9
Deloitte Indonesia Business and Industry Updates Is black gold still gold? Restructuring the coal mining sector in Indonesia
Deloitte Indonesia Business and Industry Updates
Is black gold still gold? Restructuring the coal mining sector in Indonesia
Deloitte Indonesia Business and Industry Updates
02
With the COVID-19 pandemic and the ensuing economic uncertainty, Indonesia’s coal mining sector is facing an unprecedented set of challenges. Apart from lower coal prices, coal mining companies are also grappling with a plunge in global demand for coal, declining interest in fossil fuels across international markets, as well as reluctance amongst business partners to enter long-term coal supply agreements given the current economic conditions.
This current picture differs drastically from the heydays of coal mining – when coal was often referred to as “black gold” for its high value. For many companies, the time has come to consider their restructuring options to enable them to not only survive this uncertain pandemic period, but also thrive in the days after.
In this context, we will discuss one specific form of restructuring: debt restructuring. This is distinct and separate from other definitions of restructuring, such as corporate restructuring, which is the reorganisation of a company’s group structure and streamlining of subsidaries to boost the group’s overall profit margins; or operational restructuring, in which the company makes changes to its operational procedures and systems to incorporate new technology or increase efficiency.
Although debt restructuring can sometimes be a taboo topic, as some industry players continue to hold certain misconceptions about the causes behind such activities, it has been gaining more traction in recent months as a tool for companies to ensure their long-term viability and debt-serving capability.
Indeed, the drastic measures that the COVID-19 pandemic have compelled companies to take – such as imposing strict limitations on the number of field and office employees that can be present in at any point in time – have adversely impacted their production levels, with the result that debt restructuring is becoming closer to an inevitability for many players.
Deloitte Indonesia Business and Industry Updates
03
Earlier in June 2020, coal prices plunged to about USD 52.98 per ton on the back of the COVID-19 outbreak – a drastic decline from levels in the first quarter of the year, where prices had been consistently above USD 65 per ton1 (see Figure 1). This downward trend continued until September 2020, when it reached its lowest level in the year at USD 49.42 per ton, before a slight uptick in October 2020 owing to an easing of coal import restrictions by China2.
Is black gold still gold?
1 Directorate General of Mineral and Coal. 2020. 2 “Harga Batubara Diharapkan Terus Membara Hingga Akhir Tahun Ini”. Kompas.com. 5 October 2020. 3 “Realisasi Produksi dan Penjualan Batubara Tahun 2020”. Kementerian ESDM.2020.
Figure 1: Coal reference price levels in January-October 2020
Figure 2: Coal production levels, export levels, and contributions to DMO targets in January-August 2020
From a production perspective, coal companies also continue to struggle to meet production targets. As of August 2020, Indonesia’s overall year-to-date coal production came in at about 374 million tons, or about only 68% of the targeted 550 million tons for 20203 (see Figure 2).
Source: Directorate General of Mineral and Coal, Ministry of Energy and Mineral Resources.
Source: Minerba One Data (MODI), Ministry of Energy and Mineral Resources, 12 October 2020.
Deloitte Indonesia Business and Industry Updates
04
4 “Konsumsi Batubara Domestik Diperikarakan Anjlok 13%”. CNBC Indonesia. 28 August 2020.5 “Ada Pandemi, Realisasi Target Serapan Batubara PLN di 2020 DIprediksi Meleset”. Kontan. 28 September 2020. 6 “Produsen Batubara Berencana Pangkas Produksi hingga 20 Persen”. Kompas.com. 1 July 2020.7 “IMEF: Sanksi DMO Batubara Sebaiknya Dihilangkan sampai Pandemi COVID-19 Berakhir”. Kontan. 28 September 2020. 8 “APBI Proyeksikan DMO Batubara Meningkat tapi Belum Lampaui Target Pemerintah”. Kontan. 11 October 2020.
This decrease in production is in line with the 6% year-on-year reduction in coal consumption from Indonesia’s power plants4: state-owned PT PLN, which is responsible for the majority of Indonesia’s electricity supply, reported revised projected figures for its coal absorption of 100 million tons5– down from its initial projection of 109 million tons – as a result of the decrease in electrical loads driven by a reduction in commercial activities following the implementation, and later re-implementation, of large-scale social distancing measures.
In response to the current market conditions, the Indonesian Association of Coal Mining Business or Asosiasi Pertambangan Batubara Indonesia (APBI) announced plans to cut production targets by up to 20% to enable coal prices to reach a demand-supply equilibrium in the global seaborne coal markets6.
Additionally, the Indonesian Mining and Energy Forum (IMEF) and APBI have also jointly urged the government to temporarily ease sanctions on companies who are unable to meet the target under their Domestic Market Obligation (DMO) arrangements during the pandemic period7. According to estimates by the APBI, coal mining companies are likely to only be able to meet 130-140 million tons of their DMO targets by the end of the year, significantly below the government’s target of 155 million tons8.
Deloitte Indonesia Business and Industry Updates
05
Restructuring the coal mining sector in IndonesiaThe pandemic has had varying degrees of impact on different players across Indonesia’s coal mining sector. While some companies are better positioned to meet their production target plans even with the implementation of strict health protocols, others have temporarily suspended their production activities over concerns that any outbreak in their premises will aggravate their already depressed business performance9.
Nevertheless, no player is immune to the external environmental pressures brought on by COVID-19, including but not limited to the possibility of a prolonged economic
downturn, shrinking demand, as well as supply chain and operational disruptions. As the pandemic continues to have a broad range of impacts on nearly every single sector of the economy, players in the coal mining sector are also vulnerable to disruptions from the commodity and financial markets, which could entail heightened counterparty, legal, working capital, and liquidity risks – in addition to increased interest rate and foreign exchange volatility.
Overview of the debt restructuring processUltimately, all the external pressures might combine to culminate in a typical series of events that could potentially lead to a crisis for coal mining companies (see Figure 3). Initially, revenues might decline and margins might compress, leading to some losses for companies. Later, as the situation worses, the company begins to experience negative cash flows, and therefore find themselves increasing their debt leverage. As their debt servicing capability deteriorates, it becomes increasingly difficult to access liquidity, and defaults – or even an eventual collapse – become inevitable.
Figure 3: Typical series of events leading to a crisis
9 “Dampak COVID-19 Terhadap Rencana Bisnis Emiten Batubara Indonesia”. APBI-ICMA. 1 April 2020.
Deloitte Indonesia Business and Industry Updates
06
To avoid the undesirable scenario of a default or a collapse, an intervention must be made during the period of distress to enable the coal mining company to restructure its debt and, in doing so, set its path towards recovery. Overall, the restructuring process consists of two key phases, each with its own set of objectives and activities (see Figure 4):
• Stabilisation: The objective is to limit the impact of the crisis on the company, and to eventually resume normal operations. Broadly, this entails liquidity management, cost reduction, funding and financial support, as well as stakeholder communication activities.
• Contingency planning and damage limitation: Upon achieving stability, the next step would be to plan for contingencies and limit the damage so as to enable the company to develop and implement long-term solutions across their operations, legal and contractual, as well as financial aspects.
Figure 4: Two key phases in the restructuring process
Deloitte Indonesia Business and Industry Updates
07
Looking aheadFacing the possibility of a protracted economic downturn and long-term decline in the demand for coal, debt restructuring is becoming an increasingly real option that Indonesia’s coal mining companies will need to consider as they evaluate their financial positions, and find ways to ensure their company’s long-term viability.
As with most interventions, an earlier decision to restructure is likely to be more beneficial for a company – not least because it gives the company’s management more time and opportunities to manage their stakeholders’ expectations.
Furthermore, a consensual decision that is made between management and stakeholders to restructure a company’s debt will also enable the management to retain greater control over the process, as compared to a forced restructuring process triggered by either lenders or vendors.
Without visibility or certainty on the recovery timeframe, coal mining companies would do well to be proactive at identifying situations or positions that could quickly escalate into a crisis – and to act earlier, rather than later, to limit the fallout – and begin on the path to recovery ahead of others in the game.
Richmond AngExecutive Director, Debt Advisory and Restructuring Leader, Singapore and Southeast [email protected]
Paulus Miki KurniawanM&A & TS Associate DirectorPT. Deloitte Konsultan [email protected]
Mira Adriana PurnomoRestructuring Services ManagerPT. Deloitte Konsultan [email protected]
Deloitte Indonesia Business and Industry Updates
08
Contact UsClaudia Lauw Lie HoengCountry [email protected]
Cindy Sukiman Energy, Resources & Industrial Industry Leader [email protected]
Ali Mardi Southeast Asia Mining & Metals Leader [email protected]
Budiyanto Indonesia Mining Leader [email protected]
Business Leaders
Elisabeth ImeldaAudit LeaderImelda & [email protected]
Rosita Uli SinagaAssurance Service LeaderPT Deloitte Konsultan [email protected]
Melisa HimawanTax & Legal LeaderDeloitte Touche [email protected]
Edy WirawanFinancial Advisory LeaderPT Deloitte Konsultan [email protected]
Brian IndradjajaRisk AdvisoryPT Deloitte Konsultan [email protected]
Iwan AtmawidjajaConsulting LeaderPT Deloitte [email protected]
Irawati HermawanLegal LeaderHermawan Juniarto & [email protected]
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.
Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities, each of which are separate and independent legal entities, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Hanoi, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei and Tokyo. About Deloitte Indonesia In Indonesia, services are provided by Imelda & Rekan, Deloitte Touche Solutions, PT Deloitte Konsultan Indonesia, PT Deloitte Advis Indonesia and KJPP Lauw & Rekan.
This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication. DTTL and each of its member firms, and their related entities, are legally separate and independent entities.
© 2020 Deloitte Touche Solutions
