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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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Thursday, 30 April 15
IRON ORE PLAYS EXPECTED TO SHAPE UP MAY DRY BULK SCHEDULE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Market plays in the iron ore commodities’ markets, are expected to carve out the future demand for the shipping industry as well, said Allied ...
Wednesday, 29 April 15
MARKET INSIGHT - INTERMODAL
The figures of China’s slowing down imports of coking coal for the first quarter of the year are coming to confirm what everybody was expecti ...
Wednesday, 29 April 15
SHIPBUILDERS START OFFERING DISCOUNTS FOR DRY BULK NEWBUILDINGS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
It took a while, but now it appears that some shipbuilders are beginning to adjust their price lists to the new grim reality of the dry bulk market ...
Tuesday, 28 April 15
FOB INDONESIA COAL SWAP DECLINED M-O-M; INCREASED W-O-W
COALspot.com: Indonesian coal swap for delivery Q2 2015 gained week over week but declined month on month.
The Q2 swap was declined US$ 0.15 ( ...
Tuesday, 28 April 15
Q2' 15 FOB RICHARDS BAY COAL SWAP CLOSED 4.18% HIGHER FROM MONTH AGO
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q2' 2015 increased month over month and slightly week over week.
The Q2 swap ha ...
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- SMC Global Power, Philippines
- Baramulti Group, Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Price Waterhouse Coopers - Russia
- Barasentosa Lestari - Indonesia
- Essar Steel Hazira Ltd - India
- Kobexindo Tractors - Indoneisa
- New Zealand Coal & Carbon
- MS Steel International - UAE
- Petron Corporation, Philippines
- Vedanta Resources Plc - India
- Salva Resources Pvt Ltd - India
- Star Paper Mills Limited - India
- Xindia Steels Limited - India
- Ministry of Transport, Egypt
- Bukit Asam (Persero) Tbk - Indonesia
- Sree Jayajothi Cements Limited - India
- Energy Link Ltd, New Zealand
- Toyota Tsusho Corporation, Japan
- Maheswari Brothers Coal Limited - India
- Marubeni Corporation - India
- Leighton Contractors Pty Ltd - Australia
- Binh Thuan Hamico - Vietnam
- Pendopo Energi Batubara - Indonesia
- Ambuja Cements Ltd - India
- Australian Commodity Traders Exchange
- Rashtriya Ispat Nigam Limited - India
- Posco Energy - South Korea
- London Commodity Brokers - England
- PetroVietnam Power Coal Import and Supply Company
- Aboitiz Power Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Ministry of Mines - Canada
- Ministry of Finance - Indonesia
- Altura Mining Limited, Indonesia
- Samtan Co., Ltd - South Korea
- Maharashtra Electricity Regulatory Commission - India
- Eastern Energy - Thailand
- Alfred C Toepfer International GmbH - Germany
- Directorate Of Revenue Intelligence - India
- Mercator Lines Limited - India
- Bharathi Cement Corporation - India
- Global Business Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Bukit Baiduri Energy - Indonesia
- Jaiprakash Power Ventures ltd
- Lanco Infratech Ltd - India
- Renaissance Capital - South Africa
- Indo Tambangraya Megah - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Timah Investasi Mineral - Indoneisa
- Minerals Council of Australia
- Jorong Barutama Greston.PT - Indonesia
- Kepco SPC Power Corporation, Philippines
- Central Java Power - Indonesia
- Banpu Public Company Limited - Thailand
- Formosa Plastics Group - Taiwan
- GAC Shipping (India) Pvt Ltd
- Thai Mozambique Logistica
- Antam Resourcindo - Indonesia
- Manunggal Multi Energi - Indonesia
- Larsen & Toubro Limited - India
- Bhushan Steel Limited - India
- The State Trading Corporation of India Ltd
- Vijayanagar Sugar Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Economic Council, Georgia
- White Energy Company Limited
- Intertek Mineral Services - Indonesia
- Savvy Resources Ltd - HongKong
- Australian Coal Association
- Indian Energy Exchange, India
- GMR Energy Limited - India
- Miang Besar Coal Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Kumho Petrochemical, South Korea
- Kalimantan Lumbung Energi - Indonesia
- Malabar Cements Ltd - India
- Parliament of New Zealand
- Africa Commodities Group - South Africa
- Iligan Light & Power Inc, Philippines
- Sical Logistics Limited - India
- IHS Mccloskey Coal Group - USA
- Deloitte Consulting - India
- Ceylon Electricity Board - Sri Lanka
- Siam City Cement PLC, Thailand
- CNBM International Corporation - China
- Electricity Generating Authority of Thailand
- Romanian Commodities Exchange
- Sindya Power Generating Company Private Ltd
- Chettinad Cement Corporation Ltd - India
- Power Finance Corporation Ltd., India
- Rio Tinto Coal - Australia
- Uttam Galva Steels Limited - India
- Indogreen Group - Indonesia
- Bukit Makmur.PT - Indonesia
- Bayan Resources Tbk. - Indonesia
- Siam City Cement - Thailand
- Singapore Mercantile Exchange
- Grasim Industreis Ltd - India
- Orica Australia Pty. Ltd.
- Merrill Lynch Commodities Europe
- Meralco Power Generation, Philippines
- ICICI Bank Limited - India
- IEA Clean Coal Centre - UK
- Bhatia International Limited - India
- Kapuas Tunggal Persada - Indonesia
- Tamil Nadu electricity Board
- Gujarat Electricity Regulatory Commission - India
- Kideco Jaya Agung - Indonesia
- VISA Power Limited - India
- Edison Trading Spa - Italy
- Directorate General of MIneral and Coal - Indonesia
- Port Waratah Coal Services - Australia
- Chamber of Mines of South Africa
- Kaltim Prima Coal - Indonesia
- Makarim & Taira - Indonesia
- Planning Commission, India
- Globalindo Alam Lestari - Indonesia
- GVK Power & Infra Limited - India
- Simpson Spence & Young - Indonesia
- Wilmar Investment Holdings
- ASAPP Information Group - India
- PTC India Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Neyveli Lignite Corporation Ltd, - India
- Electricity Authority, New Zealand
- Sojitz Corporation - Japan
- Holcim Trading Pte Ltd - Singapore
- Medco Energi Mining Internasional
- Riau Bara Harum - Indonesia
- Ind-Barath Power Infra Limited - India
- Heidelberg Cement - Germany
- Indonesian Coal Mining Association
- Krishnapatnam Port Company Ltd. - India
- GN Power Mariveles Coal Plant, Philippines
- Metalloyd Limited - United Kingdom
- Agrawal Coal Company - India
- Coalindo Energy - Indonesia
- Georgia Ports Authority, United States
- SMG Consultants - Indonesia
- Oldendorff Carriers - Singapore
- Therma Luzon, Inc, Philippines
- Semirara Mining and Power Corporation, Philippines
- Trasteel International SA, Italy
- OPG Power Generation Pvt Ltd - India
- McConnell Dowell - Australia
- Latin American Coal - Colombia
- The Treasury - Australian Government
- Bulk Trading Sa - Switzerland
- Bahari Cakrawala Sebuku - Indonesia
- Borneo Indobara - Indonesia
- Mjunction Services Limited - India
- Kartika Selabumi Mining - Indonesia
- The University of Queensland
- Aditya Birla Group - India
- Sarangani Energy Corporation, Philippines
- Eastern Coal Council - USA
- CIMB Investment Bank - Malaysia
- Billiton Holdings Pty Ltd - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Vizag Seaport Private Limited - India
- Gujarat Sidhee Cement - India
- Jindal Steel & Power Ltd - India
- Global Green Power PLC Corporation, Philippines
- Global Coal Blending Company Limited - Australia
- LBH Netherlands Bv - Netherlands
- Anglo American - United Kingdom
- Offshore Bulk Terminal Pte Ltd, Singapore
- Goldman Sachs - Singapore
- Coal and Oil Company - UAE
- European Bulk Services B.V. - Netherlands
- Tata Chemicals Ltd - India
- Semirara Mining Corp, Philippines
- Sinarmas Energy and Mining - Indonesia
- Wood Mackenzie - Singapore
- Gujarat Mineral Development Corp Ltd - India
- Thiess Contractors Indonesia
- Madhucon Powers Ltd - India
- Cement Manufacturers Association - India
- Commonwealth Bank - Australia
- Interocean Group of Companies - India
- International Coal Ventures Pvt Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Meenaskhi Energy Private Limited - India
- PNOC Exploration Corporation - Philippines
- Indian Oil Corporation Limited
- South Luzon Thermal Energy Corporation
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Karaikal Port Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- India Bulls Power Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Energy Development Corp, Philippines
- TeaM Sual Corporation - Philippines
- Parry Sugars Refinery, India
- Central Electricity Authority - India
- Videocon Industries ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bangladesh Power Developement Board
- Attock Cement Pakistan Limited
- Dalmia Cement Bharat India
- Bhoruka Overseas - Indonesia
- Mintek Dendrill Indonesia
- Standard Chartered Bank - UAE
- Orica Mining Services - Indonesia
- PowerSource Philippines DevCo
- Kohat Cement Company Ltd. - Pakistan
- Coastal Gujarat Power Limited - India
- Mercuria Energy - Indonesia
- Indika Energy - Indonesia
- Independent Power Producers Association of India
- Cigading International Bulk Terminal - Indonesia
- San Jose City I Power Corp, Philippines
- Carbofer General Trading SA - India
- AsiaOL BioFuels Corp., Philippines
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