September 16, 2016 Read More →

High Risk of Stranded Assets Across Indonesian Coal Sector

Matt Timms for World Finance:

Thermal coal exports have risen eight-fold over the last 13 years, reaching a peak of 420 million tonnes in 2013. However, over the last two years exports have fallen by a quarter, and according to Tim Buckley, Director of Energy Finance Studies, Australasia at the Institute for Energy Economics and Financial Analysis (IEEFA): “The decline is continuing into 2016 as loss-making mines generally acquired or built with debt finance close or go into administration.”

Heavy financial leverage acquired over the course of the coal boom in 2010-12 also adds to extreme operating leverage in the face of a 60 percent decline in thermal coal export prices over the last five years.

China’s net thermal coal imports declined 10 percent in 2014, 30 percent in 2015 and are down another 18.7 percent a year to date on January to April. Coal consumption, meanwhile, declined three percent in 2014, four percent in 2015 and 8.7 percent a year to date in 2016. In IEEFA’s view, the loss of share by thermal coal imports is permanent and will be terminal by 2020.

In the case of India, the government has set a target to cease thermal coal imports within two to three years – and with coal imports down 18.7 percent a year on January to April, this goal looks entirely plausible.

For energy firms Indo Tambangraya Megah, Adaro Energy and Harum Energy, the selling price of coal for the first quarter of 2016 was down 21 percent, 17 percent and 12 percent respectively. And as much as these producers have shifted focus to emerging economies such as Vietnam, Thailand and the Philippines, the demand is barely enough to offset the shortfall. Ultimately, for as long as dwindling prices remain a feature of the sector, Indonesian miners will be forced to rely mostly on domestic consumption.

Yet the fear holds that almost $1trn in global coal investment could become stranded if policymakers honour the commitments set out at last year’s COP21 meeting in Paris, according to Boom and Bust 2016, a joint report by the Sierra Club, Greenpeace and CoalSwarm.

According to Buckley: “There is a clear and immediate risk that Indonesian export coal mines will be a stranded asset from a financial perspective.” Once the debts have been written off, many of these mines will be converted to a domestic focus, given the growing electricity needs of the Indonesian domestic economy. Buckley continued: “But with exports taking 80 percent of total coal mined at its peak, this transition to the domestic market will take a long time, and will be held back by the corruption undermining the billions of dollars of foreign investment required to build out domestic coal rail freight lines and electricity power transmission assets.”

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Posted in: IEEFA In the News

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