MARKETS

Indo's bearish coal scene

LEADING thermal coal exporter Indonesia could be peppered with mine closures as weak coal prices combine with an increasingly uncertain regulatory outlook.

Blair Price
Indo's bearish coal scene

On Tuesday Macquarie Private Wealth released a report on the key takeaways from its Indonesia commodities conference held last week in Jakarta.

“We are increasingly hearing anecdotal feedback of mine closures at current pricing levels, also impacting asking prices for concessions and increasing [mergers and acquisitions] activity/talks as a result,” MPW said.

But the broker said it was yet to see cuts in aggregate production and some estimates suggested it could be up 40 million tonnes for this financial year compared to its base case estimate of 20Mt growth.

However, MPW noted that the overall mood of the conference was quite bearish given ongoing price weakness and the regulatory environment, which is a major impediment to existing producers and new entrants.

A key issue is the proposed IUP (izin usaha pertambangan) royalty hike, which will make smaller Indonesian coal licence holders pay up to 13.5% instead of 3-5%.

Then there is a separate coal export tax that has been raised by the Indonesian government in recent months.

MPW listed the country’s coal contract of work to IUP conversion as an issue along with “foreign divestiture”.

“From a coal perspective, we believe the larger producers could potentially gain from the above regulatory changes, especially in the medium term if consolidation in the industry is forced through mine closures,” MPW said.

While weak thermal coal prices are closing down mines around the world, MPW considered that the government was a greater risk in Indonesia.

The Indonesian Coal Association already calculated that 43% of IUP operations would be running at a pre-tax loss at spot thermal coal prices of $US77 a tonne if the IUP royalty rate was hiked to 10-13.5%.

The additional slug of an export tax was expected to make 54% of IUP operations uneconomic.

“The biggest swing factor for Indonesian coal production on a three to six-month basis is actually the regulatory stance taken by the government rather than pricing, in our view,” MPW said.

“The clear message from the government is that it wants to curb production growth in the interest of preserving its resources long-term in addition to extracting greater revenues from the mining sector for the government.”

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