Mega Profit for Coal Miner ITMG

What's going on: Coal miner PT Indo Tambangraya Megah Tbk (ITMG) earned a net profit of USD 460.82 million in the first half of 2022, up 292% from last year.

What does this mean: ITMG is an Indonesian mining company with operations in Kalimantan that produces thermal coal — an energy source used to generate electricity in coal-fired power plants.

• Annual production is 17-18 million tonnes. As a comparison, Indonesia's total coal output in 2021 is 609 million tonnes.

• They produce two types of coal: higher and lower grade. Higher grade coal has greater energy density due to lower ash and moisture content, thus commanding a higher price point. ITMG sell to both domestic and international buyers, mainly China, Japan, Philippines, and India.

• The jump in profit is driven by strong coal price in 2022. Global coal price went from $157 per tonne at the start of the year to $427 all-time high in May.

Details: ITMG's average selling price in H1 2022 is $175 per tonne — a 133% increase from 2021. The company did encounter a few operational issues this year:

• Sales volume is 10% lower due to wet weather, causing production delays and loss of productivity.

• Rising global oil price results in higher cost of diesel oil, which is the main fuel used to operate heavy machinery and coal transportation vehicles.

• Despite lower volume and higher fuel cost, the increase in selling price is more than enough to offset these issues, as we can see from ITMG's profit jump.

Why it matters: International coal price has been on a massive rally in the past two years. In September 2020, coal price was $50/tonne. Fast forward to now in August 2022, prices have increased more than eight-fold to $416. For comparison, during the same period, Bitcoin has only doubled from $10,000 to $21,000. So what's causing this rise?

• World economy was recovering faster than expected from the pandemic in 2021, especially China and India — two countries who rely heavily on coal for electricity and represent two-thirds of global coal consumption. This pushes up demand.

• Heavy rainfall and labour shortage in Australia led to lower supply from the world's fifth largest coal producer.

• Because of the war in Ukraine, Europe is seeing natural gas prices at an all-time high and limited gas availability (The EU imports 40% of its gas from Russia). Coal is a cheaper alternative, so EU power plants are switching to coal, further pushing up demand.

• Speaking of Europe, the EU also bans coal exports from Russia starting this month. This boosts coal prices as EU nations are scrambling to secure coal supply from other countries in an effort to save gas for winter — a season where energy consumption is expected to spike as more people use indoor heating.

What to watch: Can we expect coal prices to remain this high?

• Much depends on the resolution of the Russia-Ukraine conflict. Uncertainty in the EU region continues to prop up natural gas price, which encourage gas-to-coal switching.

• China and India will also play a key role here. In the past year, both countries have put measures to increase domestic coal production to reduce import. If successful, we can see lower import demand, putting downward pressure on price.

• Lastly, there is the issue of emissions. Prior to 2021, The US and Europe have reduced coal usage due to its carbon dioxide emissions. Not all countries took the same approach. Emerging Asian economies like China, India, and Indonesia continue to rely on this fuel to meet growing electricity demand.

The big picture: Indonesia is the world's fourth largest producer of thermal coal. Out of the 609 million tonnes produced in 2021, 52% were exported while the rest were used for domestic power generation and other industries such as cement manufacturing.

• Given the abundance of our coal reserves, PLN have targeted coal to fill 34% of new power capacity in the next decade. To meet this target, coal producers like ITMG are mandated to set aside 25% of production for the domestic market — with local price fixed at $70/tonne to keep electricity cost affordable.

Extras: President Jokowi also prioritize on developing coal processing plants. This is part of Indonesia's larger business strategy to build a robust downstream industry that adds export value, create local jobs, and reduce import.

• Project is currently underway in Muara Enim, South Sumatra to build a coal gasification plant that converts coal into dimethyl ether (DME). DME is an alternative fuel that can substitute for LPG, which Indonesia currently imports.

Until next time...