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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, 22 May 15
U.S WEEKLY COAL PRODUCTION STAYS FLAT AT 16 MMST
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 16.0 million short ...
Thursday, 21 May 15
PORT OF NEWCASTLE ACHIEVED ITS BEST EVER TOTAL COAL EXPORT TURNOVER OF 159 MILLION TONS IN 2014
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port, has shipped $900 million ...
Thursday, 21 May 15
ATLANTIC PANAMAX MARKET STARTED TO IMPROVE SLOWLY - INTERMODAL
COALspot.com: The Dry Bulk market closed off the week on the green last week, purely on the back of improved Capesize performance, while the rest o ...
Wednesday, 20 May 15
LOWER PRICES SEEN IN NEWBUILDING MARKET ON LOW DEMAND - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
Cash-rich ship owners, or at least, owners with substantial access to financing will be among the prime candidates, who will reap the benefits of t ...
Wednesday, 20 May 15
TANKER MARKET INSIGHT - JOHN N. COTZIAS
Since Early October 2014 the tanker market has been experiencing a very positive momentum and has continued its strong performance so far in 2015. ...
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- Marubeni Corporation - India
- Manunggal Multi Energi - Indonesia
- Bukit Baiduri Energy - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Formosa Plastics Group - Taiwan
- Makarim & Taira - Indonesia
- Uttam Galva Steels Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Global Business Power Corporation, Philippines
- Miang Besar Coal Terminal - Indonesia
- SN Aboitiz Power Inc, Philippines
- The Treasury - Australian Government
- Energy Development Corp, Philippines
- Ind-Barath Power Infra Limited - India
- TeaM Sual Corporation - Philippines
- Jorong Barutama Greston.PT - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Central Electricity Authority - India
- Australian Coal Association
- Leighton Contractors Pty Ltd - Australia
- Binh Thuan Hamico - Vietnam
- Bharathi Cement Corporation - India
- Kumho Petrochemical, South Korea
- Electricity Authority, New Zealand
- Ambuja Cements Ltd - India
- Oldendorff Carriers - Singapore
- Kaltim Prima Coal - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Singapore Mercantile Exchange
- Billiton Holdings Pty Ltd - Australia
- Ministry of Transport, Egypt
- Maheswari Brothers Coal Limited - India
- The University of Queensland
- South Luzon Thermal Energy Corporation
- MS Steel International - UAE
- Xindia Steels Limited - India
- Central Java Power - Indonesia
- Straits Asia Resources Limited - Singapore
- Thai Mozambique Logistica
- Meenaskhi Energy Private Limited - India
- Australian Commodity Traders Exchange
- SMC Global Power, Philippines
- Barasentosa Lestari - Indonesia
- Mintek Dendrill Indonesia
- International Coal Ventures Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- Banpu Public Company Limited - Thailand
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Medco Energi Mining Internasional
- PowerSource Philippines DevCo
- Minerals Council of Australia
- PNOC Exploration Corporation - Philippines
- Krishnapatnam Port Company Ltd. - India
- Standard Chartered Bank - UAE
- Electricity Generating Authority of Thailand
- Global Coal Blending Company Limited - Australia
- Siam City Cement PLC, Thailand
- Karaikal Port Pvt Ltd - India
- India Bulls Power Limited - India
- Meralco Power Generation, Philippines
- Interocean Group of Companies - India
- Sindya Power Generating Company Private Ltd
- Jaiprakash Power Ventures ltd
- Eastern Energy - Thailand
- GVK Power & Infra Limited - India
- Indika Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Sree Jayajothi Cements Limited - India
- Wilmar Investment Holdings
- IHS Mccloskey Coal Group - USA
- Kalimantan Lumbung Energi - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Indian Oil Corporation Limited
- Kohat Cement Company Ltd. - Pakistan
- Madhucon Powers Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Economic Council, Georgia
- Coal and Oil Company - UAE
- Deloitte Consulting - India
- Sical Logistics Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Antam Resourcindo - Indonesia
- CIMB Investment Bank - Malaysia
- Ceylon Electricity Board - Sri Lanka
- Chettinad Cement Corporation Ltd - India
- Samtan Co., Ltd - South Korea
- Bhatia International Limited - India
- PTC India Limited - India
- Essar Steel Hazira Ltd - India
- Kobexindo Tractors - Indoneisa
- Pendopo Energi Batubara - Indonesia
- Intertek Mineral Services - Indonesia
- Semirara Mining and Power Corporation, Philippines
- GMR Energy Limited - India
- Mjunction Services Limited - India
- Rio Tinto Coal - Australia
- New Zealand Coal & Carbon
- Planning Commission, India
- Petrochimia International Co. Ltd.- Taiwan
- Port Waratah Coal Services - Australia
- Parry Sugars Refinery, India
- Posco Energy - South Korea
- Riau Bara Harum - Indonesia
- Videocon Industries ltd - India
- Directorate Of Revenue Intelligence - India
- Aboitiz Power Corporation - Philippines
- Commonwealth Bank - Australia
- Holcim Trading Pte Ltd - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bukit Asam (Persero) Tbk - Indonesia
- Vedanta Resources Plc - India
- Merrill Lynch Commodities Europe
- Kapuas Tunggal Persada - Indonesia
- Coalindo Energy - Indonesia
- Savvy Resources Ltd - HongKong
- IEA Clean Coal Centre - UK
- Rashtriya Ispat Nigam Limited - India
- Larsen & Toubro Limited - India
- Sojitz Corporation - Japan
- Kepco SPC Power Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Price Waterhouse Coopers - Russia
- London Commodity Brokers - England
- Vizag Seaport Private Limited - India
- Bulk Trading Sa - Switzerland
- Pipit Mutiara Jaya. PT, Indonesia
- OPG Power Generation Pvt Ltd - India
- Star Paper Mills Limited - India
- Orica Australia Pty. Ltd.
- Lanco Infratech Ltd - India
- Gujarat Sidhee Cement - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Coastal Gujarat Power Limited - India
- Sinarmas Energy and Mining - Indonesia
- Georgia Ports Authority, United States
- White Energy Company Limited
- Tata Chemicals Ltd - India
- Energy Link Ltd, New Zealand
- PetroVietnam Power Coal Import and Supply Company
- Orica Mining Services - Indonesia
- Bukit Makmur.PT - Indonesia
- Salva Resources Pvt Ltd - India
- Attock Cement Pakistan Limited
- Romanian Commodities Exchange
- AsiaOL BioFuels Corp., Philippines
- Semirara Mining Corp, Philippines
- Baramulti Group, Indonesia
- Sakthi Sugars Limited - India
- Malabar Cements Ltd - India
- GAC Shipping (India) Pvt Ltd
- Timah Investasi Mineral - Indoneisa
- Edison Trading Spa - Italy
- Dalmia Cement Bharat India
- Therma Luzon, Inc, Philippines
- Tamil Nadu electricity Board
- Cigading International Bulk Terminal - Indonesia
- Thiess Contractors Indonesia
- Sarangani Energy Corporation, Philippines
- Wood Mackenzie - Singapore
- Cement Manufacturers Association - India
- Karbindo Abesyapradhi - Indoneisa
- Trasteel International SA, Italy
- Grasim Industreis Ltd - India
- Indonesian Coal Mining Association
- Africa Commodities Group - South Africa
- Altura Mining Limited, Indonesia
- Parliament of New Zealand
- Bangladesh Power Developement Board
- Ministry of Finance - Indonesia
- VISA Power Limited - India
- Carbofer General Trading SA - India
- McConnell Dowell - Australia
- Vijayanagar Sugar Pvt Ltd - India
- Independent Power Producers Association of India
- Anglo American - United Kingdom
- SMG Consultants - Indonesia
- Globalindo Alam Lestari - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Bhoruka Overseas - Indonesia
- Mercuria Energy - Indonesia
- Jindal Steel & Power Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Agrawal Coal Company - India
- Indian Energy Exchange, India
- Mercator Lines Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Eastern Coal Council - USA
- Heidelberg Cement - Germany
- Power Finance Corporation Ltd., India
- Petron Corporation, Philippines
- Indo Tambangraya Megah - Indonesia
- Siam City Cement - Thailand
- Toyota Tsusho Corporation, Japan
- Kartika Selabumi Mining - Indonesia
- Bhushan Steel Limited - India
- LBH Netherlands Bv - Netherlands
- Iligan Light & Power Inc, Philippines
- San Jose City I Power Corp, Philippines
- Goldman Sachs - Singapore
- ASAPP Information Group - India
- Latin American Coal - Colombia
- Indogreen Group - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Chamber of Mines of South Africa
- Renaissance Capital - South Africa
- Metalloyd Limited - United Kingdom
- European Bulk Services B.V. - Netherlands
- Gujarat Mineral Development Corp Ltd - India
- CNBM International Corporation - China
- The State Trading Corporation of India Ltd
- Global Green Power PLC Corporation, Philippines
- Aditya Birla Group - India
- Ministry of Mines - Canada
- Borneo Indobara - Indonesia
- Kideco Jaya Agung - Indonesia
- ICICI Bank Limited - India
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