Coal Mining in Indonesia: Limited Reason for Optimism

Another interesting development is that stocks of miners listed on the Indonesia Stock Exchange (IDX) have performed well so far in 2016. The mining index of the IDX, which consists of the average of all mining companies (including coal miners), has climbed 10.31 percent since the year-start, outperforming the overall benchmark Jakarta Composite Index that only managed to climb 5.59 percent over the same period. However, mining is not the best index on the IDX. The miscellaneous index (+13.52 percent), consumer goods industry index (+13.29 percent), and manufacturing index (+11.77 percent) have seen higher returns between the year-start and 15 March 2016. Still, given the fact that the mining index was Indonesia's worst-performing index in 2015, its +10 percentage point growth in the first months of 2016 deserves some attention.

The strong performance of Indonesia's mining index is obviously closely related to the rising trend of crude oil prices that started in mid-February 2016. Brent and West Texas Intermediate have been gradually rising toward the USD $40 per barrel level (from 12-year low levels earlier this year) on the back of reports of oil production cuts in key oil producing regions. The globe's oil prices have been on a rising trend for one month now and this gives rise to speculation that the bottom was reached on 11 February.

Whether this is indeed the start of a prolonged period of rising commodity prices remains highly uncertain as there are still fundamental challenges: the commodity supply glut and slowing economic growth in China, the world's largest energy consumer and second-largest economy.

Regarding coal, the aforementioned 1.3 percent price rise in March 2016 cannot be regarded as the start of a sustained rebound (yet). This price increase is more likely the result of domestic factors rather than global ones. Domestic coal demand in Indonesia has increased due to the 0.9 percent (m/m) rise in the nation's industrial electricity consumption. On a year-on-year basis Indonesia's industrial electricity consumption grew 3.53 percent in February (3.9 terawatt-hour). This is positive as it signals strengthening in the country's manufacturing sector.

In the foreseeable future it will most likely be domestic factors that can support the performance of Indonesian coal miners. Last year, the government launched its ambitious 35,000 MW energy program. By building new power plants, mostly coal-fired, the government aims to add 35,000 MW to the nation's power capacity by 2019. This is particularly an opportunity for those coal miners that focus on domestic coal sales. There are also coal miners, such as Adaro Energy, that are expanding into the power generation sector and therefore have a solid (integrated) business model.

Indonesian Production, Export, Consumption & Price of Coal:

	2007	2008	2009	2010	2011	2012	2013	2014	2015
Production (in million tons)	217	240	254	275	353	412	474	458	376
Export (in million tons)	163	191	198	210	287	345	402	382	296
Domestic (in million tons)	61	49	56	65	66	67	72	76	80
Price (HBA) (in USD/ton)	n.a	n.a	70.7	91.7	118.4	95.5	82.9	72.6	60.1

^{Sources: Indonesian Coal Mining Association (APBI) & Ministry of Energy and Mineral Resources}

Regarding Indonesia's mining index, those mining firms that have experienced a strong performance are Adaro Energy (coal), Delta Dunia Makmur (coal), Harum Energy (coal), Tambang Batubara Bukit Asam (coal), Petrosea (coal), Elnusa (oil & gas), Medco Energi Internasional (oil, gas & coal), Aneka Tambang (coal & gold), and Timah (tin).

Key Points

• Coal prices will rise/fall in line with the performance of crude oil prices

• Given sluggish demand in China and the global supply glut, coal prices are not expected to experience a major rebound this year

• Domestic coal demand in Indonesia should rise on the back of the government's power program. Therefore, Indonesian coal miners that focus on domestic sales are in a better position

• Adaro Energy is an interesting stock pick because the company is involved in the USD $4 billion Batang plant, a 2 GW coal-fired power plant in Central Java. This project had been delayed due to land acquisition trouble but according to the latest stories progress has been made.

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Chris Flanagan | 16 Maret 2016 11.12

As a note on the land acquisition problems. It appears that the problem in Batang is not the land being acquired but others with surrounding land, not required, that want to cash in !