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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, 27 April 15
U.S. COAL PRODUCTION FELL BELOW ONE BILLION SHORT TONS IN 2013 - EIA
COALspot.com: For the first time in two decades, U.S. coal production fell below one billion short tons to 984.8 million short tons in 2013 from 1, ...
Monday, 27 April 15
Q3' 2015 FOB NEWCASTLE COAL SWAP CLOSED 3.69% LOWER THAN Q2' 2015 PRICE OF $46.36
COALspot.com: API 5 FOB Newcastle Coal swap for Q2’ 2015 delivery gained US$ 0.19 per MT (0.41%) month over month and US$ 0.78 week on week. ...
Monday, 27 April 15
CFR SOUTH CHINA COAL SWAP SLOWLY IMPROVED THIS PAST WEEK
COALspot.com: API 8 CFR South China Coal swap for Q2’ 2015 delivery declined US$ 0.74 (-1.41%) per MT month over month and increased US$ 0.43 ...
Sunday, 26 April 15
DRY BULK MARKET KEPT IMPROVING THIS WEEK; CAPES AND PANAMAXES SHOW A SLIGHT PICKUP IN RATES
COALspot.com: The freight market was stable this week as BDI closed at 600 points after improving 0.50 percent week over week.
The cape ...
Friday, 24 April 15
CHINA IRON ORE MINE CLOSURES TO SLOW ON GOVERNMENT SUPPORT - FITCH
Fitch Ratings expects fewer Chinese iron ore mine closures in 2015 as the government takes steps to support the industry, which has been struggling ...
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- Makarim & Taira - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Tamil Nadu electricity Board
- Indian Oil Corporation Limited
- Sinarmas Energy and Mining - Indonesia
- Savvy Resources Ltd - HongKong
- Latin American Coal - Colombia
- Simpson Spence & Young - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Aditya Birla Group - India
- New Zealand Coal & Carbon
- Parry Sugars Refinery, India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- SN Aboitiz Power Inc, Philippines
- Toyota Tsusho Corporation, Japan
- Semirara Mining and Power Corporation, Philippines
- Coalindo Energy - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- ICICI Bank Limited - India
- Kalimantan Lumbung Energi - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Wilmar Investment Holdings
- San Jose City I Power Corp, Philippines
- Karaikal Port Pvt Ltd - India
- Sakthi Sugars Limited - India
- Krishnapatnam Port Company Ltd. - India
- SMC Global Power, Philippines
- Petron Corporation, Philippines
- Ministry of Transport, Egypt
- Australian Coal Association
- Jorong Barutama Greston.PT - Indonesia
- Xindia Steels Limited - India
- Trasteel International SA, Italy
- Indonesian Coal Mining Association
- Rio Tinto Coal - Australia
- London Commodity Brokers - England
- Global Green Power PLC Corporation, Philippines
- Singapore Mercantile Exchange
- Rashtriya Ispat Nigam Limited - India
- Thiess Contractors Indonesia
- AsiaOL BioFuels Corp., Philippines
- Malabar Cements Ltd - India
- Formosa Plastics Group - Taiwan
- Independent Power Producers Association of India
- Power Finance Corporation Ltd., India
- Interocean Group of Companies - India
- Central Electricity Authority - India
- Intertek Mineral Services - Indonesia
- Kaltim Prima Coal - Indonesia
- IEA Clean Coal Centre - UK
- Orica Australia Pty. Ltd.
- Sree Jayajothi Cements Limited - India
- Electricity Authority, New Zealand
- Maheswari Brothers Coal Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Marubeni Corporation - India
- Renaissance Capital - South Africa
- Indo Tambangraya Megah - Indonesia
- Ambuja Cements Ltd - India
- Metalloyd Limited - United Kingdom
- Ceylon Electricity Board - Sri Lanka
- Wood Mackenzie - Singapore
- Samtan Co., Ltd - South Korea
- PowerSource Philippines DevCo
- Global Business Power Corporation, Philippines
- PNOC Exploration Corporation - Philippines
- Mercator Lines Limited - India
- Kobexindo Tractors - Indoneisa
- Offshore Bulk Terminal Pte Ltd, Singapore
- International Coal Ventures Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- TeaM Sual Corporation - Philippines
- Mjunction Services Limited - India
- Star Paper Mills Limited - India
- Pendopo Energi Batubara - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Oldendorff Carriers - Singapore
- Gujarat Electricity Regulatory Commission - India
- Kideco Jaya Agung - Indonesia
- Barasentosa Lestari - Indonesia
- LBH Netherlands Bv - Netherlands
- Orica Mining Services - Indonesia
- Banpu Public Company Limited - Thailand
- Aboitiz Power Corporation - Philippines
- Coal and Oil Company - UAE
- Australian Commodity Traders Exchange
- Chamber of Mines of South Africa
- Mintek Dendrill Indonesia
- Jaiprakash Power Ventures ltd
- Petrochimia International Co. Ltd.- Taiwan
- Economic Council, Georgia
- Bharathi Cement Corporation - India
- Africa Commodities Group - South Africa
- Minerals Council of Australia
- SMG Consultants - Indonesia
- MS Steel International - UAE
- Karbindo Abesyapradhi - Indoneisa
- Standard Chartered Bank - UAE
- Meralco Power Generation, Philippines
- Madhucon Powers Ltd - India
- The State Trading Corporation of India Ltd
- Kumho Petrochemical, South Korea
- Lanco Infratech Ltd - India
- Bhoruka Overseas - Indonesia
- GVK Power & Infra Limited - India
- Goldman Sachs - Singapore
- Kohat Cement Company Ltd. - Pakistan
- Indogreen Group - Indonesia
- Bulk Trading Sa - Switzerland
- Meenaskhi Energy Private Limited - India
- Binh Thuan Hamico - Vietnam
- Eastern Energy - Thailand
- Bangladesh Power Developement Board
- Straits Asia Resources Limited - Singapore
- Siam City Cement PLC, Thailand
- Commonwealth Bank - Australia
- Neyveli Lignite Corporation Ltd, - India
- Gujarat Sidhee Cement - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Vedanta Resources Plc - India
- Bahari Cakrawala Sebuku - Indonesia
- Baramulti Group, Indonesia
- GMR Energy Limited - India
- Port Waratah Coal Services - Australia
- Heidelberg Cement - Germany
- White Energy Company Limited
- Ind-Barath Power Infra Limited - India
- Bhatia International Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Medco Energi Mining Internasional
- Global Coal Blending Company Limited - Australia
- India Bulls Power Limited - India
- Tata Chemicals Ltd - India
- Vizag Seaport Private Limited - India
- Uttam Galva Steels Limited - India
- Alfred C Toepfer International GmbH - Germany
- Bukit Baiduri Energy - Indonesia
- Anglo American - United Kingdom
- Riau Bara Harum - Indonesia
- Deloitte Consulting - India
- Directorate General of MIneral and Coal - Indonesia
- Energy Development Corp, Philippines
- Sindya Power Generating Company Private Ltd
- Salva Resources Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Cement Manufacturers Association - India
- Ministry of Finance - Indonesia
- GAC Shipping (India) Pvt Ltd
- Essar Steel Hazira Ltd - India
- Semirara Mining Corp, Philippines
- Altura Mining Limited, Indonesia
- Georgia Ports Authority, United States
- Energy Link Ltd, New Zealand
- Carbofer General Trading SA - India
- Coastal Gujarat Power Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- The University of Queensland
- Timah Investasi Mineral - Indoneisa
- OPG Power Generation Pvt Ltd - India
- Price Waterhouse Coopers - Russia
- Bhushan Steel Limited - India
- Chettinad Cement Corporation Ltd - India
- Directorate Of Revenue Intelligence - India
- IHS Mccloskey Coal Group - USA
- Kartika Selabumi Mining - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Merrill Lynch Commodities Europe
- TNB Fuel Sdn Bhd - Malaysia
- Manunggal Multi Energi - Indonesia
- ASAPP Information Group - India
- Bayan Resources Tbk. - Indonesia
- Iligan Light & Power Inc, Philippines
- Posco Energy - South Korea
- Kapuas Tunggal Persada - Indonesia
- CNBM International Corporation - China
- Maharashtra Electricity Regulatory Commission - India
- CIMB Investment Bank - Malaysia
- PTC India Limited - India
- Jindal Steel & Power Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Parliament of New Zealand
- Bukit Asam (Persero) Tbk - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Attock Cement Pakistan Limited
- VISA Power Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Dalmia Cement Bharat India
- The Treasury - Australian Government
- Pipit Mutiara Jaya. PT, Indonesia
- Eastern Coal Council - USA
- Kepco SPC Power Corporation, Philippines
- Videocon Industries ltd - India
- Borneo Indobara - Indonesia
- Antam Resourcindo - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Central Java Power - Indonesia
- Edison Trading Spa - Italy
- Agrawal Coal Company - India
- South Luzon Thermal Energy Corporation
- Electricity Generating Authority of Thailand
- Indian Energy Exchange, India
- Siam City Cement - Thailand
- Grasim Industreis Ltd - India
- Globalindo Alam Lestari - Indonesia
- Mercuria Energy - Indonesia
- Planning Commission, India
- European Bulk Services B.V. - Netherlands
- Sojitz Corporation - Japan
- Indika Energy - Indonesia
- Ministry of Mines - Canada
- McConnell Dowell - Australia
- Larsen & Toubro Limited - India
- Therma Luzon, Inc, Philippines
- Thai Mozambique Logistica
- Sical Logistics Limited - India
- Romanian Commodities Exchange
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