Marketing Indonesian coal, from papaya to the ace of spades.[ Coal Asia magazine Vol.47]
Marketing Indonesian coal, from papaya to the ace of spades.
Introduction.
The following is a translated extract from the Presidential debate of 5th July 2014(session 2) refers to food security, but can also be interpreted to reflect all primary industries, including coal.
Moderators question ; Based on the vision and mission stated by Mr. Jokowi-JK, food security through agribusiness export, what is the strategy to use in facing the challenges of trade liberalization?
Jokowi response: The first and foremost concern is the market. If the market is clearly evident, then we think about the production. If the farmers are told to plant papaya, melon, and watermelon, but where is the market? If farmers are given good direction, then the farmer can produce anything provided they are given direction, supervision and PPL. Do not underestimate the farmers. The problem is we never set up a market for them. If they are told to plant papaya, we must prepare the industry of papaya juice. In the past this approach has not been undertaken. We all know the problem, understand the problem, but that there is no intention to prepare such an industrial approach. We have many experts, we have fertile soil, so the key depends on our intention and willingness.
From this speech we can see the aspect of markets must be considered in close connection to all industries. The recent (13 July 2014) half day IHS seminar on The Future of Indonesia’s Coal Sector provided a window into the current coal marketing world. IHS is well known for their publications, including IHS McCloskey Coal Report Fax (mccloskeycoal.com), conferences and consultancy etc. This article presents some aspects of the seminar that I found interesting. Various parties at the seminar encouraged the coal industry to lobby the new government for an improved business climate, particularly through more coordinated business friendly regulations and reduced fees. The seminar speakers confirmed that coal is here to stay as Indonesia & Asia’s principal energy source. For me the seminar indicated that there are indications that some coal companies may not be able to salvage their business with an endless growth strategy.
Seminar Notes;
Bob Kamandanu, chairman of the Indonesian Coal Mining Association (ICMA) opening address reflected the coal industries concern, and hopes, that the new government can stimulate exploration, get back on track with construction of new coal fired power stations and smooth out the industries regulations to be workable for good producers. The industries typical concerns are for the Mines Department to issue regulations in time to support the new Department of Trade coal export permit that becomes effective on 1st September, the significant increase in forestry fees, royalty and CCOW negotiations etc.
James Ooi, IHS director of Energy Insight looked at the increased coal fired power demand that underpins SE Asia projected growth to be more than 5% over the next 5 years. Thailand, Indonesia and Malaysia form one group, having fossil energy and have domestic power growth plans, while Philippines and Singapore are prepared to purchase energy at a high price, though Myanmar and Vietnam are seen as emerging markets for power. Japan, Taiwan and S.Korea are mature power markets, though this presentation excluded China & India. James’ view is that gas production is declining and becoming more expensive, wherein the energy gap shall be met by coal. The energy market fundamentals are changing from subsidies to stimulate the development of such industries (gas) to new concerns on energy security, affordability and sustainability. Most projections for the next 20 years indicate coal is the only significant power option to meet ASEAN growth needs.
Alex Whitworth, IHS senior researcher presented a most interesting presentation on China’s energy situation. China’s coal imports have been growing at about 7.5% per year for some time, but 2014 may be the last of such growth years into China, with future growth of coal imports tapering off to a relative steady state. China’s long term energy policy is materializing, with hydro electricity and, soon, atomic power playing a significant roll. The significant new development is the completion in recent years of several 1,000km and 2,000km power transmission systems (7-8 GW), whereby hydro and mine mouth coal power stations from inland China are delivering power to the eastern provinces at similar prices to importing coal at local power stations. Such power transmission systems are still innovative, but are becoming more widely accepted as “proven technology” and investment in 2014 has greatly accelerated. Within China the coal fired coal power market is highly competitive, forcing prices down and stimulating efficiencies and innovation. About 15% of China’s coal supply is economically fragile, coal rail capacity is less tight than it used to be, and the situation is expected to loosen considerably more in the next few years as major rail lines are completed and demand growth slows down. Many of these investment decisions on these rails were made 4-5 years ago during boom years and are just being completed. About 30% of coal producer’s costs are taxes and royalties etc. The coal producers are meeting with local and central government to further rationalize costs wherein we might expect some debt restructuring or easing of fees from district and central government in order to avoid bankruptcies and maintain employment, stability and cheap fuel. China is also researching coal conversion to natural gas, diesel and other products, as China would like to stop using high sulphur diesel etc.
Scott Dendy, IHS head of Coal Research Asia Pacific noted the trends of coal trading, with growth into India, lowering of most trades from 6,000 to 5,000 NAR coal heating values and South African coal switching from Europe destinations to Asia. Most trading is benchmarked against Newcastle 6000 NAR coals, but the increase in diversified brands about the 5,000 NAR product from Indonesia reflect a change in risk strategies. Coal miners, trades and end users are increasingly using hedging to limit down side risk to coal pricing, though many Indonesian products are yet to have a large enough number of paper traders to make such hedging fully effective. Indonesian coal prices have been relatively stable for the past two years, but volatility in the freight market is a significant factor on risk of delivered coal price to Asian markets. The value of mid ranked coal has delinked (on energy equivalent bases) from the high ranked coals, and coals into China tend to be at a higher price differential of $1-2/t over India deliveries. Scott predicts that as the ASIAN coal players mature their business options, including hedging, will grow.
The panel group of Dr Gatut Adisoma (ICMA), Pandu Sjahrir (Toba Bara), Norman Bissett (HHP- law) and Jeffrey Mulyono (ICMA) discussed their post election outlook for Indonesia’s coal industry. They indicated areas of concern included; eliminating illegal coal activities, prioritizing growth in the power sector, improving the business climate, stabilizing & improving the government regulations, to stimulate the industry (not leave it in the ground) so that Indonesia’s growth can continue. They noted that the rapid growth of the coal industry was accompanied by opportunistic management that has now become evident with some outstanding liabilities (with little to show for it) and the recent efficiency drives. Coal will continue to be a significant energy supplier for Indonesia and Asia. The panel acknowledged that the regulation mess shall take time, cooperation and good administrative management amongst the numerous government bodies to sort out. It is hoped that the new government can provide such properties to restore the coal industry. As the current government developed new regulations to tidy up the industry, the private sector had a decision to comply with the increased complexity and costs, or simply to find a way around such regulations. Over time those that could afford, or with the will power, to strictly follow the regulations diminished and it is an important task to get back to, and support, a clean business in the coal sector. Investment (including exploration) in the coal sector is declining and this is not good for Indonesia’s long term benefit. The discussion ended on a sad note – to not let the coal industry collapse.
The second panel discussion group lead by Ben Lawson (Coal Club Indonesia) discussed Where Now for Indonesian Exports. Crystal Chan (IHS) provided a wonderful glimpse into the international freight market wherein the Supermax dry bulk carriers are oversupplied due to the collapse of the Indonesian nickel and bauxite trade, though the Philippines is slowly replacing some of this market. There will be an oversupply of Panamax ships with 900 ships on order while 300 ships are to be scrapped in the same period. Some 300 new ships are to be delivered in 2014. Similarly 115 Cape size ships are scheduled to be delivered by IHS this year and a further 200 by 2015. China coastal freight is not included in these statistics, and given the trend to “coal by wire’ we may see less demand for China coastal shipping, possibly bringing new pressures on the international shipping market. Adrian Lunt (ISX) sees some growth in physical coal trading, and further development of paper trading (hedging). There are less long term contracts and more spot trading in this downward price trending market that leads to uncertainty in investment margins, and so emphasize better business planning and pressure on directors regarding duty of care. James Ooi (IHS) sees that developed nations of Japan, Korea etc are under pressure to maintain cheap energy (coal) to underpin the increasing price competition for products from middle and emerging Asian countries. Options for Indonesia to follow the China model and develop mine mouth power plants in Sumatra or Kalimantan with long transmission lines to Java or Malaysia etc has bright prospects, but has first to deal with geopolitics across local and international borders. The biggest challenge to mine mouth power plants remains capital investment concerns of certainty and business economics. Alex Whitworth (IHS) indicated that the China long distance power transmission network in China is still relatively new technology which has never been tested with a large scale power interruption scenario etc. China backed away from earlier thoughts of banning low ranked coal imports, as there were concerns of challenges through the WTO for unfair trade. Although volumes are peaking, it still makes economic sense to import Indonesian coal into southern China. Outsiders see the Indonesian coal industry as “too big to fail” as so much of the countries income, employment etc is tied to the Indonesian coal industry. Scott Dendy (IHS) indicated dealing with the Indonesian coal industry is complicated, and requires further transparency. Scott mentioned that the HBA benchmark pricing has essentially worked well in Indonesia, as a means of collecting royalties, although it isn’t a suitable trading tool, so IHS is excited by any discussions that are ongoing to improve the bases and make it more reflective of actual trade. The multitude of small volume brands makes development of hedging difficult, particularly as there are few players, plus the time-risk factors are less certain due to sudden changes in regulation etc.
Conclusion.
My conclusion from this seminar for shippers and marketing is that miners and geologists are closely linked industries through the common medium of coal branding. Indonesia has many mines in different coal basins producing a myriad of coal types for the market. The larger mines develop their own brand identities, and the smaller producers tend to fit in between relative to their delivered coal quality, consistency, reliability and throughput. Through clean mining and selective blending of seams from within their concessions, the geologists and miners try to optimize the quality of their product to achieve the best price.
Taking a broader view, I fear that the Indonesian coal industry is like a house of cards. The downward trending coal price is not sustainable, as some companies will not be able to continue with lower strip ratios for long periods, be strangled through forestry or red tape, and for others the repayment of debt will eventually be too much. At some time more Indonesian mines shall close like a collapsing house of cards, to the point where demand meets sustainable supply from the lower cost quartile miners, and then prices may return to provide a workable profit. The wild card is the Government, that may impose more burden on the industry, or develop a coal cartel or other mechanism to hold up prices. The Joker in the pack is China, which may even decide to export a little coal. Indonesian producers are hoping that India has the ace of spades to take more coal imports.