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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, 20 October 15
API 5 FOB NEWCASTLE COAL SWAP CLOSED NEGATIVE
COALspot.com: API 5 FOB Newcastle Coal swap for Q4’ 2015 delivery decreased $1.23 per ton (2.86%) month over month to US$ 41.80 per ton. The ...
Monday, 19 October 15
RUSSIA MAJOR COAL MINER KRU CUTS 4.5 MLN T/YR "UNPROFITABLE" EURO SALES - JACQUELINE HOLMES
COALspot.com: Kuzbassrazrezugol (KRU), one of Russia's largest producers of high-quality coal, plans to cut its coal exports in 2016 by about 4 ...
Monday, 19 October 15
CFR SOUTH CHINA COAL SWAP CLOSED AT $48.68 PER TON
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery down just US cents 55 (1.12 %) per ton month over month.
A commodity ...
Monday, 19 October 15
KOMIPO SEEKS 1.28 MILLION T/Y COAL FOR DEC 2015 - Q2 2016
COALspot.com: South Korean state-owned utility Korea Midland Power (KOMIPO) issued an new tender for 1,280,000 Metric Tons (MT) of minimum 4,600 kc ...
Sunday, 18 October 15
THE BDI AND OTHER INDICES CLOSED OFF ON NEGATIVE NOTE THIS FRIDAY
COALspot.com: The BDI closed off on negative note this Friday compared to previous Friday's closing.
The BDI closed this Friday (16 Octobe ...
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- Indika Energy - Indonesia
- Grasim Industreis Ltd - India
- White Energy Company Limited
- Directorate Of Revenue Intelligence - India
- Jindal Steel & Power Ltd - India
- Madhucon Powers Ltd - India
- Electricity Authority, New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Sarangani Energy Corporation, Philippines
- Commonwealth Bank - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Tata Chemicals Ltd - India
- ICICI Bank Limited - India
- Bharathi Cement Corporation - India
- Rio Tinto Coal - Australia
- Formosa Plastics Group - Taiwan
- Energy Development Corp, Philippines
- Coastal Gujarat Power Limited - India
- The University of Queensland
- Videocon Industries ltd - India
- Global Coal Blending Company Limited - Australia
- Kobexindo Tractors - Indoneisa
- GN Power Mariveles Coal Plant, Philippines
- Central Java Power - Indonesia
- Aboitiz Power Corporation - Philippines
- Cigading International Bulk Terminal - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Antam Resourcindo - Indonesia
- Gujarat Sidhee Cement - India
- Minerals Council of Australia
- Makarim & Taira - Indonesia
- Eastern Coal Council - USA
- Sinarmas Energy and Mining - Indonesia
- Economic Council, Georgia
- Meenaskhi Energy Private Limited - India
- Coal and Oil Company - UAE
- Straits Asia Resources Limited - Singapore
- Maheswari Brothers Coal Limited - India
- Kartika Selabumi Mining - Indonesia
- Planning Commission, India
- Therma Luzon, Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- McConnell Dowell - Australia
- Orica Mining Services - Indonesia
- Australian Commodity Traders Exchange
- Maharashtra Electricity Regulatory Commission - India
- Altura Mining Limited, Indonesia
- Jaiprakash Power Ventures ltd
- Malabar Cements Ltd - India
- Independent Power Producers Association of India
- Vedanta Resources Plc - India
- Posco Energy - South Korea
- Marubeni Corporation - India
- Attock Cement Pakistan Limited
- Savvy Resources Ltd - HongKong
- Kepco SPC Power Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- PowerSource Philippines DevCo
- Karbindo Abesyapradhi - Indoneisa
- Salva Resources Pvt Ltd - India
- Ind-Barath Power Infra Limited - India
- Carbofer General Trading SA - India
- Bukit Asam (Persero) Tbk - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Power Finance Corporation Ltd., India
- AsiaOL BioFuels Corp., Philippines
- Australian Coal Association
- Iligan Light & Power Inc, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- ASAPP Information Group - India
- Interocean Group of Companies - India
- Ministry of Finance - Indonesia
- San Jose City I Power Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- Kaltim Prima Coal - Indonesia
- Aditya Birla Group - India
- Indogreen Group - Indonesia
- LBH Netherlands Bv - Netherlands
- Siam City Cement - Thailand
- Rashtriya Ispat Nigam Limited - India
- New Zealand Coal & Carbon
- CIMB Investment Bank - Malaysia
- Semirara Mining and Power Corporation, Philippines
- Africa Commodities Group - South Africa
- Samtan Co., Ltd - South Korea
- Ambuja Cements Ltd - India
- PNOC Exploration Corporation - Philippines
- Kideco Jaya Agung - Indonesia
- Oldendorff Carriers - Singapore
- Directorate General of MIneral and Coal - Indonesia
- Star Paper Mills Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Goldman Sachs - Singapore
- Trasteel International SA, Italy
- Pipit Mutiara Jaya. PT, Indonesia
- Barasentosa Lestari - Indonesia
- Semirara Mining Corp, Philippines
- Coalindo Energy - Indonesia
- Bhoruka Overseas - Indonesia
- Vizag Seaport Private Limited - India
- Holcim Trading Pte Ltd - Singapore
- Bayan Resources Tbk. - Indonesia
- Pendopo Energi Batubara - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- London Commodity Brokers - England
- Cement Manufacturers Association - India
- International Coal Ventures Pvt Ltd - India
- Renaissance Capital - South Africa
- Indian Energy Exchange, India
- GMR Energy Limited - India
- MS Steel International - UAE
- India Bulls Power Limited - India
- GVK Power & Infra Limited - India
- IHS Mccloskey Coal Group - USA
- PetroVietnam Power Coal Import and Supply Company
- PTC India Limited - India
- Sical Logistics Limited - India
- TeaM Sual Corporation - Philippines
- Thiess Contractors Indonesia
- Merrill Lynch Commodities Europe
- European Bulk Services B.V. - Netherlands
- Indonesian Coal Mining Association
- Thai Mozambique Logistica
- Bukit Makmur.PT - Indonesia
- Metalloyd Limited - United Kingdom
- Ministry of Transport, Egypt
- Sree Jayajothi Cements Limited - India
- Port Waratah Coal Services - Australia
- Gujarat Mineral Development Corp Ltd - India
- Baramulti Group, Indonesia
- Banpu Public Company Limited - Thailand
- Larsen & Toubro Limited - India
- Siam City Cement PLC, Thailand
- The Treasury - Australian Government
- Wood Mackenzie - Singapore
- Georgia Ports Authority, United States
- The State Trading Corporation of India Ltd
- Sojitz Corporation - Japan
- Uttam Galva Steels Limited - India
- Essar Steel Hazira Ltd - India
- Karaikal Port Pvt Ltd - India
- Eastern Energy - Thailand
- South Luzon Thermal Energy Corporation
- Standard Chartered Bank - UAE
- Mercuria Energy - Indonesia
- Bhushan Steel Limited - India
- Medco Energi Mining Internasional
- Sindya Power Generating Company Private Ltd
- Leighton Contractors Pty Ltd - Australia
- Neyveli Lignite Corporation Ltd, - India
- Kapuas Tunggal Persada - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Romanian Commodities Exchange
- Petron Corporation, Philippines
- Wilmar Investment Holdings
- Manunggal Multi Energi - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Chettinad Cement Corporation Ltd - India
- Parliament of New Zealand
- VISA Power Limited - India
- Central Electricity Authority - India
- Ceylon Electricity Board - Sri Lanka
- Indo Tambangraya Megah - Indonesia
- Meralco Power Generation, Philippines
- Parry Sugars Refinery, India
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bulk Trading Sa - Switzerland
- Borneo Indobara - Indonesia
- SN Aboitiz Power Inc, Philippines
- Tamil Nadu electricity Board
- Mjunction Services Limited - India
- OPG Power Generation Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- CNBM International Corporation - China
- Heidelberg Cement - Germany
- GAC Shipping (India) Pvt Ltd
- Kumho Petrochemical, South Korea
- Singapore Mercantile Exchange
- Billiton Holdings Pty Ltd - Australia
- Krishnapatnam Port Company Ltd. - India
- Energy Link Ltd, New Zealand
- Price Waterhouse Coopers - Russia
- Toyota Tsusho Corporation, Japan
- Latin American Coal - Colombia
- SMG Consultants - Indonesia
- Agrawal Coal Company - India
- Miang Besar Coal Terminal - Indonesia
- Dalmia Cement Bharat India
- Binh Thuan Hamico - Vietnam
- Bangladesh Power Developement Board
- Global Business Power Corporation, Philippines
- Orica Australia Pty. Ltd.
- Anglo American - United Kingdom
- SMC Global Power, Philippines
- Bukit Baiduri Energy - Indonesia
- Indian Oil Corporation Limited
- Simpson Spence & Young - Indonesia
- Bhatia International Limited - India
- Riau Bara Harum - Indonesia
- Sakthi Sugars Limited - India
- Mintek Dendrill Indonesia
- Ministry of Mines - Canada
- Mercator Lines Limited - India
- Xindia Steels Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Lanco Infratech Ltd - India
- Deloitte Consulting - India
- Timah Investasi Mineral - Indoneisa
- Electricity Generating Authority of Thailand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Chamber of Mines of South Africa
- Intertek Mineral Services - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Edison Trading Spa - Italy
- IEA Clean Coal Centre - UK
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