ACCORDING the Institute for Energy Economics and Financial Analysis (IEEFA), the Indonesian government must let the market decide the future for financially broken coal companies wishing to avoid payments of much-needed royalties and loans, since only one leading coal company is able to make profits.
Exacerbated by Covid-19, coal prices have dropped about 52% in five months and Indonesia’s coal export markets including China and India are slashing imports and increasingly turning to domestic sources to bolster energy security.
“The Indonesian coal industry is in trouble structurally and financially, with companies now struggling to break even,” financial analyst Ghee Peh said.
Peh, also the author of the report ‘No Bailout, Don’t Throw Good Money After Bad’, added that only one of the 11 listed Indonesian coal companies that were reviewed is at cash breakeven or better, with the current coal benchmark price of US$47 per tonne.
The coal company in question, Bayan Resources is doing exceptionally well compared to other coal companies, namely Bumi Resources (US$63 per tonne), ABM Investama (US$61 per tonne) and Geo Energy Resources (US$60 per tonne).
“If low coal prices persist, these companies will not be able to manage their debt load,” the report said.
IEEFA also found that leading Indonesian companies have outstanding loans of US$3.8 bil to both foreign and domestic banks including Mandiri, BNI, BRI and Permata.
“There’s a question about whether those banks are protected from likely further losses as coal companies struggle to make ends meet, particularly as current outstanding coal sector bonds of US$3.1 bil are also unlikely to be refinanced,” Peh said.
He added that with a total debt at US$6.4 bil, any financial assistance provided to the coal industry will go straight into the hands of lenders, leaving a broken industry still broken.
Additionally, the Indonesian coal industry is facing a range of structural risks that go beyond the weak pricing.
According to the report, many governments are backing away from providing financial assistance to coal companies due to the marked drop in asset values reflecting the ongoing structural decline of the industry.
Currently, nearly 140 significant global lenders, insurers and asset managers have already announced their divestment from coal financing, while major mining companies have sold or are selling their coal assets, namely Anglo American, Rio Tinto and BHP.
These moves signal a negative view on the economic and risk profile of coal assets, supporting the view that the decline in their economic value is more structural than cyclical.
This means that coal prices will remain under pressure due to the rise of renewable energy sources, especially wind and solar power.
“We believe that market forces should continue to be permitted to operate in Indonesia, giving all market participants a fair chance to re-price the companies’ coal assets,” Peh said.
“The market will continue to provide healthy royalties to the government if it is allowed to perform as a market should, with companies re-configuring their asset base to reflect the current technology-driven energy transition,” he added.
From IEEFA’s analysis, the Indonesian government collected US$1.1 bil in royalties and US$1.2 bil taxes in 2019 from the 11 coal companies.
“Any government bailout to the coal industry would put at risk any further royalties the country sorely needs, while protecting underperforming companies in decline and thereby failing to generate target returns,” the report said.
“Allowing poorly run coal mines and companies to fail may be the economically correct option. Therefore, IEEFA recommends that the government not provide a bailout to the coal sector,” it added. – Sept 16, 2020