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Monday, 29 June 20
FALLING DEMAND IN CHINA AND INDIA SIGNAL TOUGH TIMES AHEAD FOR INDONESIAN EXPORTS - GHEE PEH | EEFA
IEEFA LOGOAssessing the Impact on Indonesian Coal Companies
 
The bad news for Indonesia’s coal companies is that they are likely to have lower sales volumes to India and China for 2020. 
 
This may also reflect cyclical and secular trends if both major markets continue to priorities domestic production ahead of imports. To stress test our assumptions about Indonesia’s coal export prospects, we evaluated the following key fundaments for 10 of Indonesia’s leading coal producers:
  • Percentage and volume of sales to India and China in 2018–19
  • Sales short falls for 2020 if year-on-year sales to India and China fall by 20% and 10%, respectively 
  • Company rankings in terms of short fall, by volume and by percentage. 
To put each company’s export risk exposure in context, we compiled coal sales volumes to China and India, as disclosed by the 11 listed Indonesian companies. We note that ABM Investama does not disclose sales volumes or revenue breakdowns by country. For Geo Resources and Golden Energy, we used their revenue breakdowns to estimate shipment volumes to the major markets. In 2018, Bumi Resources sold 25.3mt of coal to China and India, which is 83% more than the second-placed Indika Energy, which had combined sales of 13.8mt. Adaro was ranked third, with 13.6mt. In relation to China, Bumi had top ranking in 2018, with 13.9mt, 28% ahead of second-placed Indika, with 10.8mt. For India, Bumi also took the top rank with 11.4mt,which is 90% ahead of second-placed Adaro, with 6.0mt.
 
IEEFA Sample Coal Companies' 2018 Total, China and India Sales Volumes (million tonnes)
 
In 2019, Bumi Resources sold 24.7mt of coal to China and India, 34% more than second-placed Golden Energy, which had combined sales of 18.4mt. Adaro was ranked third, with 16.0mt. For China, Indika ranked first in 2019,with 12.2mt, 5% ahead of second-placed Golden Energy, with 11.7mt. In India, Bumi ranked first, with 13.3mt,50% ahead of second-placed Adaro, with 8.9 mt.
 
IEEFA Sample Coal Companies' 2019 Total, China and India Sales Volumes (million tonnes)
 
In 2019, the companies in our sample accounted for 66% of total Indonesian coal exports, these same companies accounted for 43% of Indonesia’s exports to China, and the IEEFA sample also accounted for 43% of exports to India.
 
IEEFA Sample and Other's Share of 2018-19 Total, China and India Sales Volumes (million tonnes)
 
Based on IEEFA’s data, we estimate that the smaller producers outside our sample accounted for 57% of exports to China and India in 2019. This compares to their total share of 34% of all Indonesian coal exports in 2019. This means the smaller producers are more exposed to the two large markets and may have difficulty diversifying away and finding new export markets.
 
Estimating the Shortfall and Impact
When estimating the shortfall faced by Indonesian coal producers, we based our calculations on the reported 2019 full-year volumes for China and India. We estimate they face year-on-year declines in exports of 10% to China and 20% to India.
 
IEEFA Sample's 2019 Total Sales, 2020 China and India Sales Shortfall (million tonnes, Percentage)
 
IEEFA estimates that the three companies most at risk in terms of volume to these two major markets are Bumi with 3.8mt, and Golden Energy and Adaro, each with around 2.5mt. In terms of percentage of total sales volume, the three companies most at risk are Golden Energy at 8.4%, Harum at 7.7% and Geo Energy at 6.6%. A shortfall in volume would mean these producers would be less able to cut costs, and they would have to consider either reducing output or finding new customers to take up the shortfall. However, we stress that when we apply the same calculation to other Indonesian coal producers’ export volumes to China and India, it shows that they face greater risks.
 
IEEFA Sample and Other's 2019 Total, China and India Sales Volumes, 2020E Shortfall (million tonnes, Percentage)
 
However, we highlight that other non-listed and smaller-scale coal producers account for 57% of total coal exports to China and India in 2019. We estimate that these producers outside our sample could face a total shortfall of 11%. These producers may have customer bases that are less diversified than those of our 10-company sample. Due to smaller companies' less detailed financial disclosure, it is difficult to analyze the financial impact of the shortfall. However, the smaller producers have less access to public debt and equity markets and maybe less able to manage the financial impact of such a shortfall.
 
Conclusion
The Indonesian coal industry not only has to contend with lower coal prices, it must deal with lower export volumes to the two key markets of China and India, which account for more than 50% of total exports. 
 
In 2019, China accounted for 29% of Indonesian coal exports and India accounted for 23%. Our analysis of demand and supply trends suggests that exports could undergo year-on-year declines of 10% to China and 20% to India. 
 
Of the 10 listed companies in our sample, those that were most highly geared to China and India in 2019 were, by volume to both markets, Bumi, Golden Energy and Resources, and Adaro. As a percentage of total sales to both markets, the three most geared were Golden Energy and Resources, Harum, and Geo Resources. 
 
We estimate that smaller producers outside our sample accounted for 57% of total exports to China and India in 2019. This compares to their 34% total share of all Indonesian coal exports in 2019. However, these producers risk facing an 11% sales volume shortfall in 2020,compared to a 5% shortfall for our sample group. This means the smaller producers are more exposed to the two large markets and may have difficulty diversifying away and finding new export markets.
 
About IEEFA
The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. www.ieefa.org
 
About the Author Ghee Peh
Financial Analyst 
Ghee Peh has worked in investment research since 1995, including at Jefferies, BNP Paribas, and UBS. He has covered Asian coal, cement and metal companies.


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