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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, 10 April 15
DRY BULK MARKET'S DOWNFALL ALSO OFFER INVESTMENT BARGAINS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
Dry bulk market rates have fallen to historical lows over the past few weeks, with no clear path of recovery, at least in the near term. As such, m ...
Thursday, 09 April 15
CAPESIZE: RATES ARE STILL DISAPPOINTING - FEARNLEYS
Handy
The handy market had a stronger sentiment before the Easter holidays, but have as the bigger panamaxes seen a softening tendency this week. ...
Wednesday, 08 April 15
DRY BULK MARKET SEEMS UNABLE TO CATCH A BREAK - INTERMODAL
COALspot.com: The Dry Bulk market seems unable to catch a break these days.
According to Intermodal, following the market stabilization that p ...
Wednesday, 08 April 15
CHINA BURNS HALF OF THE WORLD'S COAL - CHRISTOPHER T. WHITTY
Intermodal Weekly Market Update
China is the world's largest consumer of coal, using more coal each year than the United States, the Europ ...
Tuesday, 07 April 15
SUB-BIT FOB INDONESIA COAL SWAP KEEPS DROPPING; DROPPED 2% W-W
COALspot.com: Indonesian coal swap for delivery Q2 2015 declined month on month and week over week.
The Q2 swap was declined US$ 2.44 (5.14%) ...
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- Uttam Galva Steels Limited - India
- Kepco SPC Power Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Anglo American - United Kingdom
- SMC Global Power, Philippines
- Bharathi Cement Corporation - India
- Sakthi Sugars Limited - India
- International Coal Ventures Pvt Ltd - India
- San Jose City I Power Corp, Philippines
- Central Java Power - Indonesia
- CIMB Investment Bank - Malaysia
- Asmin Koalindo Tuhup - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Energy Development Corp, Philippines
- Chettinad Cement Corporation Ltd - India
- Eastern Energy - Thailand
- Bukit Makmur.PT - Indonesia
- Bhatia International Limited - India
- Tata Chemicals Ltd - India
- ICICI Bank Limited - India
- Minerals Council of Australia
- Agrawal Coal Company - India
- Formosa Plastics Group - Taiwan
- The Treasury - Australian Government
- Ministry of Transport, Egypt
- Coal and Oil Company - UAE
- Jindal Steel & Power Ltd - India
- Indian Energy Exchange, India
- Maheswari Brothers Coal Limited - India
- TeaM Sual Corporation - Philippines
- Mjunction Services Limited - India
- GVK Power & Infra Limited - India
- Cement Manufacturers Association - India
- Simpson Spence & Young - Indonesia
- Larsen & Toubro Limited - India
- Alfred C Toepfer International GmbH - Germany
- Madhucon Powers Ltd - India
- Interocean Group of Companies - India
- Kobexindo Tractors - Indoneisa
- Binh Thuan Hamico - Vietnam
- Indogreen Group - Indonesia
- Attock Cement Pakistan Limited
- Ministry of Mines - Canada
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- OPG Power Generation Pvt Ltd - India
- Vizag Seaport Private Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Sree Jayajothi Cements Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Sojitz Corporation - Japan
- Economic Council, Georgia
- Parry Sugars Refinery, India
- Straits Asia Resources Limited - Singapore
- Parliament of New Zealand
- Africa Commodities Group - South Africa
- Power Finance Corporation Ltd., India
- Posco Energy - South Korea
- SN Aboitiz Power Inc, Philippines
- Sindya Power Generating Company Private Ltd
- Directorate General of MIneral and Coal - Indonesia
- European Bulk Services B.V. - Netherlands
- Meenaskhi Energy Private Limited - India
- Coastal Gujarat Power Limited - India
- Siam City Cement - Thailand
- Tamil Nadu electricity Board
- Lanco Infratech Ltd - India
- Australian Coal Association
- Bukit Baiduri Energy - Indonesia
- Rio Tinto Coal - Australia
- Baramulti Group, Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Thiess Contractors Indonesia
- Kapuas Tunggal Persada - Indonesia
- Kartika Selabumi Mining - Indonesia
- Latin American Coal - Colombia
- Bhoruka Overseas - Indonesia
- Dalmia Cement Bharat India
- Commonwealth Bank - Australia
- Wilmar Investment Holdings
- Meralco Power Generation, Philippines
- Petron Corporation, Philippines
- Kideco Jaya Agung - Indonesia
- Electricity Generating Authority of Thailand
- Romanian Commodities Exchange
- GAC Shipping (India) Pvt Ltd
- Ind-Barath Power Infra Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Directorate Of Revenue Intelligence - India
- Global Green Power PLC Corporation, Philippines
- MS Steel International - UAE
- Miang Besar Coal Terminal - Indonesia
- Central Electricity Authority - India
- Sical Logistics Limited - India
- Banpu Public Company Limited - Thailand
- Price Waterhouse Coopers - Russia
- PNOC Exploration Corporation - Philippines
- Barasentosa Lestari - Indonesia
- India Bulls Power Limited - India
- Savvy Resources Ltd - HongKong
- Cigading International Bulk Terminal - Indonesia
- Jaiprakash Power Ventures ltd
- GN Power Mariveles Coal Plant, Philippines
- Essar Steel Hazira Ltd - India
- Orica Mining Services - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kumho Petrochemical, South Korea
- Salva Resources Pvt Ltd - India
- Aditya Birla Group - India
- Global Coal Blending Company Limited - Australia
- Manunggal Multi Energi - Indonesia
- IEA Clean Coal Centre - UK
- Indika Energy - Indonesia
- Bangladesh Power Developement Board
- Bulk Trading Sa - Switzerland
- Altura Mining Limited, Indonesia
- Semirara Mining Corp, Philippines
- Timah Investasi Mineral - Indoneisa
- Holcim Trading Pte Ltd - Singapore
- IHS Mccloskey Coal Group - USA
- Goldman Sachs - Singapore
- PowerSource Philippines DevCo
- SMG Consultants - Indonesia
- Carbofer General Trading SA - India
- Neyveli Lignite Corporation Ltd, - India
- Indian Oil Corporation Limited
- Globalindo Alam Lestari - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Semirara Mining and Power Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- CNBM International Corporation - China
- Toyota Tsusho Corporation, Japan
- Bhushan Steel Limited - India
- Medco Energi Mining Internasional
- Malabar Cements Ltd - India
- ASAPP Information Group - India
- Intertek Mineral Services - Indonesia
- New Zealand Coal & Carbon
- Leighton Contractors Pty Ltd - Australia
- Iligan Light & Power Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Ambuja Cements Ltd - India
- Maharashtra Electricity Regulatory Commission - India
- Kalimantan Lumbung Energi - Indonesia
- Energy Link Ltd, New Zealand
- Gujarat Sidhee Cement - India
- Thai Mozambique Logistica
- Georgia Ports Authority, United States
- Renaissance Capital - South Africa
- Singapore Mercantile Exchange
- Pendopo Energi Batubara - Indonesia
- Xindia Steels Limited - India
- Chamber of Mines of South Africa
- Aboitiz Power Corporation - Philippines
- London Commodity Brokers - England
- VISA Power Limited - India
- Borneo Indobara - Indonesia
- Mercuria Energy - Indonesia
- Mintek Dendrill Indonesia
- Ministry of Finance - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Standard Chartered Bank - UAE
- Vedanta Resources Plc - India
- Port Waratah Coal Services - Australia
- Samtan Co., Ltd - South Korea
- South Luzon Thermal Energy Corporation
- Sarangani Energy Corporation, Philippines
- Krishnapatnam Port Company Ltd. - India
- Oldendorff Carriers - Singapore
- The State Trading Corporation of India Ltd
- Rashtriya Ispat Nigam Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Indo Tambangraya Megah - Indonesia
- Videocon Industries ltd - India
- Orica Australia Pty. Ltd.
- Vijayanagar Sugar Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Makarim & Taira - Indonesia
- Independent Power Producers Association of India
- Eastern Coal Council - USA
- Pipit Mutiara Jaya. PT, Indonesia
- LBH Netherlands Bv - Netherlands
- Therma Luzon, Inc, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Australian Commodity Traders Exchange
- Planning Commission, India
- Wood Mackenzie - Singapore
- Marubeni Corporation - India
- Deloitte Consulting - India
- Grasim Industreis Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Kaltim Prima Coal - Indonesia
- GMR Energy Limited - India
- Antam Resourcindo - Indonesia
- White Energy Company Limited
- Riau Bara Harum - Indonesia
- McConnell Dowell - Australia
- AsiaOL BioFuels Corp., Philippines
- Star Paper Mills Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mercator Lines Limited - India
- Coalindo Energy - Indonesia
- Merrill Lynch Commodities Europe
- The University of Queensland
- Indonesian Coal Mining Association
- Billiton Holdings Pty Ltd - Australia
- Bayan Resources Tbk. - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Global Business Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- PTC India Limited - India
- Electricity Authority, New Zealand
- Heidelberg Cement - Germany
- Trasteel International SA, Italy
- Edison Trading Spa - Italy
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