* 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 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
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
"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