Analysis: Coal oversupply exacerbated by Indonesian miners’ low costs


Falling fuel costs have cushioned major Indonesian thermal coal suppliers from sharply lower coal prices this year, but their smaller-than-expected output cuts have cast doubts on any possible recovery in prices going into next year.

Expectations were rife that Indonesia would sharply cut thermal coal output to address an oversupplied market, but major Indonesian miners — holding the so-called Coal Contract of Work mining licenses — have either maintained or made marginal cuts to production forecasts.

Given a persistent oversupply and dwindling Chinese demand, market participants are skeptical that any output cuts from those Indonesian miners will be significant enough to give a boost to coal prices, which have fallen nearly 20% this year.

“We estimate the impact of global supply rationalization at about 30 million mt of seaborne coal, excluding Indonesian low calorific-value coal,” Standard Chartered Bank analyst Serene Lim said in a note. “We believe this supply response is insignificant in a structurally oversupplied market.”

Lim expects any coal price recovery by end-2017 at the earliest.

In the third quarter, major Indonesian miners largely reported profits despite a slump in revenue as lower oil prices helped keep production costs under check.

“The downward trend of the oil price has contributed to curb the company’s mining operation and logistic cost,” Indonesian coal miner Indo Tambangraya Megah said in its Q3 report.

Over January-September, the company produced 21.5 million mt of coal, in line with its annual output target of 28.7 million mt.

“To cope with the prolonged weak coal price, the company will continue to employ cost reduction program and prioritize the capex spending,” Indo Tambangraya said. INDONESIAN EXPORTS DROP

Analyst Lim said cost-cutting measures have largely been exhausted. “We expect operating margins to be under intense pressure in 2016, especially for Indonesian producers,” she said.

Indonesia’s January-August thermal coal exports have slumped 18% year on year to 211 million mt, she said.

“The producers that scaled back were mostly those with mining business licenses (IUPs), not those with Coal Contract of Work permits,” Lim said.

CCoW permit holders, which account for 70%-80% of Indonesia’s total coal production, are bound by contractual production commitments.

“Under the contractual obligation, those CCoW permit holders are unable to make major changes to supply and therefore trimmed production only marginally, 1%-2% to date.”

On the other hand, IUP holders on average have cut about 20% of their output this year, she said.

Lim expects Indonesia to export 330 million mt in 2015, down from 407 million mt last year including supply from illegal operations. She expects exports to falling further to 290 million mt in 2016.

“This [estimate] assumes that illegal miners have been completely priced out at this price level and have shut down,” she said.

In September, Citibank analysts forecast total Indonesian coal exports to be 283.1 million mt in 2015, down from 304.1 million mt a year ago. For 2016, Citi expects exports to drop further to 274.6 million. MARGINAL PRODUCTION CUTS

Major Indonesian coal miner Adaro Energy lowered its 2015 production forecast to 52 million-54 million mt from its prior view of 54 million-56 million mt, citing “difficult coal market conditions.” In 2014, total production stood at 56.2 million mt.

“Persistent oversupply over the past few years has kept coal prices subdued,” Adaro said in its quarterly report. “We are taking control of our production and do not want to sell our coal at too much discount.”

The company estimates total Indonesian production cuts of about 30 million mt in 2015 by both larger and smaller miners.

Even as average selling price fell 14% year on year in the first nine months of 2015, Adaro’s cash cost also fell 13% to $28.61/mt in the same period, mainly due to lower oil prices.

Fuel cost fell 39% to the low 50 cents/liter, the company said. Fuel cost accounts for about 25%-30% of Adaro’s total production cost.

“Low diesel price in 2015 provides us with short-term cost relief,” Adaro said.

Another Indonesian coal miner PT Harum Energy said average sales price in the first nine months of 2015 stood at $53.10/mt, down about 15% from the same period a year ago.

In the first nine months of the year, the FOB vessel cash cost was $36/mt, unchanged from the second quarter, but down 17.3% from $43.50/mt in the nine-month period a year ago, the company noted.

Sales volume stood at 3.7 million mt in the nine months ended September, sharply down from 6.1 million mt in the same period last year.

“Though the company benefited from slightly lower costs in the third quarter of 2015, such cost saving was not apparent due to the lower production volume which resulted in higher unit cost of production,” the company said.

“Indonesia continues to lose market share in Japan, South Korea and Taiwan to Australian shippers and in India to South African,” Harum said in its quarterly report.

Another coal miner Bukit Asam, which produces coal with heating value ranging from 4,550 kcal/kg GAR to 7,400 kcal/kg GAR, reiterated its sales target of 24 million for the full year 2015 in its quarterly report.

Source from : Platts