With no roadblocks or red tape, the ease of doing business in that country is the most attractive factor.
Australia may be a bitter adversary for Indian cricket fans, but for Indian companies scouting for coal assets, there couldn’t have been a better choice.
Two Indian companies have made major acquisitions in Australia in the last few months. First, Adani Enterprises purchased Linc Energy’s Galilee coal tenements for $2.7 billion in August last year. Second, power producer Lanco Infratech recently acquired Griffin coal assets for $750 million. But, the Australian story does not seem to end there. Three major Indian groups — Essar, GVK and Lanco — are bidding for $2-billion coal mines, put up for sale by Hancock Coal.
With these investments, India has joined the ranks of Japan, South Korea and US, which have been traditional investors in Australia. The reasons for a tilt towards Australia could be many, but J Suresh Kumar, the chief financial officer of Lanco who also led the takeover of Griffin, says the ease of doing business in Australia is the most attractive factor.
“Australia has a very consistent framework, which is open and transparent, making it relatively easy to do business there because there are no roadblocks or bureaucratic hassles. For example, we sent an application to the Foreign Investment Review Board and it was cleared in 30-45 days,” said Kumar.
In a stark contrast with processes in India, it takes just two days to register a company in Australia, and most of the work can be done through email. Last year, the country had 180 applications with the Foreign Investment Review Board and only three were rejected.
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“The Australian government policy is to encourage foreign direct investment, expansion of private investment, development of internationally-competitive export-oriented industries and creation of employment opportunities,” says Kylie Bell, Investment Commissioner (South Asia), Australian Trade Commission.
With an annual production in excess of 800 million tonnes, Australia is the world’s largest exporter of coal. The coal industry in the country is in an expansion mode. In April 2010, A$4.9 billion worth of infrastructure projects related to new coal mines and expansion of old ones were committed or under construction. This is throwing up opportunities for investment in the sector.
“Currently, mining assets for sale in Australia typically exist in early-stage projects, most commonly by forming a joint venture with an exploration company, but this means a longer lead time for production for potential investors. New coal areas like the Galilee Basin in Queensland and the Gunnedah Basin in New South Wales provide opportunities for larger Indian companies willing to fund infrastructure developments as part of a partnership agreement,” says Bell.
Australia vs Indonesia
With these advantages, Australia is poised to dethrone Indonesia as the favourite coal mining destination for Indian companies. Until three years back, with huge coal reserves, Indonesia was an obvious choice. It was more favourable because of its proximity to India which translates into lower freight charges for companies.
There had been a few high-profile acquisitions in Indonesia, too. Tata Power, which is currently developing imported coal-based ultra mega power project at Mundra, acquired 30 per cent stake in two coal mines of Bumi Resources for $1.1 billion in 2007. The very next year, Reliance Power bought three coal mines in South Sumatra region with an investment commitment of $2 billion. In 2009, GMR acquired Indonesian coal company Barasentosa Lestari for around $80 million.
The investment scenario, however, changed in late 2009, after Indonesia tightened its mining policy with regards to coal exports. “The statutory framework in Indonesia has raised concerns, as the new implementing regulations have restricted flexibility of pricing of coal and contract mining. Hence, the cash flows to the Indian power generation assets with a coal mine in Indonesia will be modified. This can affect their attractiveness. Prices will have to be globally benchmarked and, hence, the cannibalisation of mining profits for competitive power generation in India may no longer be an option,” said Dipesh Dipu, director at mining sector consulting practice of Deloitte.
These laws, formulated by the end of 2009 and effective in 2010, also made it tougher to own mines. The companies that acquire mines cannot employ a turnkey contract miner, because it is required that they are involved in some part of the value chain. This makes it tougher, particularly for power companies, as they have no experience in mining. Besides, companies now require clearance from municipal authorities along with the Federal government, making the process lengthier.
“The Indonesian coal market is also very unorganised and there is a lot of coal mafia at play. Besides, some of the best assets have already been taken, and the ones available now are at places that lack basic infrastructure. This means we have to make larger investments,” said a top official of a power company which had tried, unsuccessfully, to acquire a mine in Indonesia.
Coal mining experts also say that the unorganised nature of assets in Indonesia raises doubts on the quality of coal and the asset being promised, and there is uncertainity over the ownership too. On the other hand, Australian coal mining market is mature and offers proven reserves with a long track record.
The flip side: Costs add up
The Australian advantage, however, comes for a price. “Australian coal resources command a premium due to better coal quality. This must be considered when price to reserves ratio is being compared for evaluation,” said Dipu.
Australian grade coal, especially thermal coal (for power generation), has an average calorific value of 6,500 KCals. This is higher than that of the Indonesian coal, which is 5,500 KCals, and much higher than that of Indian coal (around 3,500 KCals).
But, higher grade coal from Australia does not add significant value to Indian power generation, which does not require it. In fact, Australian coal, with high calorific value, will have to be blended with low-grade Indian coal for thermal power plants, even as the new super-critical-technology-based power plants require coal with higher efficiency.
Shipping costs of Australian coal are also higher — by about $2 per tonne — if the coal assets are on the West Coast of Australia. If the mine is located along the East coast, inland transportation cost would be higher. Indonesia, on the other hand, offers many options for companies to choose to be close to a river or a water body. This helps the companies save on inland transportation costs. Companies like Reliance, which have acquired mines in Indonesia, are also investing in setting up rail infrastructure to save these costs.
These factors, experts say, may encourage some companies to still pursue Indonesia. “Corruption and bureaucracy might be tough for a European company to handle, but Indian companies know how to handle these. So, I think it would be wrong to assume that companies would shun the country completely,” said a top company official of a company.
Coal exports have become a necessary evil for Indian companies — both in the steel and power sector. The gap between demand and supply for coal in the country was originally projected at 51.1 million tonnes — 40.8 million tonnes (mt) coking coal and 10.2 mt thermal coal. This gap has now widened to 81 mt, increasing the need for companies to secure assets abroad to control coal price fluctuations.
“In the past few years, we have seen huge fluctuations in the coal market — from $200 per tonne in 2008 to $70 a tonne in 2009. Currently, coal prices are ruling at about $100 a tonne. In such a scenario, it becomes risky for companies to develop power without tying up coal resources,” said Pukhraj Sethiya, consultant (mining), PwC. Coal prices also indicate an upward trend. A recent commodity report by Macquarie projected that hard coking coal prices were expected to go up by 4-11 per cent, to $251 in 2011, and could settle at $223 in 2012.