Debt-laden Indonesian coal miners bump up output in bid for revenue

Fri Jun 7, 2013 4:49am EDT

* Debt obligations mean pressure for higher revenue

* Miners risk prices falling even further

* Smaller miners closing shop

* China's proposed import curbs could impact exports, output

By Fergus Jensen and Janeman Latul

NUSA DUA, Indonesia/JAKARTA, June 7 (Reuters) - Indonesia's top coal miners are ramping up output despite soft global prices for the fuel and shrinking profit margins as they attempt to recover costs and garner cash flows to service debt.

As a result, Indonesia's thermal coal exports, already the world's largest, will set a new record this year, adding to a sizeable global oversupply of the fuel and possibly pushing prices even lower.

Coal prices have fallen dramatically in the last two years, but instead of trying to limit supply to boost prices, producers are hoping that what they cannot make in absolute margins, they can make up by boosting output volumes.

"Everyone is pumping (up) their production just trying to recover the cost they've spent for their infrastructure," Herlan Siagian, general manager for marketing at Bumi Resources , Asia's biggest thermal coal producer, told Reuters on the sidelines of an industry conference this week.

Four top Indonesian listed coal producers - Bumi, Adaro Energy, Indotambang Megah and Berau Coal Energy - are increasing their production in the 2013 fiscal year by between 4 percent and 12 percent.

Indonesia's coal production is thus expected to climb to as much as 410 million tonnes from around 375 million in 2012, according to the Indonesian Coal Mining Association.

The output growth will add to a surplus of the fuel that some analysts say could last through the end of the decade as demand flattens out, while supply continues to grow.

Australian coal prices, which serve as the benchmark for Asia, have fallen 30 percent to under $90 per tonne from a high of around $130 per tonne in 2011.

Indonesian coal prices are typically cheaper than Australian prices due to their quality, but generally track movements in the Australian coal price benchmark. Coal from Indonesia's East Kalimantan province is priced at around $68 per tonne, according to McCloskey's coal benchmark. CO-FOBSEK-ID

DEBT CONCERNS

Some Indonesian miners have been backed into a corner by their debt-servicing obligations and have been forced to gamble that an increase in production will allow them to scrape together enough cash to service their debts.

"Aside from the production cost, many mining companies in Indonesia are highly leveraged. That's why, like it or dislike it, the big producers keep pumping their production because their margin is getting smaller and smaller," said Aris Munandir vice president director of coal producer Permata Resources, a unit of PT Permata Prima Sakti.

An analysis of 11 major Indonesian miners showed an increase in their net cash positions despite a fall in revenues as they increased their net debt significantly.

For instance, Bayan Resources' net debt rose by a third in 2013 and its net cash climbed 57 percent, while Berau Coal's net debt rose 38 percent at the end of 2012.

Some lenders have also set a floor on earnings as part of their loan conditions, according to bankers involved in making loans to Indonesian coal miners.

Miners, in some cases, have been unable to walk away from investments that they made in boom times.

"They did not deliver their whole expansion plans, but as significant investments have already been made on those assets, they are under pressure to deliver these projects and so they will keep producing," said an analyst at a Swiss trading house.

One factor that could force Indonesia's coal miners to scale back their output is a proposal by China to limit imports of lower quality coal, much of which comes from Indonesia.

But while the original proposal would have impacted some 55 million tonnes, or more than 15 percent of projected Indonesian exports this year, a revised proposal would impact under 10 percent of the country's exports and thus have a smaller impact on production, according to market sources.

LAST MAN STANDING

Miners are also biding their time, hoping that competitors will cut supply from the market first and allow them to reap the benefits of the resulting higher prices.

"It's last man standing. If we can hang on long enough others will topple over and then we'll have the market to ourselves," said Bart Lucarelli, president of LP Power Consultants, Ltd, a Bangkok-based consultancy firm that works with the Indonesian power and coal industries.

Smaller miners, whose ability to wait until prices improve is relatively limited, have been quicker to slow their output.

For instance, by late last year nearly 90 percent of coal mines in Indonesia's Jambi province had already closed as low prices took their toll.

Permata's Munandir said while his company will increase its production due to a mine that they had already built, it will no longer sink money into new endeavors.

"We are not investing... we aren't opening any new projects," Munandir said.

Lower prices have also dealt a blow to rampant illegal mining in Indonesia, which tends to flourish during boom times.

Despite lower prices and signs of a slowdown, some in the industry say the conditions for the coal miners are far from dire.

"Times have rarely been this good... prices today are four times what they were a decade ago and costs are roughly double," Keith Whitchurch, a former mining engineer who is now president director of SMG Consultants, said. (Additional reporting and writing by Rebekah Kebede; Editing by Muralikumar Anantharaman)