Indonesia: No bailout – only one listed coal company is profitable, the rest are in the red.
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With only one leading coal company currently making a profit, the Indonesian government must let the market decide the future for financially broken coal companies wishing to avoid payments of much-needed royalties and loans, finds a new report from the Institute for Energy Economics and Financial Analysis (IEEFA).
Exacerbated by COVID-19, coal prices have dropped some 52% in 5 months and Indonesia’s coal export markets, including China and India, are slashing imports and increasingly turning to domestic sources to bolster energy security.
“The Indonesian coal industry is in trouble structurally and financially with companies now struggling to break even,” says IEEFA financial analyst Ghee Peh, author of the report, No Bailout, Don’t Throw Good Money after Bad.
“At the current coal benchmark price of US$47/tonne, only 1 of the 11 listed Indonesian coal companies we reviewed – Bayan Resources – is at cash breakeven or better.”
“In contrast, according to our estimates, Bumi Resources, ABM Investama and Geo Energy Resources are the most at risk due to their high gearing ratios and now cripplingly high break-even prices of US$63/tonne for Bumi, US$61/tonne for ABM Investama, and US$60/ tonne for Geo Energy Resources.
“If low coal prices persist, these companies will not be able to manage their debt load.”
IEEFA found leading Indonesian coal companies have outstanding loans of US$3.8bn to both foreign and domestic banks including Mandiri, BNI, BRI and Permata.
“There’s a question about whether those banks are protected from likely further losses as coal companies struggle to make ends meet, particularly as current outstanding coal sector bonds of US$3.1bn are also unlikely to be refinanced,” says Peh.
“With total debt at US$6.4bn, any financial assistance provided to the coal industry will go straight into the hands of lenders, leaving a broken industry still broken.”
THE INDONESIAN COAL INDUSTRY IS FACING A RANGE OF STRUCTURAL RISKS THAT GO BEYOND THE CURRENT WEAK PRICING.
“While energy markets globally have been affected by the COVID-19 slowdown, many governments, including the U.S., are backing away from providing financial assistance to coal companies due to the marked drop in asset values reflecting the ongoing structural decline of the industry.”
Nearly 140 significant global lenders, insurers and asset managers have already announced their divestment from coal financing, and major mining companies including Anglo American, Rio Tinto and BHP have sold or are selling their coal assets. These moves signal a negative view on the economic and risk profile of coal assets and supports the view that the decline in their economic value is more structural than cyclical.
Meanwhile, coal prices will remain under pressure due to the rise of renewable energy sources, especially wind and solar power.
“WE BELIEVE THAT MARKET FORCES SHOULD CONTINUE TO BE PERMITTED TO OPERATE IN INDONESIA, GIVING ALL MARKET PARTICIPANTS A FAIR CHANCE TO RE-PRICE THE COMPANIES’ COAL ASSETS and allowing them to explore opportunities to operate the assets more efficiently or diversify,” says Peh.
“The market will continue to provide healthy royalties to the government if it is allowed to perform as a market should, with companies reconfiguring their asset base to reflect the current technology-driven energy transition.”
The Indonesian government collected US$1.1bn in royalties and US$1.2bn in taxes in 2019 from the 11 coal companies in IEEFA’s analysis. Any government bailout to the coal industry would put at risk further royalties the country sorely needs, while protecting under-performing companies in decline and thereby failing to generate target returns.
Allowing poorly run coal mines and companies to fail may be the economically correct option, according to the report.
“IEEFA recommends that the Government not provide a bailout to the coal sector,” says Peh.
14 September 2020
IEEFA