11 de diciembre de 2014 / 4:38 / en 3 años

COLUMN-Big miners' coal M&A activity points to price bottoming out: Russell

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Dec 11 (Reuters) - If you were looking for a sign that coal prices have finally bottomed out, then the ramping up of merger and acquisition activity is often a good indicator.

Just as major mining companies tend to buy assets at inflated prices at the zenith of the market, they tend to sell them at discounts at the nadir.

In the past few days, a flurry of announcements have hit the headlines, including Anglo American’s proposed sale of coal assets in Australia and South Africa, and Peabody Energy and Glencore agreeing to form a joint venture at neighbouring mines in Australia’s Hunter Valley basin.

The M&A activity hasn’t been limited to Australia and South Africa, with Brazil’s Vale selling a stake in its Mozambique mine to Japan’s Mitsui, and Consol Energy saying it plans to pursue an initial public offering of some of its U.S. thermal and coking coal assets.

Companies tend to use obfuscatory language in the announcements of these deals, often resorting to terms such as “unlocking shareholder value” or “maximising synergies,” but behind the spin is often the simple message that the assets are loss-making and the pain on the bottom line has become too much to bear, or if they are profitable, they aren’t providing enough of a return on capital.

Selling loss-making coal mines can provide some short-term relief to a company’s balance sheet, even if the management of the firm believes in the longer-term story of the asset.

Witness Rio Tinto’s decision this year to sell its Mozambique coal mines for a token $50 million, having paid $4 billion in 2011 to gain a foothold in what was then seen as one of the world’s most promising undeveloped coal basins.

Rio Tinto bought at the top of the market, with the spot price of thermal coal at Australia’s Newcastle Port , an Asian benchmark, peaking at $136.30 a tonne in January 2011 and metallurgical coal reaching a record around $330 in the middle of that year.

Since then, Newcastle coal has steadily declined, reaching a 5-1/2 year low of $62.25 a tonne last week, a drop of 74 percent since the 2011 high, while metallurgical coal has slumped by about two-thirds to around $110.

Ultimately Rio Tinto’s management took the view that spending more cash to develop the necessary infrastructure to scale up its Mozambique operations made little sense at a time of sustained low prices, even if the company believes in the longer-term demand outlook.

It’s worth noting that Rio Tinto is adamant that its mines in Australia aren’t up for sale, and it has been cool to suggestions that Glencore’s proposed merger of the two mining giants would be especially good for the coal assets.

BUYING COAL MINES STILL RISKY

So, is it a good time to be buying a coal mine, even at a bargain price?

The seaborne market is still well oversupplied and the world’s top importer, China, seems to be on the warpath against pollution, which means cutting the growth of coal given it is the dominant fuel in the world’s second-biggest economy.

There has been talk that China is close to “peak coal” - the time at which it will use the maximum amount of the fuel before consumption starts to drop.

China’s peak coal has been forecast to come between 2022 and 2027 but organisations such as the government-affiliated Energy Research Institute and the U.S.-based Natural Resources Defense Council are predicting coal use will top out before 2020.

However, there are reasons to be sceptical about the early onset of peak coal in China, or indeed across Asia as a whole.

The International Energy Agency, in a preview of next week’s medium-term coal report, said that for China’s coal use to peak by 2019, one of the following would have to happen.

Economic growth would have to slow to 3 percent from 2015 onwards, GDP and electricity growth would have to decouple by 4.5 percentage points or China would need to generate an additional 2,500 terawatt hours from natural gas, nuclear or renewables.

The first two are implausible and the third would require China to raise natural gas consumption by 250 percent if it used this fuel for the additional electricity.

In other words, China’s coal demand looks set to grow for some time to come, and will probably reach the government’s 4.2 billion tonne per annum limit within the next few years, up from current annual consumption of around 3.8 billion tonnes.

Of course, China probably has the ability to mine and transport all of its own coal needs, so even increased demand might not translate into higher imports.

But the rest of Asia, led by India, probably will import more coal in the next few years, given the development of new power plants in Malaysia, Thailand and Vietnam.

It’s also possible Indonesia, the top exporter of thermal coal, will ship less of the fuel as its domestic needs grow and the government cracks down on illegal mining.

Overall, the medium- to longer-term outlook for coal in Asia is still fairly positive, meaning those with sufficient risk appetite and deep enough pockets to ride out low prices for a while yet may be just end up getting some bargains as the big miners offload underperforming assets.

Editing by Joseph Radford

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