Moody's: Indonesian coal producers need to control costs

(Singapore, August 22, 2012) -- Moody's Investors Service says that Indonesian mining companies need to keep their costs under control in order to retain their status as the world's lowest-cost thermal coal producers.

"In the prevailing environment, we expect production costs to rise 5%-15% in 2012, and this trend will further pressure operating margins," says Simon Wong, a Moody's Vice President and Senior Analysts. "Operating margins are already sensitive to price declines resulting from elevated production cost levels and greater exposure to index-linked coal contracts and spot sales."

Wong was speaking on the release of a Moody's report, "Indonesian Coal Miners' Resilience Tested If Prices Remain Low." The report follows Moody's negative rating actions on August 17 on three Indonesian coal producers.

"Looking ahead, coal producers need to preserve their capital and liquidity by rationalizing their capex plans as coal prices are not expected to recover to their recent peak of USD130 per ton in early 2011 any time soon" says Wong.

"Moody's expects the Newcastle thermal coal price, the benchmark seaborne coal price in Asia, to average around $90-$95 per ton in 2012 and that there won't be a meaningful rebound in 2013 unless the demand and supply balance improves," adds Wong.

The report also says that Moody's expects coal import by China to slow substantially in the second half of this year. Half of China's thermal coal imports come from Indonesia, and Moody's-rated issuers have varying degrees of exposure to China.

The report further notes that the increased debt burden of the rated Indonesian coal producers is a negative rating driver while coal prices remain weak. Their outstanding debt rose 28% in 2009-11 because of debt-funded capacity expansions, acquisitions and enhancements to their vertical integration. (ends)