Analyzing the prospects of overseas investment in coal industry of Bangladesh
Prepared By Rezaul Huda MBA Programme University of Southern Queensland Australia 2008
Table of Contents 1. Introduction 2. Coal industry and Bangladesh: 2.1. Present Business Environment 1 1 2
2.2. The PESTLE framework 2.2A: Political Factors 2.2B: Economic factors 2.2C: Social factors 2.2D: Technological factors 2.3. Industry’s role in world Economy
2 2 2 3 4 4
2.4. Major Global players in Coal industry
3. Research and Analysis for FDI 3.1. Attractiveness of Coal industry in Bangladesh 3.1.1. Five forces Analysis 3.1.1A. Substitute Power 3.1.1B. Buyer Power
6 6 6 7 7
3.1.1C. Supplier Power 3.1.1D. Barriers to Entry and Competitive Rivalry 3.1.2. Porter’s Diamond
8 8 9
3.1.2A Factors conditions
3.1.2B. Demand condition 3.1.2C. Related and Supporting industry
3.2. Bangladesh government policies and Regulation
3.3 Financial Budget 3.4 Entry Mode 4. Conclusion and Recommendation
12 12 13
1. Introduction: The objective of this paper to analyze the coal industry of Bangladesh, however find the prospects of overseas investment in this industry. Coal is one of the most rich fossil fuel resources, which is a complex mixture of organic chemical substances, containing carbon, hydrogen and oxygen in chemical combination. Coal has classified into four main types such as lignite, subbituminous, bituminous and anthracite. This classification depends on the amount and types of carbon it contain and the amount of heat energy it can produce. Coal has been using in different ways, such as electric utilities, industrial/retail users, the steel industry and exports. One of the most important ways is to make electricity. Power plants burn the coal to produce energy in the form of heat for changing water to steam. At the globalization period, the coal industry has ruling an important role in the global economy. World coal consumption is about 6.2 billion tons annually (World Coal Institute), of which about 75% used for the production of electricity. China produced 2.38 billion tons in 2007 where 83.2% of China's electricity comes from coal (China Coal Research Institute 2007) and India produced about 447.3 million tons in 2007 (World Coal Institute). The U.S. consumes about 1.053 billion tons of coal each year, using 90% of it for generation of electricity (WCI).
2. Coal industry and Bangladesh: Bangladesh has small coal reserves compare to other Asian country such as India. Bangladesh began commercial coal production in April 2003 with the opening of the Barapukuria Coal Mine, which expected to produce one million short tons of coal per year, primarily for electricity generation (Infrastructure Investment Facilitation Center Dhaka, Bangladesh). There is another plant in Parbotiper, which began commercial operation in January 2006 (IIFC 2007). Another possible coal-mining project at Khalashpir is under consideration as well. Despite Bangladesh’s small reserves, the government has recently promoted the development of coal to ease its reliance on natural gas for power generation. Bangladesh’s coal reserves have so far not been developing, mainly owing to a lack of domestic financing. To attract investment, the government has opened the coal sector to foreign bidding.
2.1. Present Business Environment: In analyzing the macro-environment, it is important to identify the factors that might in turn affect a number of vital variables that are likely to influence the organization’s supply and demand levels and its costs (Kotter and Schlesinger, 1991; Johnson and Scholes, 1993). The “radical and ongoing changes occurring in society create an uncertain environment and have an impact on the function of the whole organization” (Tsiakkiros, 2002 P 216).
2.2. The PESTLE framework: A number of checklists have been developing as ways of classification the huge number of possible issues that might affect on Coal industry. The PEST analysis is one of them that are merely a framework that categorizes environmental influences as political, economic, social and technological forces figure one shows the PESTEL framework for coal industry of Bangladesh. Sometimes two additional factors, environmental and legal issue might add to make a PESTEL analysis, but these themes can easily subsumed in the others. This classification distinguishes between: 2.2A: Political Factors: This refers to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide. Bangladesh government has full support in coal industry. Despite Bangladesh’s small reserves, the government has recently promoted the development of coal to ease its reliance on natural gas for power generation. Bangladesh’s coal reserves have so far not been developing, mainly owing to a lack of domestic financing. To attract investment, the government has opened the coal sector to foreign bidding. 2.2B: Economic factors: These include interest rates, taxation changes, economic growth, inflation and exchange rates. Bangladesh has limited known quantities of coal and other energy resources, which are critical to its long-term economic improvement and growth. Overall, Bangladesh operates at a low level of commercial energy consumption, which is a bottleneck to the country's economy. Through developing possibly the most significant coal reserve in Bangladesh, the coal-mining project and associated infrastructure has the potential to develop the northwest into a major industrial region. The government's political objectives and meets the
aspirations of the population, which collectively seek poverty reduction through employment, a growing private sector and improved social and human development. 2.2C: Social factors: The social factors changes in social trends can affect the demand for the industry production and the availability and willingness of individuals to work with that industry. The future growth and development of the coal industry is to be towards the greater interest of the people of Bangladesh and utilization of the coal resources that will be effect on regional development, including the sustainable development of social environment. Considering the Bangladesh economy coal industry could help the local people though the employment and it will contribute to develop the social infrastructures.
Source: Johnson G, Scholes K. 2005 p68 2.2D: Technological factors: New technologies create new products and new processes. Every industry has to concern about the new upcoming technology. The coal industry of Bangladesh is in its infancy stage with known Coal Reserves of 2.7 billion tons of coal (Bangladesh oil gas and Mineral corporation), one Underground mine of 1.0 million tons per
annum (Mtpa) capacity and one 250 MW coal fired power plant. The coal reserve can meet the country’s potential demand for many decades such as using the coal and it could help to generate electricity and meet the public demand.
2.3. Industry’s role in world Economy: Coal makes a significant contribution to global economic development by providing affordable and reliable energy. Coal supplies 40% of the world's electricity – more than the next two largest sources of electricity (gas and hydro) combined. It is also essential to over 66% of the world's steel production, as well as being used in other important industrial processes. Coal is mined in over 50 countries, and worldwide the industry directly employs some 7 million people. Much of the coal industry in developing countries is export oriented, making it a major source of foreign hard currency earnings, as well as saving import costs when used domestically. Coal is one of the affordable supplies of energy compare to gas and oil. Figure 2 shows the comparison between the oil, gas and coal at the $ per tonne.
Source: world coal institute 2.4. Major Global players in Coal industry: Coal production has grown fastest in Asia, while Europe has actually seen a decline in production. The top five producers are China, the USA, India, Australia and South Africa.
Considering the export, Australia is the largest export and the fastest growing industry. Figure 3 and 4 shows the major coal export country and the coal reserve consequently.
Source: World Coal Institute
Source: World Coal Institute 3. Research and Analysis for FDI: The United Nations Conference on Trade and Development (UNCTAD) states that “FDI is an investment involving a long-term relationship and reflecting a lasting interest and control by a
resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate)” (UN, 2006). There are several benefits of Foreign Direct Investment (FDI) on a macroeconomic level, particularly for a Third World Nation such as Bangladesh, where inflows of foreign investment can expand economic production and growth.
3.1. Attractiveness of Coal industry in Bangladesh: There are different concepts and frameworks for analyze the industry attractiveness. The Porter’s five forces and the Porter’s diamond have been taking to analyze the attractiveness of the coal industry Bangladesh. 3.1.1. Five forces Analysis: The five forces is the structural analysis which include at least a short review of suppliers, buyers and the threat from new entrants and substitution, as well as a scan of competitors together with their strengths and weaknesses lastly, analyze the substitute and compliment. Figure 5 shows the five forces for the coal industry of Bangladesh.
Sources: M.E. Porter, 1980, P 233
3.1.1A. Substitute Power: Products from one business can be replaced by products from another. If the consume have different option to choose their product then the marker will be much more competitive. “Direct and indirect substitutes, the more substitutes there are the less intense the competition will become” (Kermally, 2004. p59). In the coal industry, the oil and gas are the major substitute. However, the oil and gas has less influence on the coal industry because of the price fluctuation is higher than the coal. Figure 6 shows the comparison the price between the Oil, Gas and Coal.
Source: world coal institute
3.1.1B. Buyer Power: The buyer power over coal industry is not high. Coal has been using to produce the electricity, which has no other strong alternative. World coal consumption is about 6.2 billion tons annually, of which about 75% used for the production of electricity (World Coal Institute). However in Bangladesh the natural gas is the only commercial energy resource that mainly supports power generation. At present, more than 90% of power generation is dependent on it (IIFC, Bangladesh 2006). As per current forecast, the total remaining proven and probable (2P) gas reserves (November 2005) of 13.75 Tcf would meet the country’s projected energy demand upto 2011. After that, each year, there will be short supply of gas and by 2025, 16 to 26 Tcf of additional gas
would be required to support the projected gas demand of the country, based on GDP growth rates of 5.5 to 7% respectively (IIFC,2006). This short supply of gas would have to be managed either by discovery of additional gas fields or alternative sources of fuel such as coal. 3.1.1C. Supplier Power Any industry requires inputs—labor, parts, raw materials, and services. The cost of the inputs can have a significant effect on industries profitability. Bangladesh coal industry also has direct or indirect influence by the work force and timber industry. The wood is one of the major raw materials for the coal mining and the government has the influence on the timber industry because of global warming. So if the wood price goes up it will effect on the coal industry too, for this concern suppliers has the bargaining power over the coal industry. 3.1.1D. Barriers to Entry and Competitive Rivalry: It is very difficult to enter in the coal industry. To enter in coal industry every firm should concern some major factors such as; economics of scale, working capital requirement, absolute cost advantage, access of distribution and government policy. Regarding coal industry Bangladesh briefly this issue has been discuss below: Economics of scale: However, it requires lots of finance to set up coal mining but economies of scale still exist in the coal industry. Which mean that the high barrier to enter in coal industry.
Sources: Coal Industry Advisory Board 2006
Working capital requirement: To enter in the coal industry it requires high financial capital. According to world coal institute Mining investment over the period 2001-2030, at around $351 billion, represents close to 90% of the projected $400 billion investment in the coal industry (Figure 7). Cumulative coal-related global investment required in the bulk-dry cargo fleet is $34 billion (9%) and $13 billion (3%) in ports.
3.1.2. Porter’s Diamond:
The Porte’s diamond theory helps to understand the comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population. This model allows to analyzing why
some nations are more competitive than others are, and why some industries within nations are more competitive than other nation. Figure 8 shows the Porte’s diamond framework for Bangladesh coal industry. Considering the coal industry of Bangladesh the Porte’s diamond has been discussed blew.
3.1.2A Factors conditions: The factors condition are those issue of the country that regarding to the production such as the labor, infrastructure. For the coal industry in Bangladesh the factors conditions are the government policy regarding coal mining, the workforce the finance and the environment. The Government is to promote the Bangladesh coal industry to provide a most secure and sustainable source of energy for its economic development. Bangladesh government has the regulatory body for oversight strong such that all possible safety measures are taken for minimizing the impact to the surface and underground environment and control of the pollution, while mining, beneficiation or any other work is performed.
Source: Johnson, Scholes 2005 P73 3.1.2B. Demand condition: The demand condition of coal in Bangladesh is high considering the shortage of other resources. Gas is the only natural resources in Bangladesh, and it has been using for industry usage and electricity production. Because of shortage of gas production Bangladesh, government could not able to satisfy the home user demand in the west part of the country. According to the Petrobangla as per current forecast, the total remaining proven and probable (2P) gas reserves (November 2005) of 13.75 Tcf would meet the country’s projected energy demand up to 2011. After that, each year, there will need additional resources to support other industry. In the point of view, the shortage of gas the coal has high demand in Bangladesh.
3.1.2C. Related and Supporting industry: When local supporting industries are competitive, firms enjoy more cost effective and innovative inputs. This effect is strengthening when the suppliers themselves are strong global competitors. The timber industry is the supportive industry for coal, but taking into consideration global warming the timber industry in trouble. A study from Ohio State University, Columbus, state that
global warming trends may seriously harm North America's timber production industry. However, I will also effects on the Asian and African timber industry as well.
3.2. Bangladesh government policies and Regulation: The people’s republic of Bangladesh has significance to future growth and development of the coal industry and utilization of the coal resources aimed at integrated regional development, including a sustainable development of social environment. Private investment, local and foreign, is to be encouraged for coal exploration, development, production and marketing. Foreign investment in association with local investors and listing in Bangladesh stock exchanges is to be encouraged in case of large mine, coal-fired electricity generation and development of local technology in supplying equipment, spares and consumables, both for coal mining and coal-fired generation (Bangladesh power development board). The government also allowed to the investors to export coal. Government states that the Coal Export Ratio is to be 1:2 during the initial development period and 1:1 thereafter. The export of coal from Bangladesh will require the approval of the bureau in the form of a Coal export certificate that is provide after the receipt of proper data on coal production. According to the Bangladesh government policy all investor must have to pay the royalty for local coal use or export. The rate of royalty for export coal is to comprise of two components, one is the fixed royalty and another is variable royalty component. Which calculate based upon the following formula: Rt = FRC + (ECPt - ECPb)*10/ECPb Where,
Rt represents the rate of royalty in percentage of export goal during the quarter at any time t FRC represents fixed royalty component that will be 6% for opencast mines and 5% for underground mines The term (ECPt - ECPb)*10/ECPb represents the variable royalty component, as the premium for exporting coal, and shall not be less than zero
ECPt is the export coal price represented by the average of international coal price index for the preceding 3 months, at any time t, in $/tone ECPb is the base year coal price, and is to be taken to be US$ 25/tonne
3.3 Financial Budget: To enter in the coal industry it has took huge investment as well as have to concern the local government policy. The initial investment in the Phulbari mining project would be $1.4 billion, and the open-pit mine expected to produce 15 Mmst /y of coal to fuel a planned 500-megawatt power station. 3.4 Entry Mode: TOWS matrix has been analysis to identify the best way to enter in Bangladesh coal industry. Figure 9 shows the TOWS matrix for Bangladesh coal industry. By analyzing the external environment (threats and opportunities), and internal environment (weaknesses and strengths) of Bangladesh coal industry, this matrix generate the different strategic option such as joint venture, strategic alliance, foreign direct investment or internal development.
Source: Johnson, Scholes 2005 P347
Figure shows that Bangladesh coal industry has poor infrastructure that is weakness and substitute price going up and the global demand is the opportunity. In this aspect to do international business industry will prefer the joint venture. The combination of threat and weakness, threat and strength consequently prefer the internal development and the diversification or the strategic alliance. The best option is goes for foreign direct investment with the combination of the strength and the opportunity of Bangladesh coal industry. Bangladesh coal policy appreciates the foreign direct investment and that will be the best option for investment in coal industry.
4. Conclusion and Recommendation: However, Bangladesh has small coal, reserves compare to other Asian country such as India but they have been began commercial coal production in April 2003 with the opening of the Barapukuria Coal Mine, which expected to produce one million short tons of coal per year, primarily for electricity generation (Infrastructure Investment Facilitation Center Dhaka, Bangladesh). Bangladesh government will appreciate the foreign investment in coal sector; they believe it will help to country development. According to the PEST analysis, it shows that this industry has the positive external environmental. To concern about the foreign investment the Porters five forces and diamond indicate the attractiveness of Bangladesh coal sector. However, Bangladesh has lack of infrastructure shortage of land but they do have the work force and full government support. As a matter of fact the FDI(foreign direct investment) will be the best choices to enter this market because considering the strength and the opportunity of Bangladesh coal industry indicate that the FDI will be better option to enter this market.
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