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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, 16 April 15
INDIA: COAL IMPORTS RISE BY 33 PC TO 240 MT IN FY'15 - PTI
India’s coal imports in the just concluded FY 2015 increased by 33 per cent to about 240 million tonnes.
“Coal import have gone up ...
Thursday, 16 April 15
CAPESIZE: THE SUPPLY AND DEMAND SIDE ARE NOW SUFFERING HEAVILY - FEARNLEYS
Handy
It seems to be some standoff between owners and charterers in both hemispheres this week. Owners are raising their rates while charterers a ...
Thursday, 16 April 15
Q3 FOB RICHARDS BAY COAL SWAP CLOSED AT $ 55.67 PMT
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q2' 2015 declined month over month.
The Q2 swap has declined US$ 1.90 (3.17%) m ...
Wednesday, 15 April 15
PORT OF NEWCASTLE SHIPPED 13.63 MMT OF COAL IN MARCH; UP 4.41% M-O-M
COALspot.com: The Port of Newcastle, Australia’s major trading ports and the world’s largest coal export port, has shipped $1.227 billi ...
Tuesday, 14 April 15
COAL OUTPUT FALLS AS PRICES CONTINUE TO LAG - JP
Coal output dropped by 21 percent in the first three months of the year as low prices for the commodity forced mining companies to reduce activitie ...
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- GAC Shipping (India) Pvt Ltd
- International Coal Ventures Pvt Ltd - India
- Bulk Trading Sa - Switzerland
- Semirara Mining Corp, Philippines
- Goldman Sachs - Singapore
- Parliament of New Zealand
- Central Java Power - Indonesia
- PTC India Limited - India
- Madhucon Powers Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- PNOC Exploration Corporation - Philippines
- Dalmia Cement Bharat India
- Romanian Commodities Exchange
- Ministry of Finance - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Chamber of Mines of South Africa
- Samtan Co., Ltd - South Korea
- Grasim Industreis Ltd - India
- Straits Asia Resources Limited - Singapore
- Sree Jayajothi Cements Limited - India
- South Luzon Thermal Energy Corporation
- Makarim & Taira - Indonesia
- Metalloyd Limited - United Kingdom
- Georgia Ports Authority, United States
- Kohat Cement Company Ltd. - Pakistan
- Vizag Seaport Private Limited - India
- Posco Energy - South Korea
- Attock Cement Pakistan Limited
- Global Green Power PLC Corporation, Philippines
- Energy Development Corp, Philippines
- PowerSource Philippines DevCo
- Indian Energy Exchange, India
- Iligan Light & Power Inc, Philippines
- Bhushan Steel Limited - India
- Edison Trading Spa - Italy
- Vijayanagar Sugar Pvt Ltd - India
- MS Steel International - UAE
- CIMB Investment Bank - Malaysia
- Essar Steel Hazira Ltd - India
- Globalindo Alam Lestari - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Planning Commission, India
- Xindia Steels Limited - India
- The State Trading Corporation of India Ltd
- Eastern Coal Council - USA
- IEA Clean Coal Centre - UK
- Toyota Tsusho Corporation, Japan
- Intertek Mineral Services - Indonesia
- New Zealand Coal & Carbon
- Indo Tambangraya Megah - Indonesia
- Africa Commodities Group - South Africa
- Maharashtra Electricity Regulatory Commission - India
- IHS Mccloskey Coal Group - USA
- Trasteel International SA, Italy
- Standard Chartered Bank - UAE
- Marubeni Corporation - India
- Global Business Power Corporation, Philippines
- The Treasury - Australian Government
- Sakthi Sugars Limited - India
- Singapore Mercantile Exchange
- Krishnapatnam Port Company Ltd. - India
- Pendopo Energi Batubara - Indonesia
- Merrill Lynch Commodities Europe
- San Jose City I Power Corp, Philippines
- Tata Chemicals Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Rio Tinto Coal - Australia
- Deloitte Consulting - India
- Bayan Resources Tbk. - Indonesia
- Thiess Contractors Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Savvy Resources Ltd - HongKong
- Coal and Oil Company - UAE
- Mintek Dendrill Indonesia
- Heidelberg Cement - Germany
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Makmur.PT - Indonesia
- Parry Sugars Refinery, India
- Independent Power Producers Association of India
- Gujarat Sidhee Cement - India
- Kepco SPC Power Corporation, Philippines
- Latin American Coal - Colombia
- Kapuas Tunggal Persada - Indonesia
- SN Aboitiz Power Inc, Philippines
- Indika Energy - Indonesia
- Rashtriya Ispat Nigam Limited - India
- CNBM International Corporation - China
- Lanco Infratech Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bukit Baiduri Energy - Indonesia
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- Manunggal Multi Energi - Indonesia
- SMC Global Power, Philippines
- Siam City Cement PLC, Thailand
- Ministry of Transport, Egypt
- Binh Thuan Hamico - Vietnam
- Cement Manufacturers Association - India
- Meralco Power Generation, Philippines
- Mercuria Energy - Indonesia
- European Bulk Services B.V. - Netherlands
- AsiaOL BioFuels Corp., Philippines
- Indogreen Group - Indonesia
- Sical Logistics Limited - India
- Ind-Barath Power Infra Limited - India
- OPG Power Generation Pvt Ltd - India
- Videocon Industries ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Siam City Cement - Thailand
- Jindal Steel & Power Ltd - India
- Riau Bara Harum - Indonesia
- VISA Power Limited - India
- Interocean Group of Companies - India
- Mjunction Services Limited - India
- Banpu Public Company Limited - Thailand
- Eastern Energy - Thailand
- Sindya Power Generating Company Private Ltd
- Larsen & Toubro Limited - India
- Indonesian Coal Mining Association
- Leighton Contractors Pty Ltd - Australia
- Altura Mining Limited, Indonesia
- Oldendorff Carriers - Singapore
- GMR Energy Limited - India
- Orica Mining Services - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Maheswari Brothers Coal Limited - India
- Kideco Jaya Agung - Indonesia
- ASAPP Information Group - India
- Wilmar Investment Holdings
- Kalimantan Lumbung Energi - Indonesia
- LBH Netherlands Bv - Netherlands
- Medco Energi Mining Internasional
- Kaltim Prima Coal - Indonesia
- Electricity Authority, New Zealand
- Global Coal Blending Company Limited - Australia
- Vedanta Resources Plc - India
- Coalindo Energy - Indonesia
- Tamil Nadu electricity Board
- Malabar Cements Ltd - India
- The University of Queensland
- Jaiprakash Power Ventures ltd
- Mercator Lines Limited - India
- Agrawal Coal Company - India
- Bhatia International Limited - India
- Power Finance Corporation Ltd., India
- India Bulls Power Limited - India
- Borneo Indobara - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Petron Corporation, Philippines
- Directorate Of Revenue Intelligence - India
- Commonwealth Bank - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Ambuja Cements Ltd - India
- Coastal Gujarat Power Limited - India
- Kumho Petrochemical, South Korea
- Holcim Trading Pte Ltd - Singapore
- Anglo American - United Kingdom
- Formosa Plastics Group - Taiwan
- Orica Australia Pty. Ltd.
- PetroVietnam Power Coal Import and Supply Company
- Chettinad Cement Corporation Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Renaissance Capital - South Africa
- Economic Council, Georgia
- Sinarmas Energy and Mining - Indonesia
- Sojitz Corporation - Japan
- Billiton Holdings Pty Ltd - Australia
- GN Power Mariveles Coal Plant, Philippines
- Price Waterhouse Coopers - Russia
- Australian Commodity Traders Exchange
- Gujarat Electricity Regulatory Commission - India
- GVK Power & Infra Limited - India
- Kartika Selabumi Mining - Indonesia
- Aditya Birla Group - India
- Karaikal Port Pvt Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Salva Resources Pvt Ltd - India
- Thai Mozambique Logistica
- Bhoruka Overseas - Indonesia
- Wood Mackenzie - Singapore
- Electricity Generating Authority of Thailand
- Simpson Spence & Young - Indonesia
- London Commodity Brokers - England
- McConnell Dowell - Australia
- SMG Consultants - Indonesia
- Bharathi Cement Corporation - India
- TeaM Sual Corporation - Philippines
- Cigading International Bulk Terminal - Indonesia
- Sarangani Energy Corporation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Central Electricity Authority - India
- Kobexindo Tractors - Indoneisa
- Alfred C Toepfer International GmbH - Germany
- Energy Link Ltd, New Zealand
- Australian Coal Association
- Meenaskhi Energy Private Limited - India
- Ministry of Mines - Canada
- TNB Fuel Sdn Bhd - Malaysia
- Uttam Galva Steels Limited - India
- Carbofer General Trading SA - India
- Minerals Council of Australia
- Directorate General of MIneral and Coal - Indonesia
- White Energy Company Limited
- Petrochimia International Co. Ltd.- Taiwan
- Bukit Asam (Persero) Tbk - Indonesia
- Antam Resourcindo - Indonesia
- Star Paper Mills Limited - India
- Timah Investasi Mineral - Indoneisa
- ICICI Bank Limited - India
- Miang Besar Coal Terminal - Indonesia
- Aboitiz Power Corporation - Philippines
- Bangladesh Power Developement Board
- Therma Luzon, Inc, Philippines
- Port Waratah Coal Services - Australia
- Barasentosa Lestari - Indonesia
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