UT: We’re cautiously optimistic

By Thomas Sembiring

IDX-listed PT United Tractors Tbk (UT), which is engaged in heavy equipment, coal mining services, coal mining, gold mining, and power plant businesses, remains “cautiously optimistic” about the outlook for this year despite industry challenges marked among others by declining trend in coal price and weak economic growth that have undermined its key sources of revenue. 

UT, which is the sole distributor of the Komatsu heavy equipment in the country, is hopeful that its heavy equipment spare part and services business will remain stable this year as revenue from its two largest sources: heavy equipment sales and coal mining services are expected to weaken amid conservative business strategy of coal miners in the wake of declining trend in the price of the commodity.

The company, which is part of the well-diversified IDX-listed PT Astra International Tbk, expects the Martabe gold mine in North Sumatra Province, which it acquired late last year, would provide meaningful revenue contribution. 

Petromindo.com/CoalAsia recently interviewed UT Corporate Secretary Sara Loebis, discussing the company’s business outlook this year, and future business diversification and acquisition plans.  Following are the excerpts of the interview.  

How’s the performance of UT’s business units so far this year?   

Compared to same period of last year, our coal sales volume as per May (of this year) increased by 4 percent to 4 million tons (of full-year target of 9 million tons).

In the coal mining services business, coal getting volume (in the January-May 2019 period) increased 9 percent (year-on-year) to 51 million tons.   Over burden (OB) removal increased 8 percent to 395 million bank cubic meters. The OB removal volume for the full-year will be slightly lower than last year’s or about the same, as our coal mining clients have set conservative stripping ratio.

What about sales target of the Komatsu heavy equipment, which fell by 17 percent in the period until May?  Has this already been predicted?  

Yes.  Last year, sales volume of Komatsu heavy equipment totaled 4,800 units.  We have estimated that it will be around 4,000 units this year.  We have predicted lower sales volume because first of all, the mining industry feels there’s no need to make additional investment in heavy equipment.

We have also anticipated that in the plantation sector market segment, there won’t be aggressive investment.  In the construction (market segment), there was a question raised whether there will be demand growth in the second semester after the (presidential and legislative) elections are over.

We don’t think there will be a swift increase in sales (of heavy equipment in the construction sector) after the election is over.  New (construction) projects have yet to be offered in tender.  Ongoing projects are the result of previous tenders before the election.  So all these we have taken into account in estimating heavy equipment sales.  So we don’t think there will be surprises just because the election is over.  

 As per May (of this year), we have realized sales of around 1,700 units.  In same period of last year, we sold around 2,000 units.

Some coal miners have proposed for upward revision in their 2019 production plans.  What about UT?

No.  In making production and sales plans, we have to take into account the transportation factor because our coal concession is located in Central Kalimantan where coal transport is done via river.  The problem is that during dry season, the river is impassable.

So what we’re doing is to ensure that the transport capacity and stockpile can support production capacity.  So every time we plan to increase production, we must ascertain that the output can be transported.  There’s no use of increasing production if the output can’t be transported.  

We have actually started using smaller barges which can be used (to transport coal) when the water level in the river declines (during dry season).  But the barges requires time for delivery.   

We’re also in the process of expanding the intermediate stockpile facility.  We hope it to be completed toward the end of the year.

We have taken into account all this (factors) in making coal production and sales volume estimate of 9 million tons for this year.

If the heavy equipment business is expected to weaken this year, and there also not much can be expected from coal mining services, can the gold mining business support UT’s performance this year?

On paper yes it can.  But there are other factors (at play) that we may not yet be aware of.  So more or less (the performance of the Martabe gold mine) will be the same as last year’s.  The gold mining business will be quite helpful.  

So, operation wise, sales of heavy equipment will decline (this year).  But we must also remember that there is the product support division which include spare part (sales) and equipment services, which we think will be the same as last year’s.  The coal mining services business could be the same as last year.  There will be slight increase in coal production.  And there is the Martabe gold mine.

Don’t you expect additional heavy equipment sales from miners planning to revise upward their 2019 production plans?

No.  The waiting time to get heavy equipment is up to six months.  It you place an order now, the delivery will take place next year.  So coal miners have anticipated this.  If they want to increase production now, they must already have secured the required heavy equipment. 

What about your plan to acquire new gold mine? 

We’ll continue to study this.  But I have yet to receive information whether we have identified specific target.  We’re looking for (new gold mine to acquire), but have yet to study specific target.  We agree that gold is an interesting alternative aside from coal.  

We’re now looking for the desirable (gold) concession.  We normally look for concession that’s quite sizeable, not too small.  So it will take time to find this.

What about other minerals?

We’re actually also studying other minerals (for acquisition potential).  But we must very careful in deciding whether the other type of mineral (assets) have similar risk profile to coal or not.  We chose gold because fluctuation in coal price has not been followed by fluctuation in gold price.  

We’re studying the historical price movement of the other minerals, whether it has historical price fluctuation that is similar to coal.  If it is similar, then the risk is the same, while we’re in fact looking for (mineral assets) that can become a balance (to coal).  

Usually, the other mineral type asset must also be relevant (to UT’s other businesses) such as heavy equipment as is in the case with coal. 

Looking at the picture in the first five months of this year, what are the challenges seen by UT?

Considering that we don’t expect any surprises (this year), what we’re looking at now is how to support our customers in terms of efficiency of their operations.

If they (coal mining customers) decide not to make new investment in heavy equipment, the existing equipment must at least be able to operate without trouble.  This means (business) opportunity for our product support division.  Product support is indeed very much required in the mining sector because they operate 24 hours (a day).

We also look at the construction sector market segment, which requires small to medium size heavy equipment.  Our most popular product in this category is the 20-ton excavator.  We have just introduced a new model from Komatsu called PC 210.  The previous product PC 2000 had been well accepted by customers. 

What I want to say is that the new product has been taken into account in estimating this year’s sales target of around 4,000 units (of heavy equipment).  It (the new product) will support the sales volume target, and maintain our market share of around 36 percent.  Without it, our market share could shrink.

What about UT’s power business? 

Construction progress of the PLTU Tanjung Jati coal-fired power plant project (in Central Java) has reached around 70 percent as per May.  It is on track to start commissioning in 2020, and commercial operation planned to start in 2021.

What about the coal requirement for the power plant?

We (the consortium owning the project which includes UT) have agreed on which miners will supply the required coal.  From our concession, it would be about a third of the coal requirement, which is estimated at around 7 million tons per year.  The type of coal is medium calorie coal.

What about UT’s renewable business? 

UT’s subsidiary PT Bina Pertiwi runs mini hydro power plants (PLTMH), one located in Central Java and another in Sulawesi.  The company is also studying potential for developing similar power plant in a number of locations in Aceh Province.

What about solar power projects?

We have yet to invest in solar power plants.  Our Business Development unit is actually studying it.  But we have yet to find the (ideal) location for (developing) solar power plants.

What about other renewable potentials?

Actually there is other (renewable) potential where we can enter, which is hydro power plant that is integrated with dam.

Does it mean utilizing dams developed by the government?

It can be that.  If the government plans to develop dam, PAMA (PT Pamapersada Nusantara, a UT coal mining contractor subsidiary) can also develop it.  This is also something what we’re still studying.  This is still connected with our business chain.

So how would each UT business units contribute to overall revenue this year?  

I can say that the contribution of each business segments will be about the same as last year.  The largest contributor will continue to be the coal mining services business run by PAMA, followed by heavy equipment.  The next are coal mining and gold mining.

As per March (2019) total revenue reached Rp 22 trillion.  The Martabe mine contributed Rp 2 trillion, coal Rp 3.6 trillion and PAMA Rp 9.5 trillion.

So until end of this year, UT remains optimistic?

We’re optimistic, of course by carefully taking into consideration the industry dynamics.  We’re cautiously optimistic.

Editing by Reiner Simanjuntak