Financing Indonesian coal producers
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Financing Indonesian coal producers - Understanding the current environment - What are the fundamental risks - Where to from here? Nick Halkas, Executive Director, Natural Resources, ANZ
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Financing Indonesian coal producers
- 1. Financing Indonesian Coal Producers Nick Halkas Natural Resources Group, Mining & Metals November 2012
- 2. 2 Today…… • Concerns about the resilience of the global economy are on-going • Europe is …. • Commodity prices are down… • Focus is on China
- 3. 3 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 00 10 15F 69 Colombia Venezuela Vietnam 69 80 188 303 374 34 71 93 58 264 346 3 13 36 103 113 24 33 34 3 6 8 53 57 90 32 36 44 23 10 3 Indonesia Mongolia Poland Mozambique USA Canada 00 10 15F 00 10 15F 54 15 10 7 30 00 10 15F 15 Australia Russia China Kazakstan South Africa Global Coal Exports & Reserves Global Coal Exports and Reserves – Australia will remain the main provider of coking coal and Indonesia will continue to respond in thermal coal Thermal Coal Reserves Coking Coal Exports Coking Coal Reserves Thermal Coal Exports Source: AME, USGS, Company Reports, ANZ Research
- 4. 4Sources: Woodmac reports, BMI reports & ANZ Analysis Indonesian Long Term Coal Demands - 70 140 210 280 350 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Adaro Energy Bumi Resources Indo Tambangraya Megah Tata Berau Coal Energy Bayan Resources Samtan Indika PTBA Sakari Resources - 180 360 540 720 900 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Power Sector Non-power Sector Exports Domestic Production - 130 260 390 520 650 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Bituminous Sub-bituminous Low Rank Hard-coking Coal Semi-coking Coal PCI PRODUCTION vs EXPORTS (In million tonnes, 2011 to 2028E ) COAL PRODUCTION – THERMAL COAL ~98% (In million tonnes, 2011 to 2030E) MAJOR PRODUCERS DOMINATE (In million tonnes, 2011 to 2030E) THERMAL COAL – DEMAND-SUPPLY (In million tonnes, 2011 to 2030E) - 200 400 600 800 1000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Feasible Production Marketable Production Exports Low rank coal production to rise to 43% by 2020, reflecting that it is the most abundant type of coal in Indonesia, in terms of reserves Production contribution by top ten companies to reduce to ~51% by 2025
- 5. 5Sources: Woodmac reports, BMI reports & ANZ Analysis India and China drive Indonesian Thermal Coal - 3,000 6,000 9,000 12,000 15,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Coal Natural Gas Nuclear Hydro Other POWER GENERATION – BY SOURCE (In TWh, 2012E to 2030E ) - 220 440 660 880 1,100 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Australia High Australia Low Indonesia High Indonesia Low Other THERMAL COAL IMPORT – BY COUNTRY (In million tonnes, 2012E to 2030E) China
- 6. 6Sources: Woodmac reports, BMI reports & ANZ Analysis India and China drive Indonesian Thermal Coal India - 60 120 180 240 300 360 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 South Africa High Indonesia High Indonesia Low Other - 600 1,200 1,800 2,400 3,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Coal Natural Gas Nuclear Hydro Other THERMAL COAL IMPORT – BY COUNTRY (In million tonnes, 2012E to 2030E) POWER GENERATION – BY SOURCE (In TWh, 2012E to 2030E )
- 7. 7 (4) (2) 0 2 4 6 8 10 12 14 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Consumption Investment Net Exports GDP, y/y YoY % F F F F ANZ Forecasts (30) (20) (10) 0 10 20 30 40 50 60 01 02 03 04 05 06 07 08 09 10 11 12 EU US ASIA % y/y 3mma China, China, China………… Sources: Bloomberg, ANZ China GDP Growth China Exports by Destination
- 8. 8 0 10 20 30 40 50 60 70 J F M A M J J A S O N D J F M A M J J Decrease No Change Increase NumberofCities 20122011 Loosening monetary policy is yet to translate into stronger investment spending – but improving m/m property prices may be the start of a housing pick-up Source: Bloomberg, ANZ Research China Interest Rates & RRR China 70 City New Residential Property Price Changes 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 05 06 07 08 09 10 11 12 13 0 5 10 15 20 25 PBoC 1-year Lending Rate Reserve Requirement Ratio (RHS) % % Tightening policy
- 9. 9 0 50 100 150 200 250 300 350 400 00 01 02 03 04 05 06 07 08 09 10 11 12 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Softs Ags Base Metals Precious Metals Other Energy Oil 3mth USD Libor (RHS) US$ billion % Source: Bloomberg, ANZ Research Investment Fund Commodity Positions Investors have sold US$55bn or 15% in commodity index fund positions in the past 7 months – selling has been skewed heavily to hard/energy markets
- 10. 10 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 07 08 09 10 11 12 Indonesia Australia Russia USA Vietnam Colombia m tonnes Sources: Bloomberg, ANZ China Thermal Coal Import Origins
- 11. 11 (30) (20) (10) 0 10 20 30 40 50 04 05 06 07 08 09 10 11 12 Hydro Output Growth Thermal Power Growth YoY % change (40) (20) 0 20 40 60 80 04 05 06 07 08 09 10 11 12 (20) (10) 0 10 20 30 40 50 Coal Output Growth Thermal Power Growth YoY % change Sources: Bloomberg, ANZ China appears to be producing too much coal compared to its demand - Recovering hydro capacity is also taking market share away from thermal power, with falling Indonesian coal imports most affected China Thermal Power & Coal Production Growth China Thermal Power & Hydro Production Growth
- 12. 12 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 07 08 09 10 11 12 Mongolia Australia Canada Russia Indonesia USA Other m tonnes Source: Bloomberg, World Steel Association, ANZ Research China Coking Coal Imports by Origin
- 13. 13 0 100 200 300 400 500 600 700 800 900 06 07 08 09 10 11 12 0 10 20 30 40 50 60 70 80 90 100China ave steel price % raw material costs (RHS) Iron ore Costs Coking coal Costs US$/tonne % 20 25 30 35 40 45 50 55 60 65 70 08 09 10 11 12 1,000 2,000 3,000 4,000 5,000 6,000 China Steel Production China Rebar Prices (RHS) m tonnes RMB/tonne Source: Bloomberg, World Steel Association, ANZ Research Falling China steel prices is squeezing steel mill margins and should force closures of high cost supply – Mongolian coking coal imports would be most affected and are already coming down China Steel Mill Margins China Steel Output & Prices
- 14. 14 0 20 40 60 80 100 120 140 160 180 0 20 40 60 80 100 120 140 160 2011 Cost Curve Premium Coking Coal Price (FOB) US$/tonne million tonnes 143 top quartile 0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140 Newcastle Coal Price (FOB) 2011 Cost Curve US$/tonne million tonnes top quartile 87 40 60 80 100 120 140 160 180 200 220 240 260 06 07 08 09 10 11 12 Newcastle Coal (FOB) Qinhuangdao (CIF) US$/tonne capped price 0 50 100 150 200 250 300 350 400 450 06 07 08 09 10 11 12 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 Australia Coking (FOB) China Rebar Price (RHS) US$/tonne US$/tonne China thermal coal and steel prices remain the key driver of seaborne thermal and coking coal prices – but a floor price appears to have been set in thermal coal as high cost capacity is forced to shut Source: Bloomberg, ANZ Research Coking Coal & Steel PricesAustralia & China Thermal Coal Prices Thermal Coal Cost Curve – Energy Adjusted Coking Coal Cost Curve
- 15. 15Sources: Woodmac reports, BMI reports & ANZ Analysis Government Initiatives to Secure and Conserve Domestic Coal Supply Initiatives include: • Domestic Market Obligation • Benchmark Price Regulation • Export Tax
- 16. 16 Fundamental Risks The project must stand up under scrutiny on four fronts: • Technical soundness • Economic feasibility • Financial feasibility • Political and institutional predictability
- 17. 17 Success Factors Mining / Reserves • Mining risks - estimate of reserves – proven and probable categories • Labour • Adequate reserve tail • Mining method – open cast/underground Completion • Sponsor quality • Available labour • Land compensation issues Logistics • Access to haul roads, jetties and ports • Own logistics assets – backward/forward integration
- 18. 18 Where to from here? - Continued high Asian economic growth; - Strong rates of electricity generation; - Lack of alternative; - Price stabilization.
- 19. Find out more 19 Download the event brochure for the 2nd Coaltrans Emerging Asian Coal Markets here to find out more
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Editor's Notes
- Introduction Good afternoon Ladies and Gentlemen my name is Nick Halkas and I am responsible for ANZ’s Mining & Metals focus in Asia. ANZ has once again reverted to a sector focused strategy with the aim of providing further value to our current and future clients. The resources boom of the last couple of years has changed the landscape in Indonesia and increased the countries trade activities. Indonesia being a resource rich country has benefited tremendously from this recent period of resource activity due to its abundance of natural resources. During this phase Australia has also surged ahead, both countries being fuelled firstly by the global economic boom followed by the emergence of China as a global pillar during the global financial crisis of 2008/2009. The pain of the GFC was relatively short with markets and commodity prices rebounding quicker than anticipated. These were times of opportunity and excesses where marginal projects were quickly resurrected to cash in while the commodity prices held up. Anything from Gold, Copper, Nickel, Iron Ore and Coal, with valuations shooting through the roof and the contracting industry following suit, not to mention the Bankers, Equity Funds and Hedge Funds. Eventually the Indonesian government entered the frey to regulate exploitation, exploration, and the export of the Nation’s assets, which is I add nothing new as this has happened in almost every emerging country rich in natural resources during periods of heightened activity. Requirements for the further processing of minerals are long term National initiatives that usually cause short-term pain but are designed for the long-term benefit of the Nation. Governments aim to maximise National assets for the people of the country, while trying to find that balance with international and local investors. As in many facets of life, the timing of these initiatives is key, but inevitably such initiatives take time, and as Murpy’s Law would have it, always materialize when the markets start showing strain. A good example is the Republic of Congo where prior to the GFC Congo was experiencing a surge of foreign investment in its natural resources sector when the government decided to implement certain measures to regulate the industry and gain its share of the commodities up-side. Unfortunately the implementation of the process coincided with the GFC and as a result crippled foreign investment into the country for an extended time. Timing is everything, as during boom times such government measures are more palatable and easier to implement with the industry complaining but shrugging it off as a cost associated with high profits. We appear once again to be seeing the same trend in the Indonesian resources space, providing government with the difficult challenge of balancing long-term goals vs restricting important trade activities that form an integral part of the foundation of all countries.
- Concerns about the resilience of the global economy are on-going. Europe is to be polite, a mess. Commodity prices are down. Low coal prices are resulting in the postponement of supply projects which is having an extensive effect on all other areas of the industry. Low cost producers are cutting costs where ever they can and are still under pressure. Higher cost producers are now closing down operations. Many coal producers ramped up their S/Rs towards the end of 2011 and beginning of 2012. We have seen increases of nearly 40% in some cases. Quality producers are aggressively restoring S/Rs to previous levels, reducing staff and focusing on reducing hauling distances. Negotiations with contractors are on-going. Contractors themselves are cutting down on yellow goods and distributors of mining machinery have seen a drastic increase in the cancellation of orders, creating not only a loss in profits but also an increase in costs as they have to find property to store the equipment they are receiving that they now cannot sell and distribute. This is a time where producers-employees-contractors-distributors and buyers need to work together in order to order to keep businesses sustainable until the coal market comes back. The world is focus on China to come to the rescue with huge spending that will put us back on track.
- The Coal industry is of great importance to Indonesia. Looking at global coal exports and reserves it appears that Indonesia will be the main provider of Thermal coal while Australia will do so for Coking coal.
- In 2011, the Indonesian Coal industry produced 333m tonnes, with a weighted average energy content of 5,310 Kcal/kg Thermal coal accounted for ~98% of total production Indonesia had 11bn tonnes of marketable coal reserves in 2011, predominantly located in Kalimantan Marketable production from identified projects and operations expected to decline beyond 2020 The increase in production of low rank coal mines will be driven by the requirements of power plant projects, both domestically and internationally In 2012, the ten largest producers are estimated to account for ~65% of the total production - All ten have expansion plans over the next five years and will continue to dominate production growth over this period
- Indonesia is currently the largest coal supplier to China, accounting for 56% of the latter’s total thermal coal imports in 2011. Chinese power sector will continue to drive the country’s thermal coal demand. Coal-fired power generation is estimated to increase by nearly three-fold from 3,710 TWh in 2011 to 10,365 TWh in 2030
- In India, Indonesian coal is primarily used in the power sector and Indonesian thermal coal has accounted for majority of the growth in Indian thermal coal imports in the recent years Power sector continues to drive the thermal coal consumption in India. An estimated three-fold increase in coal-fired power generation capacity to 315GW by 2030 WoodMac estimates that India’s growing demand for low ash, low rank coal will be met by Indonesia, in the coming years. US and Mozambique are expected to become increasingly large suppliers
- Recently China’s GDP growth is showing signs of moderating, however it still remains at a solid level. China has raised interest rates 5 times and the Reserve Requirement Ratio 9 times in the past 2 years order to control an overheated market. China exports that rocketed up in 2009 now show a progressive decline as a result of the cooling measures coupled with global economic and geo-political issues. China’s investment has slowed down but will non-the-less continue.
- Monetary policy has tightened China has raised interest rates 5 times and the Reserve Requirement Ratio 9 times in the past 2 years order to control an overheated market. Interesting though to note that in a survey on New Residential Property Prices in 70 cities there appears to be an increase in new residential prices in July of this year in the majority of those 70 cities surveyed, which may point to some relief coming our way.
- Investment funds are pulling out of commodities due to the recent volatility. In the past 7 months Investors have sold US$55 billion or 15% in their commodity index fund positions. The trend is similar across the different commodities.
- China continues to be an important purchaser of Indonesian coal, however the graph shows the gap between Indonesian and Australian supply narrowing. We must keep in mind though that India are substantial purchasers of Indonesian low cal coal and the S. Korea and Japan remain strong buyers of Indonesian coking coal.
- If we look at the first graph on the left it appears that China’s thermal power growth is not keeping up with coal output growth. This is further exacerbated by the recovery in hydro capacity which is taking market share away from thermal power. This will affect Indonesian coal imports.
- We see a similar trend in the Chinese import of coking coal.
- The purchase of coking coal by China is affected by the falling China steel prices which is squeezing the margin of the steel mills and should causing high cost supply to close down As we can see from the graph the gap between the steel price and cost of raw material is very, very close. This will cause China steel production to decrease thereby affecting selling of products to this industry.
- China thermal coal and steel prices remain the key driver of seaborne thermal and coking coal prices – but a floor price appears to have been set in thermal coal as high cost capacity is forced to shut We are starting to see this in the Indonesian market as Buyers negotiate lower coal prices to try and make their break-even. High cost producers are starting to close down, especially the smaller miners that can not support themselves during this protracted period of low coal prices. Quality Indonesian producers understanding the need for good long-term relations are trying their best to accommodate their buyers. This is the time when the quality producers will rise to the top and cement relationships with their buyers for the future. Those that renege, both Buyers and Sellers, will be remembered.
- - Under the Mining law of 2009, the Indonesian government issued a regulation, called Direct Market Obligation (DMO), requiring the mining companies to sell a portion of their production to local customers - For coal, the Ministry of Energy and Mineral Resources publishes every year a list of companies with their DMO as a percentage of total production. Average DMO to total production is estimated at 24.7% for 2012 at a production level of 332m tonnes - The DMO estimates are overestimated. The domestic demand for coal is estimated to grow at 7.1% per annum to reach 260m tonnes by 2030. Strict adherence to DMO levels will result in over allocation in domestic market, thereby stranding the coal supply - Under the Ministerial Regulation 17/2010, guidelines are provided to determine the minimum selling price of coal, both to domestic and export markets. Prices are adjusted to coal quality - The primary objective of this regulation is to ensure that producers are indifferent to selling coal in domestic or export markets. Failure to abide by this regulation will result in mandatory production cuts or even revocation of mining licenses - However, the interpretation of the regulation, can vary for each company, resulting in different price levels. Also high benchmark prices in a particular month, due to lagging effect of high prices in the previous month, can affect domestic sales The sensitivity analysis on a proposed export tax suggests that Indonesian thermal coal exports will be impacted significantly.
- Continued high Asian economic growth; Strong rates of electricity generation; Lack of alternative abundant and competitively priced fuel sources will create a growing need for seaborne coal. The local demand for coal will keep on increasing thereby putting pressure on local suppliers. We see prices stabilizing in the short-term and then gradually increasing. From a banking perspective we will continue to support quality coal producers who are low cost producers, have good and credible management. We would continue to provide products such as project finance, trade finance, yellow goods financing and leasing and also prepayments where appropriate.