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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, 11 May 15
CFR SOUTH CHINA COAL SWAP: DECLINED MOM AND WOW
COALspot.com: API 8 CFR South China Coal swap for Q3’ 2015 delivery declined US$ 0.46 (-0.90%) per MT month over month and US$ 0.28 (0. ...
Monday, 11 May 15
KOREA MIDLAND POWER INVITES BIDS FOR 140K MT OF 4600 NAR COAL
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued a new tender to buy total 140,000 Metric Tons (MT) of Sub-bitumi ...
Sunday, 10 May 15
FREIGHT RATES TO REMAIN SOFT NEXT WEEK
COALspot.com: The freight market was flat to soft week over week except for the Cape Index which was up 7.32%. Cape index was closed at 616 p ...
Friday, 08 May 15
BUSIEST CAPESIZE DEMOLITION MARKET EVER - BIMCO
The activity on the demolition market is off to a good start in 2015 when looking at dry bulk tonnage.
The dry bulk market has long suffered f ...
Friday, 08 May 15
COAL PRODUCTION IN U.S. UP 3.2% THIS PAST WEEK - EIA
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 17.4 million short ...
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- Independent Power Producers Association of India
- OPG Power Generation Pvt Ltd - India
- Videocon Industries ltd - India
- Africa Commodities Group - South Africa
- Global Coal Blending Company Limited - Australia
- Cement Manufacturers Association - India
- Economic Council, Georgia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Renaissance Capital - South Africa
- Intertek Mineral Services - Indonesia
- Ministry of Transport, Egypt
- Indo Tambangraya Megah - Indonesia
- Simpson Spence & Young - Indonesia
- Mercuria Energy - Indonesia
- TeaM Sual Corporation - Philippines
- MS Steel International - UAE
- Anglo American - United Kingdom
- Salva Resources Pvt Ltd - India
- Antam Resourcindo - Indonesia
- Indika Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Price Waterhouse Coopers - Russia
- Pendopo Energi Batubara - Indonesia
- Wood Mackenzie - Singapore
- Dalmia Cement Bharat India
- Ceylon Electricity Board - Sri Lanka
- Oldendorff Carriers - Singapore
- Rio Tinto Coal - Australia
- Cigading International Bulk Terminal - Indonesia
- ASAPP Information Group - India
- Tamil Nadu electricity Board
- Posco Energy - South Korea
- Bangladesh Power Developement Board
- CNBM International Corporation - China
- Meralco Power Generation, Philippines
- Attock Cement Pakistan Limited
- Bulk Trading Sa - Switzerland
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ministry of Finance - Indonesia
- Formosa Plastics Group - Taiwan
- Minerals Council of Australia
- Tata Chemicals Ltd - India
- Banpu Public Company Limited - Thailand
- Central Java Power - Indonesia
- Power Finance Corporation Ltd., India
- Directorate General of MIneral and Coal - Indonesia
- CIMB Investment Bank - Malaysia
- Malabar Cements Ltd - India
- Iligan Light & Power Inc, Philippines
- Barasentosa Lestari - Indonesia
- Aditya Birla Group - India
- Indonesian Coal Mining Association
- Ministry of Mines - Canada
- Jorong Barutama Greston.PT - Indonesia
- Standard Chartered Bank - UAE
- The University of Queensland
- Parliament of New Zealand
- GAC Shipping (India) Pvt Ltd
- Neyveli Lignite Corporation Ltd, - India
- Sinarmas Energy and Mining - Indonesia
- Eastern Coal Council - USA
- The State Trading Corporation of India Ltd
- Borneo Indobara - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Agrawal Coal Company - India
- IHS Mccloskey Coal Group - USA
- Central Electricity Authority - India
- Latin American Coal - Colombia
- Deloitte Consulting - India
- European Bulk Services B.V. - Netherlands
- Gujarat Mineral Development Corp Ltd - India
- Siam City Cement PLC, Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- SN Aboitiz Power Inc, Philippines
- Ind-Barath Power Infra Limited - India
- Toyota Tsusho Corporation, Japan
- Chamber of Mines of South Africa
- Global Green Power PLC Corporation, Philippines
- SMG Consultants - Indonesia
- Essar Steel Hazira Ltd - India
- IEA Clean Coal Centre - UK
- Bukit Baiduri Energy - Indonesia
- PNOC Exploration Corporation - Philippines
- South Luzon Thermal Energy Corporation
- LBH Netherlands Bv - Netherlands
- Sindya Power Generating Company Private Ltd
- Kobexindo Tractors - Indoneisa
- Riau Bara Harum - Indonesia
- Planning Commission, India
- Timah Investasi Mineral - Indoneisa
- Asmin Koalindo Tuhup - Indonesia
- San Jose City I Power Corp, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Port Waratah Coal Services - Australia
- Kapuas Tunggal Persada - Indonesia
- Indian Oil Corporation Limited
- Vijayanagar Sugar Pvt Ltd - India
- Baramulti Group, Indonesia
- Chettinad Cement Corporation Ltd - India
- Lanco Infratech Ltd - India
- Thiess Contractors Indonesia
- Australian Commodity Traders Exchange
- Global Business Power Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- Karbindo Abesyapradhi - Indoneisa
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Commonwealth Bank - Australia
- Georgia Ports Authority, United States
- Goldman Sachs - Singapore
- Energy Development Corp, Philippines
- Eastern Energy - Thailand
- GVK Power & Infra Limited - India
- Bhatia International Limited - India
- VISA Power Limited - India
- Savvy Resources Ltd - HongKong
- White Energy Company Limited
- Indian Energy Exchange, India
- Gujarat Sidhee Cement - India
- Singapore Mercantile Exchange
- Meenaskhi Energy Private Limited - India
- Merrill Lynch Commodities Europe
- Mercator Lines Limited - India
- Electricity Generating Authority of Thailand
- Karaikal Port Pvt Ltd - India
- Heidelberg Cement - Germany
- Kaltim Prima Coal - Indonesia
- Bayan Resources Tbk. - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sical Logistics Limited - India
- Carbofer General Trading SA - India
- Krishnapatnam Port Company Ltd. - India
- Kepco SPC Power Corporation, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Bhushan Steel Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Semirara Mining Corp, Philippines
- Wilmar Investment Holdings
- McConnell Dowell - Australia
- Bhoruka Overseas - Indonesia
- Orica Mining Services - Indonesia
- Sakthi Sugars Limited - India
- Jaiprakash Power Ventures ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Vizag Seaport Private Limited - India
- Orica Australia Pty. Ltd.
- Gujarat Electricity Regulatory Commission - India
- Bharathi Cement Corporation - India
- Makarim & Taira - Indonesia
- Siam City Cement - Thailand
- Indogreen Group - Indonesia
- Ambuja Cements Ltd - India
- Edison Trading Spa - Italy
- Miang Besar Coal Terminal - Indonesia
- Billiton Holdings Pty Ltd - Australia
- International Coal Ventures Pvt Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Xindia Steels Limited - India
- Sarangani Energy Corporation, Philippines
- GMR Energy Limited - India
- Maharashtra Electricity Regulatory Commission - India
- GN Power Mariveles Coal Plant, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Marubeni Corporation - India
- Maheswari Brothers Coal Limited - India
- Uttam Galva Steels Limited - India
- Australian Coal Association
- Coastal Gujarat Power Limited - India
- Holcim Trading Pte Ltd - Singapore
- Star Paper Mills Limited - India
- Larsen & Toubro Limited - India
- Romanian Commodities Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Grasim Industreis Ltd - India
- Kartika Selabumi Mining - Indonesia
- Mjunction Services Limited - India
- Mintek Dendrill Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Semirara Mining and Power Corporation, Philippines
- Directorate Of Revenue Intelligence - India
- Kalimantan Lumbung Energi - Indonesia
- Altura Mining Limited, Indonesia
- Jindal Steel & Power Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Binh Thuan Hamico - Vietnam
- Interocean Group of Companies - India
- Vedanta Resources Plc - India
- PowerSource Philippines DevCo
- Leighton Contractors Pty Ltd - Australia
- Coalindo Energy - Indonesia
- The Treasury - Australian Government
- Metalloyd Limited - United Kingdom
- Bukit Makmur.PT - Indonesia
- Trasteel International SA, Italy
- Petron Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Parry Sugars Refinery, India
- Alfred C Toepfer International GmbH - Germany
- Globalindo Alam Lestari - Indonesia
- Sree Jayajothi Cements Limited - India
- Energy Link Ltd, New Zealand
- India Bulls Power Limited - India
- Sojitz Corporation - Japan
- Therma Luzon, Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Medco Energi Mining Internasional
- New Zealand Coal & Carbon
- Madhucon Powers Ltd - India
- Straits Asia Resources Limited - Singapore
- Thai Mozambique Logistica
- PTC India Limited - India
- Rashtriya Ispat Nigam Limited - India
- London Commodity Brokers - England
- SMC Global Power, Philippines
- ICICI Bank Limited - India
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