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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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Tuesday, 07 April 15
Q3 FOB RICHARDS BAY COAL SWAP CLOSED AT $ 55.96 PMT; DOWN 8.40% M-M
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q2' 2015 declined month over month and week on week.
The Q2 swap has declined U ...
Monday, 06 April 15
INDONESIA'S HBA FIXED AT US$ 64.48 PMT FOR APRIL DELIVERY; DOWN 4.84% M-M
COALspot.com - The Ministry of Energy & Mineral Resources of Indonesia revised down Indonesian coal benchmark prices to US$ 64.48 per MT in Apr ...
Monday, 06 April 15
FOB NEWCASTLE COAL SWAP DECLINED 12% MONTH OVER MONTH
COALspot.com: API 5 FOB Newcastle Coal swap for Q2’ 2015 delivery declined US$ 6.23 per MT (-12%) month over month and US$ 0.86 (-1.85%) week ...
Monday, 06 April 15
CFR SOUTH CHINA COAL SWAP FALL CONTINUES
COALspot.com: API 8 CFR South China Coal swap for Q2’ 2015 delivery declined US$ 5.96 (-10.37%) per MT month over month and US$ 0.98 (- ...
Sunday, 05 April 15
FREIGHT RATES UNDER PRESSURE WEEK OVER WEEK
COALspot.com: The Indices fell on all segments and the market seemed to soften this week.
The BDI was almost lost 1.34% week over week and clo ...
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- Dr Ramakrishna Prasad Power Pvt Ltd - India
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- Standard Chartered Bank - UAE
- Bukit Asam (Persero) Tbk - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Metalloyd Limited - United Kingdom
- Bayan Resources Tbk. - Indonesia
- Bharathi Cement Corporation - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Formosa Plastics Group - Taiwan
- Sical Logistics Limited - India
- Global Business Power Corporation, Philippines
- SMG Consultants - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Mercuria Energy - Indonesia
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- Kumho Petrochemical, South Korea
- San Jose City I Power Corp, Philippines
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- Jorong Barutama Greston.PT - Indonesia
- Singapore Mercantile Exchange
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- MS Steel International - UAE
- PTC India Limited - India
- Coalindo Energy - Indonesia
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- Independent Power Producers Association of India
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- Kaltim Prima Coal - Indonesia
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- South Luzon Thermal Energy Corporation
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- Parliament of New Zealand
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- Bhushan Steel Limited - India
- Parry Sugars Refinery, India
- Cement Manufacturers Association - India
- Global Coal Blending Company Limited - Australia
- New Zealand Coal & Carbon
- Minerals Council of Australia
- Kobexindo Tractors - Indoneisa
- Planning Commission, India
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- Borneo Indobara - Indonesia
- Larsen & Toubro Limited - India
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- The Treasury - Australian Government
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- Semirara Mining and Power Corporation, Philippines
- Ceylon Electricity Board - Sri Lanka
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- Medco Energi Mining Internasional
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- Bhatia International Limited - India
- Heidelberg Cement - Germany
- Riau Bara Harum - Indonesia
- Interocean Group of Companies - India
- Petron Corporation, Philippines
- Sindya Power Generating Company Private Ltd
- Globalindo Alam Lestari - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Posco Energy - South Korea
- Sinarmas Energy and Mining - Indonesia
- IEA Clean Coal Centre - UK
- Bank of Tokyo Mitsubishi UFJ Ltd
- Africa Commodities Group - South Africa
- Indian Energy Exchange, India
- AsiaOL BioFuels Corp., Philippines
- The State Trading Corporation of India Ltd
- Orica Mining Services - Indonesia
- Coastal Gujarat Power Limited - India
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- Georgia Ports Authority, United States
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- Wilmar Investment Holdings
- VISA Power Limited - India
- Energy Development Corp, Philippines
- Timah Investasi Mineral - Indoneisa
- IHS Mccloskey Coal Group - USA
- Attock Cement Pakistan Limited
- Directorate Of Revenue Intelligence - India
- Pipit Mutiara Jaya. PT, Indonesia
- Gujarat Electricity Regulatory Commission - India
- Australian Coal Association
- TNB Fuel Sdn Bhd - Malaysia
- Uttam Galva Steels Limited - India
- Samtan Co., Ltd - South Korea
- Romanian Commodities Exchange
- Power Finance Corporation Ltd., India
- Barasentosa Lestari - Indonesia
- Commonwealth Bank - Australia
- Mjunction Services Limited - India
- Aboitiz Power Corporation - Philippines
- CNBM International Corporation - China
- Banpu Public Company Limited - Thailand
- International Coal Ventures Pvt Ltd - India
- Eastern Energy - Thailand
- Semirara Mining Corp, Philippines
- GAC Shipping (India) Pvt Ltd
- Central Electricity Authority - India
- Holcim Trading Pte Ltd - Singapore
- Indo Tambangraya Megah - Indonesia
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- Anglo American - United Kingdom
- Jaiprakash Power Ventures ltd
- Ministry of Transport, Egypt
- Rashtriya Ispat Nigam Limited - India
- GMR Energy Limited - India
- Billiton Holdings Pty Ltd - Australia
- Madhucon Powers Ltd - India
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- Bulk Trading Sa - Switzerland
- Orica Australia Pty. Ltd.
- Deloitte Consulting - India
- Port Waratah Coal Services - Australia
- McConnell Dowell - Australia
- Kapuas Tunggal Persada - Indonesia
- Star Paper Mills Limited - India
- Bhoruka Overseas - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Bangladesh Power Developement Board
- Manunggal Multi Energi - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Marubeni Corporation - India
- Sarangani Energy Corporation, Philippines
- Tata Chemicals Ltd - India
- Sakthi Sugars Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
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- GVK Power & Infra Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Dalmia Cement Bharat India
- Xindia Steels Limited - India
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- Toyota Tsusho Corporation, Japan
- Therma Luzon, Inc, Philippines
- Krishnapatnam Port Company Ltd. - India
- The University of Queensland
- Siam City Cement PLC, Thailand
- Global Green Power PLC Corporation, Philippines
- Vizag Seaport Private Limited - India
- European Bulk Services B.V. - Netherlands
- Antam Resourcindo - Indonesia
- Chamber of Mines of South Africa
- Indian Oil Corporation Limited
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- Savvy Resources Ltd - HongKong
- LBH Netherlands Bv - Netherlands
- Ministry of Finance - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Renaissance Capital - South Africa
- Indonesian Coal Mining Association
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- Eastern Coal Council - USA
- Lanco Infratech Ltd - India
- Siam City Cement - Thailand
- Sojitz Corporation - Japan
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- Binh Thuan Hamico - Vietnam
- Simpson Spence & Young - Indonesia
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- ICICI Bank Limited - India
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- GN Power Mariveles Coal Plant, Philippines
- Energy Link Ltd, New Zealand
- Baramulti Group, Indonesia
- Electricity Authority, New Zealand
- Malabar Cements Ltd - India
- Latin American Coal - Colombia
- Ind-Barath Power Infra Limited - India
- SMC Global Power, Philippines
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- Economic Council, Georgia
- Thiess Contractors Indonesia
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- Petrochimia International Co. Ltd.- Taiwan
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