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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, 15 October 15
Q1' 16 FOB RICHARDS BAY COAL SWAP ADVANCED 2 PER CENT WEEK OVER WEEK
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q4' 2015 gain week over week and declined month over month.
The Q4 swap was dow ...
Tuesday, 13 October 15
DRY BULK SHIPPING FLEET NET EXPANSION WAS 1.3% DURING THIRD QUARTER, BUT ORDERBOOK REDUCED TO 17% OF THE TRADING FLEET
If the dry bulk market is to rebound on a sustainable level, it needs to limit the tonnage expansion, at least until demand picks up again, as Chin ...
Tuesday, 13 October 15
FOB NEWCASTLE COAL SWAP DECLINED 2 PER CENT MONTH OVER MONTH
COALspot.com: API 5 FOB Newcastle Coal swap for Q4’ 2015 delivery decreased $0.46 per ton (1.08%) month over month to US$ 42.17 per ton. The ...
Monday, 12 October 15
CFR SOUTH CHINA COAL SWAPS GAIN W-W; SLIGHTLY DOWN M-M
COALspot.com: API 8 CFR South China Coal swap for 4Q’ 2015 delivery down just US cents 3 (0.06 %) per ton month over month.
A commodity ...
Monday, 12 October 15
DRY BULK SHIPPING: MARKETS ARE SLOWLY IMPROVING FROM A VERY LOW LEVEL AS THE DEMAND SIDE FALTERS - HELLENIC SHIPPING NEWS
The dry bulk market is in the midst of a shift in demand patterns, which coupled with a tonnage supply overhang, has been facing headwinds over the ...
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- Economic Council, Georgia
- Kepco SPC Power Corporation, Philippines
- Wilmar Investment Holdings
- Directorate General of MIneral and Coal - Indonesia
- Jindal Steel & Power Ltd - India
- Malabar Cements Ltd - India
- Grasim Industreis Ltd - India
- Alfred C Toepfer International GmbH - Germany
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Mjunction Services Limited - India
- MS Steel International - UAE
- Xindia Steels Limited - India
- Ceylon Electricity Board - Sri Lanka
- GAC Shipping (India) Pvt Ltd
- Bhoruka Overseas - Indonesia
- Baramulti Group, Indonesia
- VISA Power Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indogreen Group - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bayan Resources Tbk. - Indonesia
- Medco Energi Mining Internasional
- San Jose City I Power Corp, Philippines
- New Zealand Coal & Carbon
- Vedanta Resources Plc - India
- Parliament of New Zealand
- Meenaskhi Energy Private Limited - India
- Energy Development Corp, Philippines
- Globalindo Alam Lestari - Indonesia
- Petron Corporation, Philippines
- Borneo Indobara - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Orica Australia Pty. Ltd.
- Port Waratah Coal Services - Australia
- Africa Commodities Group - South Africa
- Indian Energy Exchange, India
- Cement Manufacturers Association - India
- Orica Mining Services - Indonesia
- Makarim & Taira - Indonesia
- Sree Jayajothi Cements Limited - India
- Meralco Power Generation, Philippines
- Energy Link Ltd, New Zealand
- Commonwealth Bank - Australia
- Agrawal Coal Company - India
- Bulk Trading Sa - Switzerland
- Heidelberg Cement - Germany
- Deloitte Consulting - India
- ASAPP Information Group - India
- International Coal Ventures Pvt Ltd - India
- Cigading International Bulk Terminal - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- Planning Commission, India
- Central Java Power - Indonesia
- Interocean Group of Companies - India
- PNOC Exploration Corporation - Philippines
- Savvy Resources Ltd - HongKong
- Pendopo Energi Batubara - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Larsen & Toubro Limited - India
- London Commodity Brokers - England
- Rashtriya Ispat Nigam Limited - India
- Bhushan Steel Limited - India
- Dalmia Cement Bharat India
- Sojitz Corporation - Japan
- Formosa Plastics Group - Taiwan
- European Bulk Services B.V. - Netherlands
- Indian Oil Corporation Limited
- PTC India Limited - India
- Metalloyd Limited - United Kingdom
- Independent Power Producers Association of India
- Eastern Coal Council - USA
- SN Aboitiz Power Inc, Philippines
- Gujarat Electricity Regulatory Commission - India
- Antam Resourcindo - Indonesia
- Wood Mackenzie - Singapore
- Kideco Jaya Agung - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Salva Resources Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Central Electricity Authority - India
- Posco Energy - South Korea
- PetroVietnam Power Coal Import and Supply Company
- OPG Power Generation Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Sarangani Energy Corporation, Philippines
- Power Finance Corporation Ltd., India
- Altura Mining Limited, Indonesia
- Tamil Nadu electricity Board
- Kartika Selabumi Mining - Indonesia
- Attock Cement Pakistan Limited
- Indika Energy - Indonesia
- Australian Coal Association
- Videocon Industries ltd - India
- Renaissance Capital - South Africa
- Indonesian Coal Mining Association
- South Luzon Thermal Energy Corporation
- Semirara Mining Corp, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Parry Sugars Refinery, India
- Singapore Mercantile Exchange
- Maharashtra Electricity Regulatory Commission - India
- Minerals Council of Australia
- Kohat Cement Company Ltd. - Pakistan
- Samtan Co., Ltd - South Korea
- Sakthi Sugars Limited - India
- Eastern Energy - Thailand
- Billiton Holdings Pty Ltd - Australia
- Binh Thuan Hamico - Vietnam
- Thai Mozambique Logistica
- Coalindo Energy - Indonesia
- Thiess Contractors Indonesia
- Intertek Mineral Services - Indonesia
- Ambuja Cements Ltd - India
- GVK Power & Infra Limited - India
- Madhucon Powers Ltd - India
- Tata Chemicals Ltd - India
- Semirara Mining and Power Corporation, Philippines
- ICICI Bank Limited - India
- Ministry of Finance - Indonesia
- Sinarmas Energy and Mining - Indonesia
- India Bulls Power Limited - India
- Mercator Lines Limited - India
- Bhatia International Limited - India
- Neyveli Lignite Corporation Ltd, - India
- The University of Queensland
- The State Trading Corporation of India Ltd
- Uttam Galva Steels Limited - India
- Iligan Light & Power Inc, Philippines
- Oldendorff Carriers - Singapore
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Bahari Cakrawala Sebuku - Indonesia
- Sical Logistics Limited - India
- AsiaOL BioFuels Corp., Philippines
- Ministry of Transport, Egypt
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Directorate Of Revenue Intelligence - India
- Bukit Baiduri Energy - Indonesia
- Sindya Power Generating Company Private Ltd
- Miang Besar Coal Terminal - Indonesia
- Bharathi Cement Corporation - India
- Latin American Coal - Colombia
- Kapuas Tunggal Persada - Indonesia
- Gujarat Sidhee Cement - India
- Toyota Tsusho Corporation, Japan
- Anglo American - United Kingdom
- Price Waterhouse Coopers - Russia
- Edison Trading Spa - Italy
- Standard Chartered Bank - UAE
- Gujarat Mineral Development Corp Ltd - India
- LBH Netherlands Bv - Netherlands
- Karbindo Abesyapradhi - Indoneisa
- Trasteel International SA, Italy
- Straits Asia Resources Limited - Singapore
- Jaiprakash Power Ventures ltd
- Goldman Sachs - Singapore
- Siam City Cement PLC, Thailand
- GMR Energy Limited - India
- Karaikal Port Pvt Ltd - India
- Romanian Commodities Exchange
- CIMB Investment Bank - Malaysia
- The Treasury - Australian Government
- Chettinad Cement Corporation Ltd - India
- Barasentosa Lestari - Indonesia
- IHS Mccloskey Coal Group - USA
- Aditya Birla Group - India
- Simpson Spence & Young - Indonesia
- Ind-Barath Power Infra Limited - India
- Star Paper Mills Limited - India
- Mintek Dendrill Indonesia
- Australian Commodity Traders Exchange
- White Energy Company Limited
- Ministry of Mines - Canada
- Asmin Koalindo Tuhup - Indonesia
- SMC Global Power, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Electricity Authority, New Zealand
- Riau Bara Harum - Indonesia
- Essar Steel Hazira Ltd - India
- Maheswari Brothers Coal Limited - India
- Siam City Cement - Thailand
- Therma Luzon, Inc, Philippines
- CNBM International Corporation - China
- Indo Tambangraya Megah - Indonesia
- Electricity Generating Authority of Thailand
- TeaM Sual Corporation - Philippines
- IEA Clean Coal Centre - UK
- Marubeni Corporation - India
- Carbofer General Trading SA - India
- Petrochimia International Co. Ltd.- Taiwan
- Lanco Infratech Ltd - India
- Global Coal Blending Company Limited - Australia
- Vizag Seaport Private Limited - India
- Coastal Gujarat Power Limited - India
- Leighton Contractors Pty Ltd - Australia
- Holcim Trading Pte Ltd - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Merrill Lynch Commodities Europe
- Timah Investasi Mineral - Indoneisa
- Bangladesh Power Developement Board
- Georgia Ports Authority, United States
- McConnell Dowell - Australia
- Kaltim Prima Coal - Indonesia
- SMG Consultants - Indonesia
- Rio Tinto Coal - Australia
- Chamber of Mines of South Africa
- Banpu Public Company Limited - Thailand
- Mercuria Energy - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Global Business Power Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- GN Power Mariveles Coal Plant, Philippines
- Aboitiz Power Corporation - Philippines
- PowerSource Philippines DevCo
- Kalimantan Lumbung Energi - Indonesia
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