JAKARTA — Major coal miners in Indonesia swung back to profit or reported multifold increases in earnings in the first nine months of the year thanks to record prices for the commodity. But they face rising refinancing risks in the coming years as domestic banks join their global peers becoming cautious about lending to the fossil fuel industry.
Another potential long-term obstacle for miners is President Joko “Jokowi” Widodo’s ambition to make Indonesia a climate leader as the country takes over the Group of 20 presidency from Italy.
Among coal producers listed on the Indonesia Stock Exchange, Bayan Resources posted the biggest gain in net income at $650 million, a sixfold rise from $108 million in January to September last year. Similarly, Adaro Energy saw an almost fourfold increase in its net profit to $420.9 million, while state-owned Bukit Asam had a nearly threefold rise to 4.77 trillion rupiah ($332 million). Bukit Asam reports earnings in the Indonesian currency.
Bayan exported 90% of its coal output, versus Adaro’s 70% and Bukit’s 37%, with China, India and neighboring Southeast Asian countries among the main export destinations.
During the same period, ABM Investama and Bumi Resources returned to profit. Bumi posted $64 million in net income, reversing its loss of $137 million last year, while ABM reported a $94 million net profit, compared with a $5.4 million net loss the previous year.
The figures are based on the companies’ filings to the Indonesian Stock Exchange in recent days.
“Strong market conditions continued in [the third quarter of this year], which propelled seaborne thermal coal prices to historic highs,” Adaro said in a news release on Wednesday. “Demand remained strong during the period, while supply struggled to meet the high demand.”
Thermal coal prices have rebounded strongly this year, following roughly two years of declines, reaching record prices of around $240 per ton in October. Supply constraints, including unfavorable weather conditions in top coal exporting nations Indonesia and Australia, as well as problems with China’s domestic mines, meant that production failed to keep pace with spikes in electricity demand for air conditioning and for winter restocking as countries recovered from their worst COVID-19 outbreaks in the first half of this year.
But coal prices dropped to around $150 per ton in November as China, the world’s biggest consumer, saw its power crunch ease.
Maisam Hasnain, vice president and senior analyst at Moody’s Investors Service, on Wednesday said coal prices are expected to decline further over the next 12 to 18 months, but stay above their medium-term price range of $60 to $90 per ton.
Moody’s forecasts the combined earnings before interest, taxes, depreciation, and amortization of its rated Indonesian coal producers next year to fall 20% from its EBITDA forecast of more than $5.5 billion for the full year in 2021, which is a 111% rise versus last year. Hasnain said 2022 earnings are expected to be “in line with 2018 levels, which was the peak of the last commodity upcycle.”
Commenting on concerns over the spread of the omicron variant of COVID-19, he said there is still “considerable uncertainty,” but added that there could be risk on the demand side and potential price declines if omicron leads to another round of national lockdowns.
The medium- and long-term outlooks for coal producers, however, are definitely bleaker especially after the latest climate conference in Glasgow, Scotland, last month.
“The climbdown on a global agreement to phase out coal made headlines, but the COP26 messaging was clear enough: Coal’s days are numbered,” said Robin Griffin, research director at global energy consultancy Wood Mackenzie, in a note on Wednesday. “As a result, finance and insurance costs for coal will climb even higher.”
In Indonesia, in addition to pressure from global investors, more immediate risks to coal companies are expected to come from domestic banks. The Financial Services Authority is preparing initiatives that will strengthen requirements that banks manage risks associated with the transition away from carbon-intensive energy. Miners’ refinancing risks will rise, given “the shrinking pool” of bank lending and lack of alternative funding sources, Moody’s said in a recent note.
“The Indonesian coal mining companies that we rate have around $2.9 billion in U.S. dollar bonds maturing between 2024 and 2026. These companies are unlikely to fully refinance these bond maturities with domestic bank loans because the aggregate principal of these bonds is large — equivalent to around 30% of total domestic bank loans to the mining sector as of August 2021,” Hasnain added.
“We expect miners to take advantage of strong cash flow generation, amid current high coal prices, to retire debt” or to “significantly diversify their earnings away from thermal coal,” he said.
On the national policy front, Indonesia has vowed to achieve carbon neutrality by 2060. Among its initiatives are plans to introduce a carbon tax in April on coal-fired power plants. An emissions trading market is also expected to be put in place soon, and Widodo has touted the country’s potential as a renewable energy producer.