Wednesday, July 27, 2011

I want to be a Coal player! - Intro to Coal part 2

Coal at the moment is the hottest business in Indonesia. Having an annual turnaround of tens of Billions of Dollars, the coal industry consists of a lot of different players, each with different roles and responsibilities in the chain from getting the coal out of the ground to getting it to buyer's burners.

Indonesian Coal Mining are mostly done by external contractors

To better understand the coal industry, we have to understand the players of the industry,

  • Mine Owners - Ownership of a coal mine is not simple. The legal owner of a mine might not be the "real" owner of the mine, just a nominee for legal or tax reasons. Even real owners might not be the economic owners of the mine, as the economic interest of the mine can be "sold" through royalty scheme or joint venture arrangements without selling the mine.

    Mines can be bought already operating at very expensive price or developed from scratch at very high risk. Developing a mine from scratch is very difficult and requires very specific skill-sets, not for the faint hearted and certainly not for beginners. Although there are exceptions to any rule, and some players do get beginner's luck and succeed on their first try, many more lost everything trying to start up green fields from scratch.
  • Services Companies - Unlike in some other countries where a mining company mine the coal themselves, in Indonesia, it is the norm that concession holder companies outsource the coal mining to Mining Contractors. The mining contractors handle the removal of overburden (earth on top of the coal) and coal getting. The coal are then transported to port using trucks by Hauling Contractors. The operation of coal mines involve other services companies such as Surveyors and  Inspectors.

Coal Port is a vital part of the operation and a profit center in itself
  • Stockpile and Port Operators - After being mined, coal is trucked to stockpiles where it is crushed and then loaded to barges at loading port for shipment either directly to destination ports or to be trans-shipped, loaded to huge mother vessels at anchorage.

  • Barge Operators, Stevedores and Agents - On vessel shipments, the coal are transported by barge and then loaded to vessels by the stevedores, while the agents handles the loading process and documentations. On larger shipments where the larger vessels are not equipped with cranes, then a Floating Crane is required. Barges are also used for shipping on domestic coal sales.

  • Coal Traders and Brokers - In almost all Indonesian mines, coal is sold not from miners directly to end users but through traders and brokers. On the majority of the case, it usually involves several traders for the coal to get from the mine to the burner.

    Differing sizes of mine attracts different kind of traders. On smaller mines, selling vessel loads are almost impossible as it requires a month or more to accumulate enough coal for a vessel, making a burden on the working capital as the millions of dollars cost required for a single shipment will have to be held for months just for a single turnover. To remedy the situation traders buy in cash from smaller miners in lots of just several thousand tons, sometimes buying from several miners to reach the 5 to 8 thousand tons required for a single barge. These barges are then sold to another trader that buys several barges to reach the 40 to 60 thousand tons of a vessel which in turn is sold to an international trader that only buys by the vessel.

    Larger mines only sell by the vessel, but almost never directly to the end user. Most of the time neither miner nor end user wants the difficulties and risks of shipping as well as possible quality discrepancies between loading port and discharging port. These are where the traders come in the picture. They take care of them and in return get profit for their risks. Traders also facilitates transfer pricing and sometimes even provide financing and off-take contracts for larger quantities.

    A special breed of traders don't even bother handling the coal, where they trade coal contracts and right-to-buy and right-to-sell options. These paper traders use coal or its derivatives trades as instruments for financial games or hedging. The contracts are sold and resold numerous times to different traders until the last one do the physical trade of the coal on the due date of the contract.
Trans shipment from barges to a vessel using floating cranes

As the saying goes, money makes The World goes round. Coal world is huge and huge money makes it goes round. There are opportunities on all corners, nooks and crannies of the coal world and money to be made. All that need to be done are matching the skills with the requirements, without getting caught in the risks.

Only in the coal world of Indonesia can so much opportunity be gained, if only how the game is played is understood. But be warned! Once you tasted the sweet taste of Indonesia's black gold, other businesses will no longer interest you.

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