Semen Gresik to spend Rp 1 trillion for coal mine acquisition

Cement maker PT Semen Gresik Tbk (SMGR) plans to spend Rp 1 trillion to acquire a coal mine which produces low-rank coal, the company's President Director said.

?The acquisition aims at reducing production costs. Costs spent to buy coal are significant so we want to reduce it by acquiring coal mines that are in production stage," said Dwi Soetjipto as quoted by Investor Daily recently.

Coal is used to fire kiln and it accounts for 30 percent of the overall cement production costs.

However, the company has yet to decide when the acquisition plan can be executed, said Dwi.

"We have to do it cautiously to make sure that inorganic business expansion is done correctly. In theory, it looks simple but implementing it is not that easy," he said.

The planned acquisition of the coal mine is in line with the company's plan to increase production capacity which will be 20.2 million tonnes this year while sales volume is expected to reach 19.5 million tonnes.

Semen Gresik group comprises three state owned cement makers namely Semen Gresik, Semen Padang, and Semen Tonasa. Semen Gresik accounts for half of the company's total production capacity or 10 million tonnes. Semen Padang accounts for 30 percent or 6,1 million tonnes while Semen Tonasa makes up the remaining.

The company has set a target to produce 23 million tonnes of cement next year with the completion of new cement plants in East Java and in South Sulawesi, said Dwi.

The company is expected to produce 30 million tonnes of cement by 2015 as it plans to build 2 more cement plants, in Sumatera and Java, he said.

?The planned expansion will need additional coal supply to ensure production can go smoothly," said Dwi, adding that the company has been struggling to reduce costs amid soaring coal prices, among others by switching to cheaper low-rank coal from higher-quality ones. Semen Gresik has been using low-rank coal for its plants in Tuban, East Java since April 2011 and expects Semen Padang and Semen Tonasa to do the same, he said.

?We expect all plants to gradually use the lower quality coal until vertical inorganic expansion takes place. If we have our own coal mines it will boost cost efficiency," said Dwi.

The company's coal consumption will increase to 5 million tonnes this year, from 2 million tonnes last year with the operation of new plants in Tuban and in South Sulawesi, said Semen Gresik's Finance Director Ahyanizzaman, adding that two-third of its coal consumption is medium to low-quality type while hard coking coal makes up the remaining 30 percen.

the company burned 2.77 million tonnes of coal last year, falling 1.19 percent from 2009 of 2,8 million tonnes, he said.

The conversion to low-quality coal will increase the consumption volume but costs can be managed because of lower prices, Ahyanizzaman said, adding that the company can save costs around 7 percent because of using cheaper low-quality coal.

Semen Gresik expects all it's plants will be using low-quality coal by 2013, the company said. (*)