Fuzzy regulations not helping the Indonesian coal sector

Strong growth is already locked in and a clearer regulatory framework would only provide more push, said Fitch.

There is a risk of stifling this growth if regulations remain murky, including a ban on low-rank coal exports that can hurt more than it can help.

"Indonesia's coal mining sector should continue to see strong growth prospects but can benefit from clearer and more predictable regulations," said Fitch in a release accompanying its full report titled "Indonesia: Coal Mining - Strong Medium-term Outlook; Clearer Regulations Highly Desirable."

"The regulatory environment of the Indonesian coal industry is in a state of transition. Further clarity is required on certain major aspects, including the proposed ban on low-rank coal exports. If implemented, the ban can hit certain operators who have significant reserves in low-rank coal. Most of the large coal miners in Indonesia are export-oriented and their coal reserves are either below or marginally above this threshold," Fitch said.

"The sector's rapid expansion of production and acquisition of coal reserves. A number of operators have acquired, and will continue to acquire, green-field projects which generally entail higher operational and financial risks. However, as long as risks associated with such projects are sufficiently addressed and green-field project development exposure contained, these do not necessarily pose a significant threat to credit profiles," it added.

"Credit profiles of Indonesian coal miners remain sub-investment grade, owing to limited mine site diversification, evolving mining regulations, debt-funded expansion and, in some instances, corporate governance issues," it said further.

"Fitch expects medium term demand supply dynamics for thermal coal to remain well balanced, leading to healthy prices and strong operational cash flows for Indonesian coal miners," says Shahim Zubair, Associate Director in Fitch's Asia-Pacific Energy & Utilities team. Low production costs are a major advantage for Indonesian coal producers.

"It is a tough act to balance the health of the industry against long-term domestic energy security of Indonesia" said Mr Zubair. "Fitch believes that Indonesia will take a pragmatic approach to industry regulations as failing to do so can have negative consequences for the sector in the long-run."