Around the world, miners scramble for coal

Deal activity in the coal sector is being driven by growing demand from China and India. Nikhil Kumar reports

Even before we heard of Rio Tinto's $3.5bn (£2.2bn) approach for Mozambique-focused Riversdale Mining, the coal sector had seen more than a thousand mergers and acquisitions announced this year. If you are keeping count, Rio's approach takes the tally to 1,004, against 100 or so in 2004 and 60 at the turn of the century, according to figures from the research firm Dealogic.

The great coal rush of 2010 comes against the backdrop of rising demand from China and India, both of which are burning copious amounts of the black stuff to power their economies. China, for example, imported 34 million tons of coking coal – a key ingredient in the production of steel – in 2009, up almost fivefold on the year before. In India, total coal imports stood at more than 73 million tonnes this year, compated to less than 60 million tonnes in 2009.

Overall, Asia currently accounts for 66 per cent of global coal consumption, according to figures from Standard Chartered, whose analysts are eyeing a "massive" mismatch between supply and demand in years ahead. The global deficit, they say, could be as large as 30 million tonnes by 2018. Demand is such and the auguries so good that the bank expects the global coal market to nearly double to 12.8 billion tonnes by 2030. Given these and other forecasts, "miners who used to be satisfied with the capacity they had now feel under pressure to expand in this area," Olivetree Securities analyst Christian Georges said.

Mr Georges said there were two parts to Asia's appetite, namely thermal coal for power stations and coking or metallurgical coal for steel production. "There is a clear perception that the demand for metallurgical coal is expanding," he explained, highlighting China's role as both a major producer and consumer of steel, something that is confirmed by recent industry data.

Crude steel production stood at around 1.6 million tonnes per day over the first 20 days of November, according to figures from the China Iron and Steel Association, while output for the year is expected to climb to 624 million tonnes, up more than 8 per cent on last year's figure.

Looking ahead, the growth in global steel demand is forecast to slow to 5.3 per cent in 2011 – but still climb to a record 1.34 billion tonnes, according to figures from the World Steel Association. The key drivers? China, India and other fast-growing economies.

This potential no doubt provided the spur for Walter Energy's recent $3.3bn bid for Canada's Western Coal, AIM's largest company, which specialises in metallurgical coal.

The merger puts US-based Walter on track to become the world's number three producer of steel-making coal, leaving it well placed to cash in on increasing demand from China and elsewhere.

"Our combined production capacity and geographic footprint leaves us extremely well positioned to benefit from favourable sector dynamics driven by increased steel production in markets such as China, India and Brazil," Walter's interim chief executive, Joe Leonard, said when the merger was agreed earlier this month.

"Bottom line, this is the right transaction at the right time."

The appetite for thermal coal is also forecast to swell in coming years. The vast majority of China's energy needs are serviced by thermal coal plants, while more than half of India's electricity plants depend on coal. Beyond that, sector watchers point to the scope for expansion in the wider world as cash-strapped governments seek cheaper alternatives to atomic energy.

"There is a renewed expansion of atomic energy, but it's expensive and more dangerous," Mr Georges said, pointing out that thermal coal technology was well understood and much cheaper than nuclear. The case for coal has also been helped by improvements in ways to treat exhaust fumes and by innovations in carbon storage, he added.

Like steel-making coal and Walter Energy, the strength of the thermal coal market provides a useful context for another recent deal. Earlier this month, Vallar, the London-listed cash shell led by the financier Nat Rothschild, unveiled a complex $3bn transaction that will see it join forces with Indonesia's powerful Bakrie family to form a new venture that by 2013 is set to become the largest supplier of thermal coal to China.

Of course, Walter, Vallar and Rio are just three of the more than 1,000 deals announced this year. Back in July, Thailand saw its biggest overseas acquisition when coal producer Banpu agreed to buy Australia's Centennial Coal for $2bn, gaining an entry in the island nation's vast resources sector.

Weeks later in August, Australia's Linc Energy agreed to sell its Galilee coal project to India's Adani Enterprise in a cash and royalty deal worth a cool $2.7bn. In October, hopes were raised when Coal India said it was putting aside a $1.2bn war chest to fund overseas takeovers.

And so on and so forth until the Rio approach came to light this week.

Mozambique's resources

* Rio Tinto's approach for Mozambique-focused Riversdale Mining has thrown the spotlight on the former Portuguese colony, which holds vast, largely untapped, coal reserves.

Australia is world's the biggest producer of coal, making up for around 60 per cent of global consumption, according to Christian Georges, metals and mining analyst at Olivetree Securities. But he said: "At this point, [Mozambique] probably offers the cheapest and most widely available coal outside Australia."

Though large, the country's deposits of coal and other natural resources account for less than 5 per cent of GDP. But that figure is expected to rise as production picks up, with the mining minister, Esperança Bias, hoping to see a contribution of more than 12 per cent in the future. "I hope from 2011, the mining sector can contribute more than 5 per cent and maybe in the next five years, I would like to see the contribution being more than 12 per cent," she said last week. Coal production, for example, stands at 500 tonnes a year, but is set to climb to more than2 million tonnes next year, with future output forecast to peak at 10 million tonnes a year.

The Mozambique mining sector has attracted investments totalling $1bn this year, according to Ms Bias, with mineral exploration taking up more than half of that sum.

"Our doors are open... we are trying to improve our infrastructure so that when the mining companies want to export, the facilities will be there," she said, adding that the government had issued 1,000 mineral exploration licences.

Eyeing the country's potential, analysts expect Rio to face competition for Riversdale, which is 24 per cent-owned by India's Tata Steel. Besides Tata, Brazil's Vale, London-listed Xstrata and Anglo American are seen as possible rivals for the company, whose Zambeze project boasts one of the largest undeveloped coking coal resources in the world.

David Quinlivan, chairman of the AIM-listed Churchill Mining, said Mozambique was "strategically very important" for the coal industry, not least because of its location, with an easy supply route to India.

"India is investing in infrastructure, in ports, which makes it easier to supply from Mozambique," he said. Olivetree's Christian Georges said: "It all boils down to costs. Producing coal in the UK or northern Europe is two to three times more expensive than Australia," he explained. "Mozambique is much closer to Australia in production costs."

News
Pro-Russia rebels guard a train containing the bodies of victims of the Malaysia Airlines flight MH 17 crash in Torez, Ukraine
i100
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
PROMOTED VIDEO
News
people
Arts and Entertainment
Struggling actors who scrape a living working in repertory theatres should get paid a 'living wage', Sir Ian McKellen has claimed
theatre
News
Skye McCole Bartusiak's mother said she didn't use drink or drugs
peopleActress was known for role in Mel Gibson film The Patriot
Arts and Entertainment
filmThe Rock to play DC character in superhero film
News
i100
Arts and Entertainment
Damon Albarn is starting work on a new West End musical
artsStar's 'leftfield experimental opera' is turning mainstream
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Life and Style
Paul and his father
artsPaul Carter wants to play his own father in the film of his memoirs
Sport
Ben Stokes trudges off after his latest batting failure for England as Ishant Sharma celebrates one of his seven wickets
cricket
Arts and Entertainment
Members of the public are invited to submit their 'sexcapades' to Russell T Davies' new series Tofu
tv
News
Sky's Colin Brazier rummages through an MH17 victim's belongings live on air
i100
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch star in the Alan Turing biopic The Imitation Game
arts + ents'The Imitation Game' stars Benedict Cumberbatch and Keira Knightley
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Training Programme Manager (Learning and Development)-London

£28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

Training/Learning and Development Coordinator -London

£28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

Business Analyst (Systems/ Incident Analyst)

£40000 - £50000 Per Annum: Clearwater People Solutions Ltd: Business Analyst r...

BA/PM - Client Data

£500 - £550 per day: Orgtel: BA/PM - Client Data London (Greater)

Day In a Page

Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

Meet the people who play with Lego for a living

They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

20 best days out for the summer holidays

From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
Open-air theatres: If all the world is a stage, then everyone gets in on the act

All the wood’s a stage

Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
Rand Paul is a Republican with an eye on the world

Rupert Cornwell: A Republican with an eye on the world

Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
Self-preservation society: Pickles are moving from the side of your plate to become the star dish

Self-preservation society

Pickles are moving from the side of your plate to become the star dish
Generation gap opens a career sinkhole

Britons live ever longer, but still society persists in glorifying youth

We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor