S&P Says Coal Miners in Indonesia Could Shift Focus To Power Generation
Coal miners in Indonesia might find an alternative to the risk of lower prices of the commodity by shifting some of their resources to electricity generation, according to Standard & Poor’s Ratings Services.
In a report made available to the Jakarta Globe on Tuesday, S&P said that stable and steady revenues from the power business could ease weaker margins in mining production should coal prices remain low.
The rating agency said that the power sector is already attracting coal producers because of the prospects for electricity consumption. It forecasts Indonesia’s economy to grow about 6 percent annually for the next five years, but it expects electricity use to expand at a faster rate of 8 percent to 10 percent.
The report is consistent with a trend in Indonesia’s power-generation business, centered around the limited capability of the state utility, Perusahaan Listrik Negara, to build more power plants to meet the strong demand from Indonesia’s 240 million people. As a result, the government is turning to independent power producers (IPPs) to meet the projected demand.
The government has laid out plans to increase the country’s electricity capacity by about 20,000 megawatts in two separate fast-track programs, of which the first focused on the country’s huge coal reserves.
“The government’s proposal creates investment opportunities for the larger, more established, and generally cash-rich domestic coal producers,” analysts Xavier Jean, Andrew M. Wong and Vishal Kulkarni said in the report.
“These companies’ long record of reliable operations with growing production, large and abundant coal reserves, and generally strong cost positions make them natural partners in power generation investments.”
S&P noted three main characteristics that make investing in the power business attractive for coal miners: a fixed cost component that compensates IPPs for investment costs; cost pass-through provisions for fuel that allow IPPs to raise power generation tariffs; and limited volume risk.
“These factors should result in steady operating performances and margins for coal companies that expand into the power sector,” the S&P analysts said.
Some coal miners already have plans to construct power plants. Adaro Energy, the country’s second-largest coal miner, is working with two Japanese firms to build a 2,000 MW coal-fired power plant at a cost of around $4 billion in Central Java. Adaro, however, has seen the project delayed because the government has been slow to issue a permit.
Still, S&P said that investing in the power business is risky because a single project is likely to cost billions of dollars.
It also said that PLN is vulnerable to fuel price volatility and exchange-rate risks as well as being dependent on government subsidies, which would serve as a long-term risk for investing in the power business.
The rating agency urged Indonesian coal miners to partner with more established and experienced players in the power business and to manage the financing structure of power plants projects better.
S&P also said that capital will remain available for financing large power projects in the next three years from lending institutions such as development banks.
“Cash flow stability, long tenors, and the developmental aspects of these infrastructure projects make them attractive to global export-import banks such as Japan Bank for International Cooperation, China Development Bank or multilateral lending institutions,” the analysts wrote.
Bukit Asam, a state-controlled coal miner, views the power business as an opportunity to offload its commodities.
President director Milawarman said that the company planned to build more power plants located near its mines that contain low-rank coal, or coal with low energy density. He added that about 70 percent of Bukit Asam’s coal reserves are low-rank. The company is developing three power plants, with a combined generation capacity of about 2,060 megawatts, in Sumatra.