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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, 06 May 15
COMBINATION OF HOLIDAYS AND A SHAKY MARKET PUT ADDITIONAL PRESSURE ON RATES
COALspot.com: The combination of holidays and a shaky market is always a recipe for additional pressure on rates and last week was no exception. Wi ...
Wednesday, 06 May 15
SHIPPING MARKET INSIGHT - GEORGE ILIOPOULOS
The first four months of 2015 are now behind us and they make up for a decent amount of time to look back and assess how the year is evolving so fa ...
Tuesday, 05 May 15
MIFA BERSAUDARA UNIT OF ABM INVESTAMA STARTS OPERATING $200M COAL MINE IN ACEH
Reswara Minergi Hartama, a coal mining unit of coal miner ABM Investama known as known as Reswara, inaugurated a $200 million integrated coal minin ...
Tuesday, 05 May 15
FREIGHT DERIVATIVE VOLUMES REACHED TOTALED 14,154 CONTRACTS IN APRIL - SGX
COALspot.com: “Our unique suite of freight and bulk commodity products provides market participants with a wide range of trading strategies a ...
Tuesday, 05 May 15
OVERSUPPLY PUTTING INDONESIAN COAL PRICES UNDER PRESSURE
COALspot.com: Indonesian coal swap for delivery Q3 2015 lost week over week and month on month, this past week.
The Q3 swap was declined US$ 1 ...
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- Sree Jayajothi Cements Limited - India
- Romanian Commodities Exchange
- Karaikal Port Pvt Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Latin American Coal - Colombia
- Jorong Barutama Greston.PT - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Salva Resources Pvt Ltd - India
- Madhucon Powers Ltd - India
- Energy Development Corp, Philippines
- Mintek Dendrill Indonesia
- Rashtriya Ispat Nigam Limited - India
- Kepco SPC Power Corporation, Philippines
- Eastern Energy - Thailand
- AsiaOL BioFuels Corp., Philippines
- Deloitte Consulting - India
- Uttam Galva Steels Limited - India
- Semirara Mining Corp, Philippines
- European Bulk Services B.V. - Netherlands
- Barasentosa Lestari - Indonesia
- Price Waterhouse Coopers - Russia
- Baramulti Group, Indonesia
- GMR Energy Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Global Coal Blending Company Limited - Australia
- Mercator Lines Limited - India
- Star Paper Mills Limited - India
- Bulk Trading Sa - Switzerland
- Indika Energy - Indonesia
- Sical Logistics Limited - India
- Posco Energy - South Korea
- Marubeni Corporation - India
- Aboitiz Power Corporation - Philippines
- Essar Steel Hazira Ltd - India
- Altura Mining Limited, Indonesia
- Agrawal Coal Company - India
- TeaM Sual Corporation - Philippines
- Bukit Makmur.PT - Indonesia
- IHS Mccloskey Coal Group - USA
- Simpson Spence & Young - Indonesia
- Pendopo Energi Batubara - Indonesia
- The State Trading Corporation of India Ltd
- Sojitz Corporation - Japan
- Vizag Seaport Private Limited - India
- Vedanta Resources Plc - India
- Larsen & Toubro Limited - India
- Ceylon Electricity Board - Sri Lanka
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ministry of Mines - Canada
- LBH Netherlands Bv - Netherlands
- Anglo American - United Kingdom
- Electricity Generating Authority of Thailand
- Holcim Trading Pte Ltd - Singapore
- Kobexindo Tractors - Indoneisa
- Kartika Selabumi Mining - Indonesia
- Indogreen Group - Indonesia
- Port Waratah Coal Services - Australia
- Samtan Co., Ltd - South Korea
- Semirara Mining and Power Corporation, Philippines
- Riau Bara Harum - Indonesia
- Bayan Resources Tbk. - Indonesia
- Carbofer General Trading SA - India
- Thai Mozambique Logistica
- Lanco Infratech Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- ICICI Bank Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- GVK Power & Infra Limited - India
- Independent Power Producers Association of India
- Neyveli Lignite Corporation Ltd, - India
- CIMB Investment Bank - Malaysia
- Coal and Oil Company - UAE
- Sarangani Energy Corporation, Philippines
- Interocean Group of Companies - India
- Standard Chartered Bank - UAE
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Banpu Public Company Limited - Thailand
- Global Green Power PLC Corporation, Philippines
- Merrill Lynch Commodities Europe
- Billiton Holdings Pty Ltd - Australia
- CNBM International Corporation - China
- Directorate General of MIneral and Coal - Indonesia
- Wilmar Investment Holdings
- PNOC Exploration Corporation - Philippines
- Orica Mining Services - Indonesia
- Cement Manufacturers Association - India
- Chamber of Mines of South Africa
- Indonesian Coal Mining Association
- Planning Commission, India
- Edison Trading Spa - Italy
- Australian Commodity Traders Exchange
- Manunggal Multi Energi - Indonesia
- Xindia Steels Limited - India
- Kumho Petrochemical, South Korea
- Iligan Light & Power Inc, Philippines
- Economic Council, Georgia
- Bukit Baiduri Energy - Indonesia
- The University of Queensland
- Alfred C Toepfer International GmbH - Germany
- Kohat Cement Company Ltd. - Pakistan
- Thiess Contractors Indonesia
- Parliament of New Zealand
- Malabar Cements Ltd - India
- ASAPP Information Group - India
- Siam City Cement PLC, Thailand
- Parry Sugars Refinery, India
- Formosa Plastics Group - Taiwan
- PetroVietnam Power Coal Import and Supply Company
- Singapore Mercantile Exchange
- Coastal Gujarat Power Limited - India
- Minerals Council of Australia
- Meenaskhi Energy Private Limited - India
- Indian Energy Exchange, India
- Leighton Contractors Pty Ltd - Australia
- Indo Tambangraya Megah - Indonesia
- The Treasury - Australian Government
- Tamil Nadu electricity Board
- Medco Energi Mining Internasional
- Commonwealth Bank - Australia
- Intertek Mineral Services - Indonesia
- SMG Consultants - Indonesia
- Coalindo Energy - Indonesia
- South Luzon Thermal Energy Corporation
- Straits Asia Resources Limited - Singapore
- Antam Resourcindo - Indonesia
- Australian Coal Association
- Grasim Industreis Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Power Finance Corporation Ltd., India
- McConnell Dowell - Australia
- Gujarat Sidhee Cement - India
- Toyota Tsusho Corporation, Japan
- Makarim & Taira - Indonesia
- Bhushan Steel Limited - India
- Eastern Coal Council - USA
- PTC India Limited - India
- PowerSource Philippines DevCo
- Ministry of Finance - Indonesia
- Mjunction Services Limited - India
- Sindya Power Generating Company Private Ltd
- Jindal Steel & Power Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Kalimantan Lumbung Energi - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Ind-Barath Power Infra Limited - India
- Bangladesh Power Developement Board
- Bhatia International Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Goldman Sachs - Singapore
- Krishnapatnam Port Company Ltd. - India
- White Energy Company Limited
- GAC Shipping (India) Pvt Ltd
- International Coal Ventures Pvt Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Attock Cement Pakistan Limited
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Asmin Koalindo Tuhup - Indonesia
- Meralco Power Generation, Philippines
- Global Business Power Corporation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- SN Aboitiz Power Inc, Philippines
- MS Steel International - UAE
- Ministry of Transport, Egypt
- VISA Power Limited - India
- Tata Chemicals Ltd - India
- India Bulls Power Limited - India
- SMC Global Power, Philippines
- Wood Mackenzie - Singapore
- Borneo Indobara - Indonesia
- Bharathi Cement Corporation - India
- Orica Australia Pty. Ltd.
- Siam City Cement - Thailand
- Metalloyd Limited - United Kingdom
- Renaissance Capital - South Africa
- Kapuas Tunggal Persada - Indonesia
- Timah Investasi Mineral - Indoneisa
- Indian Oil Corporation Limited
- Petron Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Directorate Of Revenue Intelligence - India
- Dalmia Cement Bharat India
- Central Electricity Authority - India
- New Zealand Coal & Carbon
- Georgia Ports Authority, United States
- Rio Tinto Coal - Australia
- Chettinad Cement Corporation Ltd - India
- Aditya Birla Group - India
- Gujarat Mineral Development Corp Ltd - India
- Heidelberg Cement - Germany
- Maheswari Brothers Coal Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Energy Link Ltd, New Zealand
- Videocon Industries ltd - India
- Central Java Power - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- London Commodity Brokers - England
- Binh Thuan Hamico - Vietnam
- OPG Power Generation Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Bahari Cakrawala Sebuku - Indonesia
- Bhoruka Overseas - Indonesia
- Savvy Resources Ltd - HongKong
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Mercuria Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Ambuja Cements Ltd - India
- Africa Commodities Group - South Africa
- Jaiprakash Power Ventures ltd
- Trasteel International SA, Italy
- Sakthi Sugars Limited - India
- IEA Clean Coal Centre - UK
- Globalindo Alam Lestari - Indonesia
- San Jose City I Power Corp, Philippines
- Sinarmas Energy and Mining - Indonesia
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