The Indonesian nickel slump puts pressure on coal miners hit by declining exports

The Indonesian coal producers find themselves in a difficult situation, as their exports are falling and the demand for fuel from nickel smelters is at an all-time high. This creates a conundrum of growth.

Indonesia's largest export is coal, which will generate $30.49 billion by 2024. A decline in revenues would have an adverse effect on Southeast Asia's largest economy, which is heavily dependent on commodities.

Lower profit margins and falling share prices point to coal's future woes, which include a reduction in workforce, a slowdown in production, and less money going into government coffers, at a time that President Prabowo is launching ambitious spending plans.

The fastest-growing demand for Indonesian coal has been from electricity-hungry smelters that process nickel.

According to the Indonesian Coal Miners Association, (ICMA), the demand for nickel will reach a peak of 84.2 million tonnes by 2026, and then fall to 78.6 millions tons in 2027 due to overcapacity of the nickel industry and possible implementation of stricter emission regulations.

Kpler data showed that Indonesian coal exports were down 12.6% by volume compared to a year ago, while government data indicated a 19.1% drop in value.

Chinese data show that exports to China, which is the largest coal buyer in the world, dropped by 30% compared to a year ago. The country relies more on its domestic production and uses low prices to import coal of higher quality from other countries.

Manish Gupta is a senior analyst at Wood Mackenzie for Asia thermal coal. He said that Indonesian coal miners were diversifying their businesses to protect themselves against the steeply declining demand for low to mid-grade coal.

He said that he did not expect to see the increase in the number of captive plants, which are power plants linked to nickel smelting facilities.

According to Global Energy Monitor's coal plant tracker, Indonesia's nickel smelting sector has led to a threefold increase in Indonesian coal-fired power capacity from 5.5 gigawatts in 2019 to 16.6 GW by 2024.

As nickel prices fell due to increased overcapacity, and China's lower stainless steel imports, some Indonesian smelters idled their facilities.

Data from geospatial analysis firm Earth-i revealed that in June, Indonesian nickel pig-iron operations experienced a 9% increase in smelting activity compared to a year ago, which was the highest level in the past two years. This is primarily because the country's largest nickel producer, Tsingshan, likely stopped production at its joint-venture plants in Morowali Industrial Park.

H. Kristiono is the deputy chairman of ICMA which includes Adaro Bayan Bukit Asam and foreign traders Adani Global Trafigura. He still expects that the coal-fired capacity of the smelter sector will grow despite underutilisation.

The nickel industry will continue to use coal as its primary power source due to difficulties in switching to alternative sources, the slow progress of connecting sites to national grids and Indonesia's opposition to more stringent regulations.

Global Coal Monitor reports that the Global Coal Monitor estimates that Central Sulawesi, North Maluku and Central Sulawesi provinces are expected to have a combined capacity of 6 GW, or 46%, of all coal-fired plants currently under construction in Indonesia. These two provinces are where the nickel processing industry is concentrated.

Companies are squeezed

Indonesian coal producers are being squeezed by a combination of lower exports, slower growth in captive power demand and higher government payments.

LSEG data revealed that the profit margins of Bayan, a major miner in Indonesia, have been falling for three years. Bukit Asam has also seen its first-quarter margins fall below averages every year since 2010. This is due to higher royalty payments and increasing machinery costs.

The shares of Indonesia's five largest coal producers by production are down between 1% and 18% in this year. This is below the broader market growth rate of almost 7%. Adaro has fallen 18% while Golden Energy Mines, Bukit Asam and Bukit Asam lost over a tenth since the start of this year.

Requests for comment from the companies were not answered.

Indonesia announced in April new rates of royalty for nickel, coal and other minerals, to help Prabowo increase his spending. Some coal miners experienced a drop in their royalty rates, while others saw an increase of 1 percentage point.

According to the Energy Shift Institute, based in Australia, by 2024 royalties will account for 16% of average coal producers' cost structures, making them the most expensive among the major commodities produced in Indonesia.

Jakarta also considers export duties on coal for certain price levels in order to bolster state coffers. This is at a moment when miners are already facing higher fuel prices due to the removal biodiesel subsidy.

Analysts say that some coal miners are looking at diversification as a way to survive the current downturn, but they have made little progress. Bukit Asam said, for instance, in May that it was considering an investment of $3.1 billion in a facility to convert coal into synthetic natural gas.

Gupta, of Wood Mackenzie, said that producers are looking at a combination of downstream options, renewables, or investment in alternative commodities. (Reporting and editing by Christian Schmollinger, Ashitha Shivaprasad, Hongmei LI, Fransiska Nanangoy; Additional reporting by Sudarshan Varadhan).

(source: Reuters)