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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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Friday, 24 April 15
IS INDIA THE 'NEW CHINA' WHEN IT COMES TO THE DRY BULK MARKET? - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
The dry bulk market has been feeling the “heat” of China’s slowdown and together with the industry’s own failings, with ove ...
Friday, 24 April 15
GLOBAL STEEL PRODUCTION OUTSIDE OF CHINA CONTINUES TO FARE VERY POORLY - JEFFREY LANDSBERG
COALspot.com: Data released this week showed that global crude steel production totaled approximately 138.05 million tons in March.
Wha ...
Friday, 24 April 15
WEEKLY U.S. COAL PRODUCTION ESTIMATE FALLS 5.7% FROM LAST WEEK
COALspot.com – United States the second largest coal producer in the world has produced approximately totaled an estimated 17.0 million short ...
Wednesday, 22 April 15
PANAMAX : ATLANTIC HOLDING ON TO THE GAINS OF THE PREVIOUS WEEK; PACIFIC BUSINESS SLID QUIETLY
COALspot.com: The Dry Bulk market managed to close off the week on a positive note last Friday, while as opposed to what we have been used to, it w ...
Wednesday, 22 April 15
TANKER MARKET INSIGHT - STRATOS TINIAKOS
The current environment we experience as a result of low crude oil prices is characterized by the increased demand for petroleum products in OECD c ...
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- Indogreen Group - Indonesia
- Thiess Contractors Indonesia
- Straits Asia Resources Limited - Singapore
- Sical Logistics Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Parliament of New Zealand
- Borneo Indobara - Indonesia
- Bangladesh Power Developement Board
- Merrill Lynch Commodities Europe
- Orica Mining Services - Indonesia
- Electricity Generating Authority of Thailand
- Coastal Gujarat Power Limited - India
- Rashtriya Ispat Nigam Limited - India
- Eastern Energy - Thailand
- Bhushan Steel Limited - India
- Altura Mining Limited, Indonesia
- Cement Manufacturers Association - India
- Sarangani Energy Corporation, Philippines
- Semirara Mining Corp, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- McConnell Dowell - Australia
- Videocon Industries ltd - India
- Kepco SPC Power Corporation, Philippines
- Kapuas Tunggal Persada - Indonesia
- Timah Investasi Mineral - Indoneisa
- Manunggal Multi Energi - Indonesia
- ASAPP Information Group - India
- OPG Power Generation Pvt Ltd - India
- Indian Energy Exchange, India
- Thai Mozambique Logistica
- Ministry of Finance - Indonesia
- Vedanta Resources Plc - India
- IEA Clean Coal Centre - UK
- Bhoruka Overseas - Indonesia
- Marubeni Corporation - India
- Energy Development Corp, Philippines
- Lanco Infratech Ltd - India
- Interocean Group of Companies - India
- Chettinad Cement Corporation Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Independent Power Producers Association of India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Xindia Steels Limited - India
- Global Coal Blending Company Limited - Australia
- Makarim & Taira - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Renaissance Capital - South Africa
- SN Aboitiz Power Inc, Philippines
- Kumho Petrochemical, South Korea
- Jaiprakash Power Ventures ltd
- Kalimantan Lumbung Energi - Indonesia
- Oldendorff Carriers - Singapore
- Kohat Cement Company Ltd. - Pakistan
- Essar Steel Hazira Ltd - India
- Chamber of Mines of South Africa
- Bukit Asam (Persero) Tbk - Indonesia
- PTC India Limited - India
- Central Electricity Authority - India
- Larsen & Toubro Limited - India
- Bukit Baiduri Energy - Indonesia
- European Bulk Services B.V. - Netherlands
- Tata Chemicals Ltd - India
- Aditya Birla Group - India
- Indonesian Coal Mining Association
- Bukit Makmur.PT - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Africa Commodities Group - South Africa
- Eastern Coal Council - USA
- Anglo American - United Kingdom
- The State Trading Corporation of India Ltd
- GAC Shipping (India) Pvt Ltd
- Wilmar Investment Holdings
- Meralco Power Generation, Philippines
- Billiton Holdings Pty Ltd - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Meenaskhi Energy Private Limited - India
- Savvy Resources Ltd - HongKong
- Directorate Of Revenue Intelligence - India
- Carbofer General Trading SA - India
- Globalindo Alam Lestari - Indonesia
- CNBM International Corporation - China
- Posco Energy - South Korea
- Indika Energy - Indonesia
- Edison Trading Spa - Italy
- Latin American Coal - Colombia
- Ministry of Transport, Egypt
- GVK Power & Infra Limited - India
- Australian Commodity Traders Exchange
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- Pendopo Energi Batubara - Indonesia
- Formosa Plastics Group - Taiwan
- Samtan Co., Ltd - South Korea
- Electricity Authority, New Zealand
- Intertek Mineral Services - Indonesia
- CIMB Investment Bank - Malaysia
- GMR Energy Limited - India
- Toyota Tsusho Corporation, Japan
- Mjunction Services Limited - India
- The Treasury - Australian Government
- Ministry of Mines - Canada
- Semirara Mining and Power Corporation, Philippines
- Bayan Resources Tbk. - Indonesia
- Australian Coal Association
- PowerSource Philippines DevCo
- Malabar Cements Ltd - India
- Central Java Power - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Bharathi Cement Corporation - India
- New Zealand Coal & Carbon
- Siam City Cement - Thailand
- TNB Fuel Sdn Bhd - Malaysia
- Wood Mackenzie - Singapore
- Pipit Mutiara Jaya. PT, Indonesia
- Coalindo Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- India Bulls Power Limited - India
- Iligan Light & Power Inc, Philippines
- Ambuja Cements Ltd - India
- TeaM Sual Corporation - Philippines
- Indo Tambangraya Megah - Indonesia
- International Coal Ventures Pvt Ltd - India
- Energy Link Ltd, New Zealand
- Asmin Koalindo Tuhup - Indonesia
- MS Steel International - UAE
- Jindal Steel & Power Ltd - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kaltim Prima Coal - Indonesia
- The University of Queensland
- Economic Council, Georgia
- Uttam Galva Steels Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Mercator Lines Limited - India
- Sindya Power Generating Company Private Ltd
- Offshore Bulk Terminal Pte Ltd, Singapore
- Simpson Spence & Young - Indonesia
- Heidelberg Cement - Germany
- AsiaOL BioFuels Corp., Philippines
- Kartika Selabumi Mining - Indonesia
- Kobexindo Tractors - Indoneisa
- Coal and Oil Company - UAE
- Vizag Seaport Private Limited - India
- Minerals Council of Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Price Waterhouse Coopers - Russia
- Commonwealth Bank - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Rio Tinto Coal - Australia
- Siam City Cement PLC, Thailand
- Gujarat Electricity Regulatory Commission - India
- Petron Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Tamil Nadu electricity Board
- Agrawal Coal Company - India
- Global Business Power Corporation, Philippines
- Barasentosa Lestari - Indonesia
- IHS Mccloskey Coal Group - USA
- Medco Energi Mining Internasional
- Therma Luzon, Inc, Philippines
- Salva Resources Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Ind-Barath Power Infra Limited - India
- Planning Commission, India
- Metalloyd Limited - United Kingdom
- Romanian Commodities Exchange
- Holcim Trading Pte Ltd - Singapore
- Mintek Dendrill Indonesia
- Deloitte Consulting - India
- Mercuria Energy - Indonesia
- Dalmia Cement Bharat India
- Gujarat Sidhee Cement - India
- Sree Jayajothi Cements Limited - India
- PNOC Exploration Corporation - Philippines
- ICICI Bank Limited - India
- White Energy Company Limited
- Cigading International Bulk Terminal - Indonesia
- Grasim Industreis Ltd - India
- Trasteel International SA, Italy
- Attock Cement Pakistan Limited
- Kideco Jaya Agung - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- South Luzon Thermal Energy Corporation
- Karaikal Port Pvt Ltd - India
- Parry Sugars Refinery, India
- Orica Australia Pty. Ltd.
- Maheswari Brothers Coal Limited - India
- Riau Bara Harum - Indonesia
- LBH Netherlands Bv - Netherlands
- Power Finance Corporation Ltd., India
- Sakthi Sugars Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Madhucon Powers Ltd - India
- San Jose City I Power Corp, Philippines
- SMC Global Power, Philippines
- Ceylon Electricity Board - Sri Lanka
- Aboitiz Power Corporation - Philippines
- Directorate General of MIneral and Coal - Indonesia
- Bhatia International Limited - India
- Sinarmas Energy and Mining - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Georgia Ports Authority, United States
- Neyveli Lignite Corporation Ltd, - India
- Krishnapatnam Port Company Ltd. - India
- SMG Consultants - Indonesia
- Singapore Mercantile Exchange
- Antam Resourcindo - Indonesia
- Sojitz Corporation - Japan
- Miang Besar Coal Terminal - Indonesia
- Standard Chartered Bank - UAE
- VISA Power Limited - India
- London Commodity Brokers - England
- Binh Thuan Hamico - Vietnam
- Global Green Power PLC Corporation, Philippines
- Star Paper Mills Limited - India
- Port Waratah Coal Services - Australia
- Goldman Sachs - Singapore
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