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Monday, 29 June 20
INDONESIAN COAL AT THE MERCY OF THE DRAGON AND TIGER - GHEE PEH | IEEFA
IEEFA LOGOCoal sector analysts have been busy in recent months mapping the negative impact of low coal prices from the COVID-19 pandemic on Indonesian coal companies’ cash flow and government royalties. 
 
Our first report concluded that Indonesia’s 11 listed coal producers face an onerous challenge in the pandemic-induced operating environment, with its lockdowns and slumping prices. If these circumstances continue for along period, stakeholders could start asking tough questions about each of the companies’ viability and status as going concerns. (See Can the Indonesian Coal Industry Survive COVID-19). 
 
To get a full picture of the sector, it’s necessary to look more closely at the newly volatile export demand landscape. This is critical because Indonesia’s coal sector relies on exports for more than three quarters of its demand and suffers from concentration risk because more than 50% of its exports go to two key markets: China and India. Indonesia’s Ministry of Energy and Mineral Resources (MEMR) said the country exported 175 million tonnes (mt) of coal from January to May 2020. It forecasts exports of 435mt for 2020, down from 472mt in 2019, representing a year-on-year decline of 8%. In 2019, Indonesian companies exported 29% of their coal to China and 23% to India. 
 
The export outlook in 2020 for China and India reflects the impact of weak demand and the domestic market considerations that are working against a prompt pickup in demand. Both markets have natural demand for Indonesia’s low ash/medium energy coal, with China importing 46% and India importing 43% of foreign-supplied coal from the country in 2019. But both nations have significant domestic coal suppliers that could fill gaps in supply, which could put pressure on Indonesia’s pricing power. 
 
The challenge for analysts will be judging whether, as COVID-19 abates, the market will quickly return to business as usual, or whether China and India will take full advantage of the downturn to preserve hard currency and favour domestic players. Based on IEEFA’s analysis, the demand outlook is currently better in China than India, but domestic supply for both has been growing and government policy in both markets favours reduced imports. 
 
Based on these new demand considerations, IEEFA forecasts that Indonesian coal exports to China will decline by 10% year-on-year, and to India by 20% year-on-year. This will result in a demand shortfall for 2020 for the 10 listed coal companies 
 
in our sample. They accounted for 66% of Indonesian coal exports in 2019. 
 
The companies with the largest shortfall are:
 
By volume to both markets: Bumi Resources (3.8mt),Golden Energy and Resources, and Adaro (2.5mt each),
 
By percentage of total sales to both markets: Golden Energy and Resources (8.4%), Harum (7.7%), and Geo Resources (6.6%). A volume shortfall means these producers are less able to cut costs and must either reduce output or secure new customers to take up the shortfall. The MEMR has already stated that Indonesia wants to boost sales to Vietnam, Bangladesh, and Pakistan, but the outlook for the three markets is uneven, ruling out easy negotiations. We estimate the 10 companies in our sample could face a 5% sales volume shortfall in 2020. However, the smaller-scale producers outside our sample may face an 11% sales volume shortfall in 2020. 
 
These producers have limited access to public debt and equity markets and may be less able to manage the financial impact of a decline in sales volume.
 
A Closer Look at Indonesia’s Coal Export Fundamentals 

According to the MEMR, Indonesia exported 472mt,or about 77% of its output of 610mt,in 2019. Domestic Indonesian sales were about 138mt in 2019, a year-on-year increase of 20%.

 

Indonesian Coal Production and Exports 2017-19 (million tonnes)

 
 
According to media reports, China and India together accounted for 52% of Indonesia’s coal exports in2018 and 2019. China imported 126mt in 2018 and 139mt in 2019, accounting for 28% and 29%, respectively. India imported 105mt in 2018 and 106mt in 2019, accounting for 24% and 23%, respectively. For the period 2017–19, these markets accounted for more than50% of Indonesia’s coal exports.
 
Indonesian Coal Exports to China and India 2017-19 (million tonnes)
 
Indonesia Accounts for More Than 40% of China and India’s Coal Imports 
We estimate that Indonesia had a market share of 43% of India’s total coal imports and 46% of China’s total coal imports in 2019. This market share was even higher for thermal coal, with Indonesia accounting for an estimated54% of India’s imports and 62% of China’s imports in 2019.
 
We see both price and volume risk for the Indonesian coal industry. In addition to lower coal prices, both major markets are likely to import significantly less coal year-on-year from Indonesia. In addition to COVID-19’s impact on demand, it has affected the supply side through government policies to limit imports and boost domestic coal production. 
 
According to media reports, several regional customs authorities in China are looking to maintain 2020 coal imports at 2017 levels. China imported 271mt in 2017,10% below its 300mtof imports in 2019.
 
China's Total and Thermal Coal Imports from Indonesia 2017-19 (million tonnes)
 
Indonesia’s coal exports face similar demand risks in the Indian market. According to media reports, Coal India Limited (CIL) has a mandate to replace at least 100mt of imported coal with domestic non-coking coal in the financial year 2020–21. This represents about 40% of India’s calendar year (CY) 2019 imports of 249mt. In its bid to substitute imports with domestic coal, CIL has been connecting with non-regulated sectors like sponge iron, cement and aluminum for domestic coal. This places Indonesia’s exports at risk as it supplied106mt of thermal coal to India in 2019.
 
India's Total and Thermal Coal Imports from Indonesia 2017-19 (million tonnes)
 
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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