Bukit Asam Faces Bleak Outlook on Falling Coal Price

State-controlled mining company PT Bukit Asam is still seeing pressure on its business as cost cutting measures and increases in production cannot offset the decline in commodity prices.

President director Milawarma said Bukit Asam’s selling price kept falling around 3 to 4 percent during the January-May period this year, compared with the same period last year.

“Our production volume is around 6 percent higher and sales volume is 5 percent higher. However, overall cost also rose around 9 percent,” Milawarma said.

Poor performance would likely continue throughout the year, he added.

Bukit Asam is targeting to sell 24 million tons of coal by the end of the year, increasing by around 33 percent compared to last year.

Coal miners are currently suffering from a low selling price apparently because of oversupply in the market as producers continue producing while demand — particularly in China — is weakening due to slowing economic growth.

The benchmark Newcastle thermal coal was around US$57 per ton at the end of May, according to figures from Reuters. The price dropped 11 percent this year and is already less than a half of a peak level of around $130 per ton in 2011.

Meanwhile, the country’s Energy and Mineral Resources Ministry mineral and coal office set the Indonesian coal reference price (HBA) at $59.59 per ton for June, which is 2.4 percent lower compared to $61.08 in May. On a year-on-year (yoy) basis, the June HBA price is 19 percent lower compared to $73.64 per ton in June 2014.

As the global coal price keeps declining, Bukit Asam and all coal miners in the country are struggling to maintain their operations. The coal companies are taking various measures to cut costs, such as lowering the stripping ratio — which is the ratio of volume of waste material that must be removed to get the coal — to maintain their profit. 

Many miners are also pumping out production volume to balance the lower price.

During the Coaltrans Asia conference early this month, some industry players said Indonesian coal miners had limited ability to reduce costs further.

Milawarma meanwhile said big mining companies would likely continue reducing their costs and raising output.

“Medium and low-level players might have limited space for further cost reductions. However, big miners would still try to increase their volume so that they could reduce the cost per ton of coal,” he said.

Indonesian Coal Mining Association (APBI) chairman Pandu Sjahrir earlier said that around 50 to 60 percent of mining firms in the country were selling coal below their cash costs.

“It means that the more they produce, the more they are losing,” Pandu said.

Bukit Asam, whose shares are traded on the Indonesia Stock Exchange (IDX) under PTBA, reported poor financial performance in the first quarter of the year due to falling coal prices.

The company booked a 36.5 percent drop in net profits in the January-March period of this year compared to the same period last year.

Shares in PTBA were selling for Rp 9,350 a piece at 2:31 p.m. Jakarta time, increasing by 1.08 percent from a day earlier.

Indonesia Coal Production Falls Between Jan-May

Jakarta. The Ministry of Energy and Mineral Resources announced that coal production declined to 166 million tons between January and May, a 19 percent drop on the same period last year.

Adhi Wibowo, director of coal business development at the ministry, said rainy weather and lower margins for producers due to weak commodity prices contributed to the fall in production.

A total of 135 million tons was produced for export and 31 million tons for the domestic market. The government requires producers to set aside some of their coal to be sold domestically.

This year, the Indonesian government set a target for miners operating in the country of 425 million tons, of which 315 million would be exported and 110 million sold domestically.

The Real Cost of Indonesia’s Commodity Export Restrictions

The Indonesian government has geared up its efforts to limit raw commodity exports. Although the policy measures are applicable to all sectors — coal, gas, liquefied natural gas (LNG) and minerals — the instruments used and the intensity of the curtailment vary across commodities. 

The government’s aspiration to move up the industry value chain and secure long-term supplies for the domestic market are the main drivers behind these initiatives. 

While policies may yield benefits for Indonesia in the longer term, they also bring many near-term challenges. The trade balance could further deteriorate from shrinking export revenues. As a result, both investor confidence and economic growth could suffer. 

To recap, a raw mineral export ban has been applied to nickel, bauxite, chromium, gold, silver and tin. Under a progressive export tax until 2017, exemptions were given to copper concentrates, iron ores, manganese, lead and zinc. 

In the coal mining sector, additional requirements were imposed from August 2014 for coal producers to obtain registered licenses as a condition to export. 

For gas, domestic market obligations are on the rise, with LNG exports cut to allow more volume to go to domestic consumers. In April 2015, the use of letters of credit for export payment for key commodities, excluding oil and gas, was also made mandatory. 

This move is expected to spur the development of domestic processing industries and associated infrastructure, creating new job opportunities and revenue streams in the country. 

The industrial sector is important to consider because it accounts for 47 percent of current GDP, and the government is seeking to prioritize the sector’s development, shifting away from agriculture. 

Indonesia’s energy consumption is expected to nearly double from 226 million tons of oil equivalent (mtoe) in 2015 to 418 mtoe in 2035, so substantial investment in the energy sector will also be required. 

Additionally, export restriction also aims to secure resources for domestic use. The government anticipates growing energy requirements from the domestic market, particularly in the electricity sector, as the country ramps up the development of new power plant projects, which will be fuelled mainly by coal and gas. 

Electricity will be a key component particularly given per capita electricity consumption in Indonesia is extremely low, at just 782 kilowatts per hour. 

In fact, close to 23 percent (60 million) of the population does not have regular access to electricity. But there will be a delay before the new power plants are up and running, with great uncertainty as to whether they can be delivered on time.

The short-term implications for Indonesia’s trade balance are already being felt. Energy and mining commodities form a significant part of export revenues, with coal and gas the largest contributors, accounting for 27 percent of total export revenue. Copper, nickel and bauxite ores and concentrates are also in the top ten contributors to export revenue. 

For these reasons, Indonesia’s trade position is highly sensitive to these commodities, which are the primary focus of the government’s policies. They experienced a combined loss of US$6.4 billion in export revenue. 

Indonesia’s trade balance has been deteriorating since 2012 as a result of shrinking export revenues, but the recent softening of commodity prices has exacerbated this. 

Such losses in export revenue could also affect the current account and position of the rupiah. Indirectly, both investor confidence and economic growth could suffer.

At the moment, there is a mismatch between the pace of policy implementation and market readiness. So far, development of domestic smelters and related support infrastructure has been quite limited. 

At the same time, for mineral producers, such as nickel and bauxite, the combination of outright export ban and lack of domestic processing plants further reduces market options for these domestically produced commodities. 

This results in mine closures, reduced activities and suppressed production.

In the gas sector, aside from lost export revenues, domestically allocated LNG cargoes in 2014 were not fully absorbed by local off-takers following lower demand and infrastructure constraints. 

The LNG export approval process hasn’t been quick or flexible enough to send the stranded cargoes to the international market in a timely manner.

Last year, this led to production curtailment from the Offshore Mahakam and Sanga-sanga areas in East Kalimantan and Vorwata in West Papua. If this is not mitigated properly, we could see a similar scenario repeated in the future, which will result in more production losses. 

The production curtailment may also affect the future performance of gas fields — immediate shutdowns of gas production will negatively impact reservoir performance and, in the future, require further investment to restart these gas fields.

On the coal front, the market has been less affected by the recent measures, mainly because current production is still way above the allocated domestic market obligation. 

But the impact has been felt by illegal miners, who do not pay royalties to the government. That said, as domestic coal demand continues to grow, the measures could expand in the future.

If it is to handle short-term pain and achieve its aspirations of encouraging foreign investment and securing domestic supply, Indonesia must still overcome obstacles in its commodities export restrictions. 

First, there is a clear urgency to develop domestic mineral-processing facilities. An export ban alone won’t deliver this. Concerted efforts are also required to mobilize funding, simplify permit requirements and develop support infrastructure, such as port facilities and power supply. If this does not occur, activities in the mining sector will not recover.

Second, making more supply available to the domestic market won’t necessarily lead to increased demand, given demand is also influenced by infrastructure availability and the market’s ability to pay. 

Third, there is a need for more regulatory certainty. This is evident from the fact that there was little progress in the development of domestic processing facilities between the formulation of the new mining law in 2009 and its effective implementation in January 2014. 

An ambiguous policy will not encourage market players to comply. Instead, the possibility of regulatory reversals will cause the market to take a wait-and-see approach, hoping for decisions to be reversed. 

Regulations that are firm but well planned and carefully thought through, on the other hand, will be effective in most cases.

To successfully achieve its objectives, the government needs to make a strong push in spurring and promoting domestic demand and developing new infrastructure, instead of simply focusing on cutting exports. Concerted efforts are required but seem to be missing elements from the overall experience thus far. 

Indonesia’s Reference Coal Price Hits All-Time Low in May 2015

On Monday (11/05), it was announced that the reference coal price of Indonesia declined 5.2 percent (month-on-month) to an all-time low of USD $61.08 per metric ton in May. This benchmark price, which is set by the government each month based on the average of four coal indexes (Indonesia Coal Index, Platts Index, New Castle Export Index and New Castle Global Coal Index), continued to plummet due to the coal oversupply in combination with weak global coal demand (particularly falling demand from China).
The Indonesian government introduced its reference coal price in 2009 in order to make a transparent benchmark to calculate coal royalties for Indonesian miners. On a year-on-year basis, the government’s reference price has fallen 17 percent in May from the same month last year.

The coal oversupply in recent years has been caused by falling global demand amid reduced economic activity (particularly in China). However, the oversupply has been exacerbated by miners’ efforts to increase production volumes in order to generate more revenue and maintain a healthy cash flow, while enhancing cost-efficiency in their operations. However, as global coal prices kept falling, coal miners have reportedly curbed production volumes (or stopped production altogether) in 2015 as free cash flows of various Indonesian coal miners turned negative. Current conditions in the coal mining industry of Indonesia are particularly tough for the smaller coal miners, while the midsized and larger coal miners still have sufficient cash reserves (although margins are declining).

Declining rates of coal production should have a positive impact on global coal prices toward the future. However, more importantly, global economic growth should accelerate (especially in China) in order to push coal prices back up.

Previously, the Indonesian government announced that it would raise coal royalties in May 2015 by nearly 100 percent in order to generate more funds for its development goals. Stakeholders in the coal industry have objected fiercely to this policy as conditions are already extremely tough for miners amid the low coal prices.

The government targets a coal production rate of 425 million metric tons in 2015, about one-fourth of which to be allocated for the domestic market (the remainder for export purposes). However, Pandu Sjahrir, Chairman of the Indonesian Coal Mining Association (APBI), expects that Indonesian coal production may decline to about 375 million metric tons in 2015, down from 458 million tons in 2014 as the economic slowdown of China is worse than expected. In the first quarter of 2015 Indonesian coal output fell 21 percent (y/y) to 97 million tons.

Indonesian Production, Export and Consumption of Coal:

   2007    2008    2009    2010    2011    2012    2013    2014
Production     217     240     254     275     353     412     474     458
Export     163     191     198     210     287     345     402     382
Domestic      61      49      56      65      66      67      72      76

in million tons
Source: Indonesian Coal Mining Association (APBI)