Moody's sees stable outlook for Indonesian coal industry
Wednesday, October 26 2011 - 02:45 AM WIB
"Specifically, a strong pipeline of thermal-coal power projects around the region will support thermal-coal prices, while coal issuers' low-cost base, ties with utilities in Asia Pacific, strong liquidity, and improved debt-maturity profiles support their ratings," says Simon Wong, a Moody's Vice President and Senior Analyst.
"Moreover, Indonesia's rated coal miners have accelerated their strategies of vertical integration for the purposes of enhancing control over pit-to-port operations, operating efficiency, and cost control," says Wong. "Further to solidifying their competitive advantages over their international competitors, they have managed these additional capex requirements within their current credit and financial profiles."
"Accordingly, our overall view is that the sector's strengths -- including strong financial profiles -- outweigh weaknesses and possible risks, such as the uncertainty surrounding the global economy," says Wong.
Wong was speaking on the release of a Moody's special comment on the Indonesian coal industry, and which examines key issues, including possible risks, industry trends and their rating implications, and the regulatory outlook. In addition to Wong, the report's other authors are Dylan Yeo, Associate Analyst, and Philipp Lotter, Associate Managing Director.
"However, while further rating uplift could occur in the sector, given its favorable fundamentals and conditions, it would not be to the extent of moving any of the ratings firms to investment grade," says Wong.
"And any potential movement of Indonesia's sovereign rating into investment grade is unlikely to trigger any upward rating movement for the sector, given its high concentration risk in terms of geography and product, as well as exposure to uncertain and still-evolving Indonesian mining laws," says Wong.
The Moody's report notes that the strong number of thermal-coal power projects scheduled for completion in the short to medium term in countries such as China, India, and Indonesia will continue to drive demand for thermal coal.
In such an environment, the need for a low-cost, long-term, and stable supply of coal with low ash and sulfur content will underpin sustained demand for thermal coal from Indonesia.
Over the next several years, most Indonesian coal firms will be stepping up exploration for new sites, while aggressively increasing the productive capacity of existing mines. But capex will -- as indicated -- remain manageable because coal-mining contractors will partly share the burden.
At the same time, the Moody's report notes that cash hoards pose potential event risk. The sector's issuers have ample cash, and pressure to use such cash may give rise to event risk.
Accordingly, negative rating implications would arise if issuers use their surplus to the benefit of key shareholders, which could materially decrease protection for the bondholders, or make poorly chosen purchases.
In Indonesia, Moody's rates 4 coal mining companies (Adaro, Bumi, Indika and Berau), as well as 1 coal mining services company (Buma), with ratings ranging from B1 to Ba1 and total outstanding debt of $2.845 billion.
The report, entitled, "Indonesian Coal Miners: Stable Amid Uncertain Global Macro Outlook", is available at www.moodys.com. The principal methodology used in this rating was Global Mining Industry published in May 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. (*)