - Thailand
- Romanian Commodities Exchange
- Kapuas Tunggal Persada - Indonesia
- Orica Australia Pty. Ltd.
- Samtan Co., Ltd - South Korea
- Neyveli Lignite Corporation Ltd, - India
- Rashtriya Ispat Nigam Limited - India
- Goldman Sachs - Singapore
- Indonesian Coal Mining Association
- Directorate Of Revenue Intelligence - India
- Standard Chartered Bank - UAE
- Maheswari Brothers Coal Limited - India
- Kumho Petrochemical, South Korea
- Commonwealth Bank - Australia
- Siam City Cement PLC, Thailand
- Xindia Steels Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Eastern Coal Council - USA
- Independent Power Producers Association of India
- Pipit Mutiara Jaya. PT, Indonesia
- Pendopo Energi Batubara - Indonesia
- Energy Link Ltd, New Zealand
- Riau Bara Harum - Indonesia
- Videocon Industries ltd - India
- Madhucon Powers Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Malabar Cements Ltd - India
- Planning Commission, India
- Kohat Cement Company Ltd. - Pakistan
- Kaltim Prima Coal - Indonesia
- Borneo Indobara - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- MS Steel International - UAE
- Electricity Generating Authority of Thailand
- Global Coal Blending Company Limited - Australia
- Sinarmas Energy and Mining - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- San Jose City I Power Corp, Philippines
- Aboitiz Power Corporation - Philippines
- Central Java Power - Indonesia
- Kideco Jaya Agung - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Indo Tambangraya Megah - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Australian Commodity Traders Exchange
- Grasim Industreis Ltd - India
- Mercator Lines Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- McConnell Dowell - Australia
- OPG Power Generation Pvt Ltd - India
- South Luzon Thermal Energy Corporation
- Sindya Power Generating Company Private Ltd
- Energy Development Corp, Philippines
- Bharathi Cement Corporation - India
- Bhoruka Overseas - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Asmin Koalindo Tuhup - Indonesia
- GVK Power & Infra Limited - India
- Vedanta Resources Plc - India
- Minerals Council of Australia
- SMC Global Power, Philippines
- PowerSource Philippines DevCo
- Lanco Infratech Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Ambuja Cements Ltd - India
- Sree Jayajothi Cements Limited - India
- Latin American Coal - Colombia
- Bangladesh Power Developement Board
- Thiess Contractors Indonesia
- The Treasury - Australian Government
- Billiton Holdings Pty Ltd - Australia
- Sical Logistics Limited - India
- Essar Steel Hazira Ltd - India
- Interocean Group of Companies - India
- Petron Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- GMR Energy Limited - India
- Banpu Public Company Limited - Thailand
- Meralco Power Generation, Philippines
- Formosa Plastics Group - Taiwan
- Savvy Resources Ltd - HongKong
- Chamber of Mines of South Africa
- ASAPP Information Group - India
- Electricity Authority, New Zealand
- Bahari Cakrawala Sebuku - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Singapore Mercantile Exchange
- GAC Shipping (India) Pvt Ltd
- Power Finance Corporation Ltd., India
- Anglo American - United Kingdom
- Indian Oil Corporation Limited
- TeaM Sual Corporation - Philippines
- Coalindo Energy - Indonesia
- Kartika Selabumi Mining - Indonesia
- IEA Clean Coal Centre - UK
- Cigading International Bulk Terminal - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Jaiprakash Power Ventures ltd
- PNOC Exploration Corporation - Philippines
- Therma Luzon, Inc, Philippines
- Metalloyd Limited - United Kingdom
- Dalmia Cement Bharat India
- Mercuria Energy - Indonesia
- Kobexindo Tractors - Indoneisa
- Indian Energy Exchange, India
- Antam Resourcindo - Indonesia
- Manunggal Multi Energi - Indonesia
- Indika Energy - Indonesia
- Trasteel International SA, Italy
- Jindal Steel & Power Ltd - India
- Global Green Power PLC Corporation, Philippines
- Bukit Baiduri Energy - Indonesia
- Edison Trading Spa - Italy
- Baramulti Group, Indonesia
- Timah Investasi Mineral - Indoneisa
- Orica Mining Services - Indonesia
- Tamil Nadu electricity Board
- Bhushan Steel Limited - India
- Star Paper Mills Limited - India
- Medco Energi Mining Internasional
- Sojitz Corporation - Japan
- Bhatia International Limited - India
- Attock Cement Pakistan Limited
- Posco Energy - South Korea
- Ministry of Transport, Egypt
- Binh Thuan Hamico - Vietnam
- Globalindo Alam Lestari - Indonesia
- CIMB Investment Bank - Malaysia
- White Energy Company Limited
- Semirara Mining Corp, Philippines
- Karaikal Port Pvt Ltd - India
- Economic Council, Georgia
- Makarim & Taira - Indonesia
- Port Waratah Coal Services - Australia
- Marubeni Corporation - India
- Ind-Barath Power Infra Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Tata Chemicals Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- India Bulls Power Limited - India
- Australian Coal Association
- International Coal Ventures Pvt Ltd - India
- Parry Sugars Refinery, India
- Mjunction Services Limited - India
- Bayan Resources Tbk. - Indonesia
- CNBM International Corporation - China
- Maharashtra Electricity Regulatory Commission - India
- SN Aboitiz Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Sakthi Sugars Limited - India
- The State Trading Corporation of India Ltd
- AsiaOL BioFuels Corp., Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ceylon Electricity Board - Sri Lanka
- Larsen & Toubro Limited - India
- Wood Mackenzie - Singapore
- Mintek Dendrill Indonesia
- Barasentosa Lestari - Indonesia
- ICICI Bank Limited - India
- Kepco SPC Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- Toyota Tsusho Corporation, Japan
- Oldendorff Carriers - Singapore
- Sarangani Energy Corporation, Philippines
- Gujarat Sidhee Cement - India
- Uttam Galva Steels Limited - India
- Agrawal Coal Company - India
- Coal and Oil Company - UAE
- Simpson Spence & Young - Indonesia
- Straits Asia Resources Limited - Singapore
- Coastal Gujarat Power Limited - India
- Semirara Mining and Power Corporation, Philippines
- Indogreen Group - Indonesia
- Central Electricity Authority - India
- European Bulk Services B.V. - Netherlands
- Cement Manufacturers Association - India
- New Zealand Coal & Carbon
- VISA Power Limited - India
- LBH Netherlands Bv - Netherlands
- Asia Pacific Energy Resources Ventures Inc, Philippines
- PTC India Limited - India
- Ministry of Mines - Canada
- Chettinad Cement Corporation Ltd - India
- Africa Commodities Group - South Africa
- IHS Mccloskey Coal Group - USA
- Salva Resources Pvt Ltd - India
- Iligan Light & Power Inc, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Heidelberg Cement - Germany
- Intertek Mineral Services - Indonesia
- Renaissance Capital - South Africa
- Bulk Trading Sa - Switzerland
- Aditya Birla Group - India
- TNB Fuel Sdn Bhd - Malaysia
- Thai Mozambique Logistica
- Vizag Seaport Private Limited - India
- The University of Queensland
- Wilmar Investment Holdings
- Bukit Makmur.PT - Indonesia
- Alfred C Toepfer International GmbH - Germany
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