Coal Mining Update Indonesia: Coal Production to Fall in 2015

An important shift has been detected in Indonesia. Whereas previously, due to the sharp drop in global coal demand (especially from China), Indonesian coal miners had increased production rates to maintain a healthy cash flow (thus exacerbating the global oversupply and putting more downward pressure on coal prices), we now see these companies cutting production volumes (and some smaller miners have even stopped production altogether) as a last resort after other strategies to enhance cost-efficiency have already been employed. Benchmark coal prices in Asia have fallen about 20 percent over the last year causing serious financial troubles for players in the coal mining industry.

Sjahrir said that Indonesian coal production may fall to between 350 and 400 million metric tons this year, from 458 million tons in 2014 as the Chinese slowdown is worse than expected. This decline is an unusual situation considering that the country’s coal output has been growing for at least 30 years.

Indonesian coal output had already fallen by 21 percent (y/y) to 97 million tons in the first quarter of 2015. However, given that stripping ratios as well as the removal of overburden have continued to decline (by 15 to 20 percent) it provides further indications that Indonesian coal output will fall further in the remainder of the year.

Based on data from Thomson Reuters, the free cash flow of the 15 largest listed Indonesian coal miners and contractors on the Indonesia Stock Exchange (IDX) averaged USD $10.7 million in the fourth quarter of 2014, or the lowest since the first quarter of 2014. Several of these companies, such as Indo Tambangraya Megah and Golden Energy Mines, are plagued by negative free cash flows and now need to stabilize their businesses by other means that simply produce and sell more coal (as this will backfire by exacerbating the global oversupply) to increase EBITDA figures on income statements.

To make matters worse, the Indonesian government will nearly double coal royalties in May 2015 as the government seeks to generate more revenue from its natural resources in order to obtain funds for structural economic and social development.

Big Indonesian coal players are now eager to diversify into other businesses such as power generation. Golden Energy Mines’ parent company Sinarmas Group plans to invest USD $700 million in the construction of two coal-fired power plants in Indonesia, while Tambang Batubara Bukit Asam is currently conducting a feasibility study for the construction of power plants in Vietnam and Myanmar.

Adaro Energy joined hands with Japanese investors J-Power Electric Power Development Co Ltd and Itochu Corp to construct a USD $4 billion coal-fired plant in Batang (Central Java). Despite land acquisition problems and fierce resistance from environmental groups, construction is scheduled to start soon. This public-private partnership (PPP) project is regarded as one of the most controversial infrastructure projects in Indonesia as environmental activists want the government to move away from coal as source for power generation. However due to the cheap price of coal in combination with its abundant presence in Indonesia, it has become attractive for the government to construct coal-fired plants. President Joko Widodo targets to build additional power plants with a combined capacity of 35,000 MW over the next five years.

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)}

Further Reading:

• Coal Production Indonesia Surprisingly Low in First Quarter 2015
• Earnings Indonesian Coal Miners Down on Weak Global Coal Prices
• Coal Mining News: Indonesia Plans to Raise Coal Royalties in March
• News from Indonesia’s Coal Mining Industry: Production & Export
• Coal Mining Industry Indonesia: Higher Royalties for IUP-Holders
• Illegal Coal Shipments from Indonesia Form a Persistent Problem
• Coal Mining in Indonesia: Safeguarding Future Energy Sources
• Indonesia Coal Update: Export, Production and New License System
• Overview of the Coal Mining Industry in Indonesia

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