The slowdown in China's economic growth is cutting deeper into Indonesia's coal sector, forcing producers to reduce output and slash costs, and testing the resilience of a commodity boom in Southeast Asia's largest economy.
Top Indonesian exporters PT Bumi Resources and PT Adaro Energy are feeling the pinch after a 20 per cent fall in international benchmark coal prices this year. Moody's Investors Service said Indonesian in d ustry costs in 2012 will rise as much as 15 per cent.
Indonesia is the world's largest exporter of thermal coal used by power stations and it provides about half of China's coal imports. As one of the lowest cost producers in the world, it provides a litmus test of the health of the market.
"With the reduction in coal prices over the past nine months, several companies have cut production and even some marginal companies have closed their operations temporarily," Bob Kamandanu, the chairman of the Indonesian Coal Mining Association, told Reuters at a conference in Balikpapan, a mining centre on Borneo island.
This week, the association cut its 2012 production forecast to between 340 million and 350 million tonnes, the second revision this year and 10 per cent to 13 per cent below its original forecast of 39 million tonnes.
Indonesia's coal exports to China slumped 16 per cent in July from a year earlier, the first significant fall this year, although year to date they are still up more than 15 per cent.
China's economy is widely expected to grow at its weakest pace since 1999 this year as it feels the chill of the euro zone debt crisis. The pull back is already being felt by China's trade partners.
Indonesia's merchandise exports have fallen for four straight months, largely as its commodities shipments to China slowed down, pressuring the trade deficit and the rupiah.
"I think there is more downside pressure for the rest of the year and China's coal demand growth may soften further in the coming months, especially since demand from the key industrial users, like cement makers and steel mills, are also moderating," said Dong Yueying, secretary-general of China Coal Transport & Distribution Association.
Back to basics
Some small miners said at the conference this week that they were cutting output and costs. They include PT Pesona Khatulistiwa Nusantara, which has slashed its 2012 output target by 30 per cent to 2.1 million tonnes.
Big players such as Bumi and Adaro operate some of the country's richest mines in the Indonesian part of Borneo but their margins are under pressure too.
Bumi Resources posted a net loss in the first half of 2012, dragged down by currency losses and rising costs, and its shares have been battered this month by concerns over cash flows and debt.
Adaro has cut its 2012 production forecast by 4 per cent and its chief executive Garibaldi Thohir said he wants to get "back to basics" by focusing on costs. The firm has a hiring freeze and has slashed its capital expenditure plans for 2012.
"You don't really get too much of a benefit in this business by expanding your market share," said Cameron Tough, the firm's investor relations spokesman. "We also see some benefits from the economic downturn in that it sweeps some of the short-term miners away."
Costs for hiring equipment and workers are still rising sharply following years of a mining boom, so with market prices for coal falling, miners are reconsidering expansion plans.
"We are much more focused on cost reduction than production increases, and even cost reductions with a slight production decrease," Alastair McLeod, chief financial officer of Bayan Resources, told Reuters this week by telephone.
He said he doubted the firm's original guidance for this year's production would be achievable.
Bayan's costs rose 49 per cent in the first half of the year, above an average of 30 per cent for six top miners in Indonesia, Reuters calculations show.
Last year, Bayan had outlined ambitious plans to double its annual output to as much as 25 million tonnes by 2013 to meet growing demand from consumers such as India.
It costs Indonesia's large miners between $US30 and $US55 to produce a tonne of coal and transport it to ports, a low cost only matched by some South African mines. Australia's large miners spend at least $US80.
Moody's said last month that Indonesian coal producers needed to keep costs under control if they want to maintain their status as the world's lowest-cost thermal coal producers.
"We expect production costs to rise 5 per cent to 15 per cent in 2012, and this trend will further pressure operating margins," says Simon Wong, a senior analyst at Moody's.
If miners cut back, companies that service the industry also feel the pinch. Indonesia's second-biggest contractor, PT Delta Dunia, has seen four consecutive quarterly losses.
"Mining contractors don't have enough work, so whatever the price you offer they will take it," said Jeffrey Mulyono, director of coal miner PT Pesona Khatulistiwa Nusantara.
China's domestic coal price has fallen to a two-year low of around $US98.50 per tonne and could fall further said Hou Wenjin, a coal industry official with the provincial government in Shanxi, the country's second-biggest coal producing region.
"Overall inventories, at over 80 million tonnes, are still much higher than normal levels," he said this week at an industry conference in Beijing.
The slowdown in China's economic growth has hit the construction sector and intensive coal users such as steel and cement makers. Although some miners have cut production the coal market is far from balanced.
Chen Ze, deputy director in the coal industry department in Inner Mongolia, China's biggest coal region, said he expected imports from the United States, Australia, Indonesia, Colombia and South Africa to compound the oversupply in China.
"Because demand in Europe is poor, so everyone will try to move their coal to China," he said at the Beijing conference. "We may see supply growth surpassing demand over the coming months."
Despite the slowdown, Indonesia needs heavy investment in infrastructure to ensure it can meet demand in the future, especially as India's import needs grow.
"Indonesia's coal industry is at risk today, but that risk will be actualised around 2015-2016, when increased quantities of coal will come from competitors in Australia, the U.S., Russia, Africa and even Columbia," said Bart Lucarelli, an adviser to the Indonesian government.