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Indonesian coal producers cut costs to sustain profits as prices fall

https://www.chemnet.com   Oct 30,2014 Platts
Indonesian thermal coal producers are focusing on cutting costs in a bid to remain profitable amid a 27% slump in seaborne prices this year, market sources said this week.

Mining contractor United Tractors' company secretary Sarah Loebis said all its coal customers had asked to renegotiate their contracts in recent months to maximize efficiency and reduce costs.

Trimming output was not an option for major Indonesian producers as output means cash flow, even in an oversupplied seaborne market, she added.

Indonesian coal miner Berau Coal said it had been able to negotiate a 15% reduction in mining costs at its Lati seam in East Kalimantan province with major contractor Bukit Makmur Mandiri Utama.
Berau's London-listed owner Asia Resources Mineral separately said Berau has also lowered its fuel usage this year from last year.

Negotiating lower mining contract fees and cutting fuel expenses were the major ways coal producers could cut costs, said Standard & Poor's Singapore-based director Xavier Jean.

Standard & Poor's, like Platts, is owned by The McGraw-Hill Companies.

A 10% fall in global oil prices equates to a 2-3% improvement in the cash cost base of mining companies, he said, adding fuel costs typically account for 20-30% of a coal producer's total mining costs.

Indonesian miners had further room to move in lowering costs and were likely to maintain production levels in a bid to secure market share, making it harder to gauge when a price recovery could occur in an oversupplied seaborne market, Jean said.

"If you are a big miner and you believe in your cost position even though the bottom line is affected by lower prices, and if you have big reserves, you will increase production even if you are the last man standing," he said.

Publicly-listed Indonesian coal mining companies have yet to release their third quarter production results, but are expected to post both profits and year-on-year increases in production.

The country's largest coal producers -- Bumi Resources, Adaro, Kideco, Berau and Bukit Asam -- posted both profits and year-on-year output increases for the first half of the year.

An Indonesian energy ministry official said Indonesia's 2014 thermal and metallurgical coal output was likely to exceed its 2013 total due to higher output by major producers and new capacity by small and mid-sized miners.

Indonesia's coal production totaled 449 million mt in 2013, while exports totaled 347 million mt and domestic coal sales totaled 72 million mt, official data showed.

LOWER STRIPPING RATIOS

A Sydney-based coal market analyst noted major Indonesian coal miners were also continuing to lower their mine stripping ratios. The ratio of overburden moved to access coal is the key economic factor in open pit operations, which comprise the majority of Indonesia's coal mines.

However, focusing on cutting the volume of waste required to produce each ton of coal, reducing capital expenditure in the process, can be taken too far, according to industry experts.

Lowering the stripping ratio too much risks "compromising the long-term sustainability of their mining operations," the Sydney-based analyst said.

Industry analysts said major Indonesian coal miners have been able to reduce their stripping ratios to 1:7-1:9 over the past two-three years from 1:9-1:12 earlier. A stripping ratio of 1:7 means 7 mt of overburden has to be removed to produce 1 mt of coal.

The Sydney-based analyst cautioned the seaborne coal market was unlikely to see signs of recovery as a direct result of the cost-cutting efforts in Indonesia.

"Lower costs do not mean better margins for Indonesian coal producers. At this time when prices are falling, lower costs will allow them to produce more coal and this will not help in industry price recovery," the analyst said.

Platts assessed the daily 90-day FOB price of Newcastle coal with a calorific value of 6,300 kcal/kg gross as received at $63/mt Tuesday, down 27% from the January 2 assessment of $85.90/mt.
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