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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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Tuesday, 05 May 15
FOB RICHARDS BAY COAL SWAPS MOVE NORTH THIS PAST WEEK
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q3' 2015 increased month over month and week over week.
The Q3 swap has increas ...
Monday, 04 May 15
FOB NEWCASTLE COAL SWAP Q1'16 PRICES SLIGHTLY LOWER COMPARED TO Q3'15 PRICE
COALspot.com: API 5 FOB Newcastle Coal swap for Q3’ 2015 delivery gained US$ 1.38 per MT (3.12%) month over month and US$ 0.93 week on week. ...
Monday, 04 May 15
Q1' 2016 CFR SOUTH CHINA THERMAL COAL SWAP CLOSED HIGH THAN 2015 DERIVATIVES
COALspot.com: API 8 CFR South China Coal swap for Q3’ 2015 delivery declined US$ 0.15 (-0.29%) per MT month over month and increased US$ 0.07 ...
Sunday, 03 May 15
DRY BULK INDICES WEAKEN SLIGHTLY THIS WEEK
COALspot.com: The freight market was flat to weak for the week starting from 27 April. The BDI was fell around 2.17% closed at 580 points.
...
Thursday, 30 April 15
IRON ORE EXPORTS: A DANGEROUS RACE? - CLARKSONS
The surge in iron ore exports in recent years has resulted in a significant decrease in iron ore spot prices, which dipped to a ten year low of bel ...
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- Jaiprakash Power Ventures ltd
- Vizag Seaport Private Limited - India
- Rio Tinto Coal - Australia
- Electricity Generating Authority of Thailand
- SMG Consultants - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Cement Manufacturers Association - India
- Ministry of Mines - Canada
- PNOC Exploration Corporation - Philippines
- Kalimantan Lumbung Energi - Indonesia
- SN Aboitiz Power Inc, Philippines
- Coalindo Energy - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Attock Cement Pakistan Limited
- TeaM Sual Corporation - Philippines
- South Luzon Thermal Energy Corporation
- AsiaOL BioFuels Corp., Philippines
- Samtan Co., Ltd - South Korea
- Offshore Bulk Terminal Pte Ltd, Singapore
- Baramulti Group, Indonesia
- Marubeni Corporation - India
- Tamil Nadu electricity Board
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Makarim & Taira - Indonesia
- Energy Development Corp, Philippines
- PowerSource Philippines DevCo
- Riau Bara Harum - Indonesia
- Kumho Petrochemical, South Korea
- Bhatia International Limited - India
- Pendopo Energi Batubara - Indonesia
- Antam Resourcindo - Indonesia
- Global Business Power Corporation, Philippines
- Indian Oil Corporation Limited
- TNB Fuel Sdn Bhd - Malaysia
- India Bulls Power Limited - India
- Tata Chemicals Ltd - India
- Orica Australia Pty. Ltd.
- Siam City Cement PLC, Thailand
- New Zealand Coal & Carbon
- Merrill Lynch Commodities Europe
- Mintek Dendrill Indonesia
- Bukit Baiduri Energy - Indonesia
- Africa Commodities Group - South Africa
- IEA Clean Coal Centre - UK
- Sojitz Corporation - Japan
- Australian Coal Association
- CNBM International Corporation - China
- Karaikal Port Pvt Ltd - India
- Jindal Steel & Power Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Bukit Asam (Persero) Tbk - Indonesia
- Price Waterhouse Coopers - Russia
- Romanian Commodities Exchange
- Coastal Gujarat Power Limited - India
- Salva Resources Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- PetroVietnam Power Coal Import and Supply Company
- Bulk Trading Sa - Switzerland
- Uttam Galva Steels Limited - India
- ICICI Bank Limited - India
- GMR Energy Limited - India
- Goldman Sachs - Singapore
- Ceylon Electricity Board - Sri Lanka
- Sindya Power Generating Company Private Ltd
- Directorate Of Revenue Intelligence - India
- McConnell Dowell - Australia
- Orica Mining Services - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- CIMB Investment Bank - Malaysia
- Interocean Group of Companies - India
- Commonwealth Bank - Australia
- Bhushan Steel Limited - India
- Metalloyd Limited - United Kingdom
- Toyota Tsusho Corporation, Japan
- Gujarat Electricity Regulatory Commission - India
- Krishnapatnam Port Company Ltd. - India
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Lanco Infratech Ltd - India
- Coal and Oil Company - UAE
- Holcim Trading Pte Ltd - Singapore
- PTC India Limited - India
- Intertek Mineral Services - Indonesia
- Sree Jayajothi Cements Limited - India
- Thai Mozambique Logistica
- Energy Link Ltd, New Zealand
- Minerals Council of Australia
- Aditya Birla Group - India
- Barasentosa Lestari - Indonesia
- Power Finance Corporation Ltd., India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Manunggal Multi Energi - Indonesia
- Parry Sugars Refinery, India
- Borneo Indobara - Indonesia
- Deloitte Consulting - India
- Agrawal Coal Company - India
- Eastern Energy - Thailand
- The Treasury - Australian Government
- Kobexindo Tractors - Indoneisa
- Globalindo Alam Lestari - Indonesia
- Economic Council, Georgia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Thiess Contractors Indonesia
- Therma Luzon, Inc, Philippines
- International Coal Ventures Pvt Ltd - India
- Ministry of Transport, Egypt
- Maheswari Brothers Coal Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Semirara Mining Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Global Coal Blending Company Limited - Australia
- Jorong Barutama Greston.PT - Indonesia
- The State Trading Corporation of India Ltd
- Medco Energi Mining Internasional
- Maharashtra Electricity Regulatory Commission - India
- Indian Energy Exchange, India
- Larsen & Toubro Limited - India
- Indika Energy - Indonesia
- VISA Power Limited - India
- Dalmia Cement Bharat India
- Central Electricity Authority - India
- GVK Power & Infra Limited - India
- Central Java Power - Indonesia
- Meralco Power Generation, Philippines
- Indogreen Group - Indonesia
- Formosa Plastics Group - Taiwan
- Mercuria Energy - Indonesia
- Kaltim Prima Coal - Indonesia
- Sakthi Sugars Limited - India
- MS Steel International - UAE
- Videocon Industries ltd - India
- European Bulk Services B.V. - Netherlands
- Chamber of Mines of South Africa
- Edison Trading Spa - Italy
- Mercator Lines Limited - India
- Star Paper Mills Limited - India
- Planning Commission, India
- Mjunction Services Limited - India
- Rashtriya Ispat Nigam Limited - India
- Latin American Coal - Colombia
- Gujarat Mineral Development Corp Ltd - India
- Binh Thuan Hamico - Vietnam
- San Jose City I Power Corp, Philippines
- Ministry of Finance - Indonesia
- Gujarat Sidhee Cement - India
- Carbofer General Trading SA - India
- Wilmar Investment Holdings
- Sinarmas Energy and Mining - Indonesia
- Heidelberg Cement - Germany
- Bhoruka Overseas - Indonesia
- The University of Queensland
- GN Power Mariveles Coal Plant, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Straits Asia Resources Limited - Singapore
- Wood Mackenzie - Singapore
- White Energy Company Limited
- London Commodity Brokers - England
- Asmin Koalindo Tuhup - Indonesia
- Essar Steel Hazira Ltd - India
- Chettinad Cement Corporation Ltd - India
- Meenaskhi Energy Private Limited - India
- Xindia Steels Limited - India
- Aboitiz Power Corporation - Philippines
- OPG Power Generation Pvt Ltd - India
- Bangladesh Power Developement Board
- LBH Netherlands Bv - Netherlands
- Banpu Public Company Limited - Thailand
- Trasteel International SA, Italy
- Kartika Selabumi Mining - Indonesia
- SMC Global Power, Philippines
- Standard Chartered Bank - UAE
- Iligan Light & Power Inc, Philippines
- Global Green Power PLC Corporation, Philippines
- Kepco SPC Power Corporation, Philippines
- Kideco Jaya Agung - Indonesia
- Bayan Resources Tbk. - Indonesia
- Indonesian Coal Mining Association
- Port Waratah Coal Services - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Anglo American - United Kingdom
- Independent Power Producers Association of India
- Altura Mining Limited, Indonesia
- ASAPP Information Group - India
- IHS Mccloskey Coal Group - USA
- Georgia Ports Authority, United States
- Renaissance Capital - South Africa
- Karbindo Abesyapradhi - Indoneisa
- Parliament of New Zealand
- Vedanta Resources Plc - India
- Siam City Cement - Thailand
- Grasim Industreis Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Singapore Mercantile Exchange
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Petron Corporation, Philippines
- Sical Logistics Limited - India
- Timah Investasi Mineral - Indoneisa
- Bukit Makmur.PT - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Australian Commodity Traders Exchange
- Oldendorff Carriers - Singapore
- Indo Tambangraya Megah - Indonesia
- Posco Energy - South Korea
- Savvy Resources Ltd - HongKong
- Petrochimia International Co. Ltd.- Taiwan
- Ind-Barath Power Infra Limited - India
- Eastern Coal Council - USA
- Malabar Cements Ltd - India
- Simpson Spence & Young - Indonesia
- GAC Shipping (India) Pvt Ltd
- Ambuja Cements Ltd - India
- Bharathi Cement Corporation - India
- Billiton Holdings Pty Ltd - Australia
- Madhucon Powers Ltd - India
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