Indonesia coal price cap poses limited risk to producers: Fitch



Source: FITCH RATINGS

Indonesia’s cap on the benchmark price of coal sold to the domestic electricity sector is unlikely to have a significant impact on the credit profiles of Fitch-rated mining firms, which export most of their production, says Fitch Ratings. In any case, our ratings are based on average benchmark price forecasts that are broadly in line with the cap of USD70/tonne imposed until end-2019, and so will not be affected.

The price cap, announced last week and set to apply from mid-March, is part of the government’s strategy to ensure low prices for electricity consumers as it looks to support industrial competitiveness and household disposable incomes. It froze electricity prices charged to industrial consumers earlier in the year, preventing Perusahaan Listrik Negara (PLN), the state-owned monopoly distributor, from passing on rising costs as coal prices were pushed up by an unusually cold Chinese winter. The Indonesian coal price benchmark, Harga Batubara Acuan (HBA), has exceeded USD95/tonne since January 2018, which might have necessitated an increase in government subsidies to PLN if the price cap had not been imposed.

The new regulations will mean coal miners miss out on some of the short-term upside from high prevailing coal prices, to the extent that they sell production to the domestic market. The government sets domestic market obligations for miners to ensure they meet local demand, which prevents them from simply diverting output toward the overseas market.

That said, only around one-fifth of Indonesia’s 461 million tonnes of coal production was sold in the domestic market in 2017, which suggests any loss of revenue will be limited. Indika would be the most affected among our rated coal miners, as around 15% of its volumes are sold to the domestic power sector. GEO Energy, Golden Energy Resources, ABM Investama and PT Toba Bara sell less than 10% of volumes to the domestic power sector. Domestic market obligations are likely to increase over the medium term, as the government looks to contain production and conserve coal resources for local power needs, but a sharp rise next year is unlikely.

Coal firms will therefore continue to receive the market price for the majority of their production. As a result, their financial performance might still exceed our expectations at the start of the year, when we had forecast an average Newcastle benchmark (6000 kcal) price of USD72/tonne in 2018 and USD67/tonne in 2019. The HBA on which the regulations are based broadly reflect Newcastle prices.

The new price regime does not include a floor on prices, and so provides no benefit to the mining firms in the event of a downturn. Prices will continue to fluctuate as before if the market price drops below USD70/tonne.

The price ceiling is unlikely to have any meaningful impact on PLN’s standalone credit profile. We would have expected the government to compensate PLN for losses through subsidies if high coal prices and fixed electricity prices had caused under recoveries. PLN’s IDR of ‘BBB’ is equalised with the sovereign rating due to its very strong government linkages.

Source: FITCH RATINGS