Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment

Executive summary Since 2009, China has emerged as a net coal importer as its domestic production of coal is not able to meet demand of the domestic market. As China continues to lead global economic growth, its demand for energy and coal will similarly increase rapidly. China Coal Energy Company, a state-owned enterprise in China, is the second largest coal mining company in China. As Chinas demand for coal increase rapidly, China Coal Energy has been exploring opportunities to secure more coal reserves and supply to meet this demand. Indonesia is the worlds second largest producer of coal and presents an attractive opportunity as a core expansion market for China Coal Energy, supplementing its onshore China production to address the rapidly growing demand for coal in China.

Introduction to China Coal Energy Company Limited China Coal Energy Company Limited (China Coal Energy) is a state-owned enterprise in China, principally engaged in various aspects of coal mining businesses including coal production and trading, coal chemicals, coal mining equipment manufacturing, pit mouth power generation, coal mine designs etc. China Coal Energy was successfully listed on the Hong Kong Stock Exchange in 2006 and subsequently on the Shanghai Stock Exchange in 2008. China Coal Energy is the second largest coal mining company in China with 8.7b tonnes of coal reserves as of 2009, supporting a mine life of 64 years, after China Shenhua Energy Company Limited (China Shenhua), another state-owned enterprise, and is also the largest coal mining equipment manufacturer in China. China Coal Energy is also the third largest coal enterprise in the world. China Coal Energy owns 12 coal mines (9 in operation, 6 under development), 13 coal processing plants, 5 coking plants, 4 coal mining equipment manufacturing plants, and 2 mine design institutes. The company produced approximately 120m tonnes of coal in 2010. The company has six new mines under construction, with the potential to double its coal production capacity to 200mtpa by 2014. [China Coal Energy Company Limited 2006] Vision of China Coal Energy: China Coal Energy will seize market opportunities, rely on the advancement of science and technology, accelerate pace of development, strive for steady growth of revenue and profit, and maximize long-term profits for shareholders. [China Coal Energy Company Limited 2006] Over the past thirty years, Chinas energy demand has been driven by the countrys rapid economic expansion and is the key factor behind the increase in coal prices domestically and across the Asia Pacific region. This is due to the inability for domestic supply to meet the rapidly increasing demand for coal in China. As a result, China became a net importer of coal from 2009, driving the regional coal prices further. From 2006 to 2010, Chinas coal demand grew by 8.2% p.a, exceeding 6.8% p.a. in domestic coal production. Incremental coal consumption has been 220m tonnes on average, supporting 8% GDP growth at home. (CCB International Securities Ltd 2011, p. 8)

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment

According to the research publication issued in 2011 by CCB International Securities China Coal Sector: Supercoal leaps prices control, Chinas 12th Five-Year Plan (2011-2015) has significant implications for Chinas coal industry landscape, including the following changes: A disciplined national production target of 3.8b tonnes designed to safeguard domestic resources could tighten the domestic coal market. Deeper and wider industry consolidation that would improve industry concentration, from 30% in 2010 to 65%, giving the miners greater pricing power. A westward shift in investment focus could add to transportation costs and coal prices.

(CCB International Securities Ltd 2011, p. 8) Market Analysis - Country Background: Indonesia China Coal Energy is planning to target Indonesia as a core expansion market to secure more coal reserves and supply, supplementing its onshore China production to address the rapidly growing demand for coal in China. Indonesia is the worlds second-largest coal supplier, accounting for 43% of seaborne thermal coal in 2010E. Indonesia produced 325 million mt of coal in 2010, of which 265 million mt was exported and 60 million mt sold into domestic consumption. Indonesia's main coal mines are located in South Sumatera, East Kalimantan, and South Kalimantan, with coal production increasing about 26 per cent per year for the past five years. Some 75 per cent of the coal total productions are exported, especially to China, India, Japan, Taiwan, South Korea, and Europe. China's Indonesian coal imports are expected to reach 52 million mt in 2012, a rise of 20% on the 42.9 million mt of coal exported by Indonesia to China in 2010, according to Indonesian Coal Mining Association chairman Bob Kamandanu at the ninth Coaltrans China conference in April 2011 (Platts 2011). Indonesian coal exports to China have expanded at a rapid rate since registering at 1.4 million mt in 2004, and are forecast by the ICMA to hit 47 million mt in 2011. (Platts 2011) Wood Mackenzie forecasts that China will produce an additional one billion tonnes by 2015, but this will still struggle to keep pace with demand, with domestic production increase heavily dependant on infrastructure expansions because of the distance between demand centres and the majority of China's supply growth. (Wood Mackenzie 2011) Any delay in infrastructure projects will therefore widen the supply gap which Indonesia will surely fill.

Market Analysis - Environment Factors Political: In mid-1997, Indonesia was a major victim of the Asian financial and economic crisis. During this time, Indonesia also experienced its worst drought in 50 years, along with falling prices for

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment commodity exports. Indonesias economy suffered tremendously during this time as its national currency, the rupiah, as a consequence of being a fully floated currency, depreciated significantly in value. The situation was worsened by a rapid rise in inflation and capital flight from the country by international investors. Upset citizens called for then President Suharto, who had ruled Indonesia with an iron fist for almost 30 years, to resign from his post. As a result of widespread civil unrest, Suharto finally resigned in 1998. Since Suhartos resignation, Indonesia went through a period of unstable political environment. However, Indonesia has since had its first fully democratic election for President. The current President, President Susilo Bambang Yudhoyono, was first elected in 2004 and in 2009, won a reelection for another 5-year term. Ever since President Yudhoyono took on his post in 2004, the bilateral relations between China and Indonesia have improved significantly. In 2005, during a state visit to Indonesia by Chinese President Hu Jintao, Indonesia and China agreed to establish a strategic partnership. This is a special status that China has only given to the United States, Russia and India. Later in the year, President Yudhoyono paid a state visit to China where both governments concluded several major agreements covering defense technology cooperation, trade and investment. In March 2012, as reported by Xinhua News Agency, Chinas state-owned news agency, President Yudhoyono intends to discuss with Chinese leaders the future development of bilateral relations and further boost the strategic cooperation between the two emerging countries through his China visit later this month. (Xinhua News Agency 2012). Chinas state official had responded with China attaches great importance to relations with Indonesia and looks forward to President Yudhoyono's visit to China. (Xinhua News Agency 2012) Economic: Indonesia runs a market-based economy, with the government taking on a major role. Since the 1980s, the government had begun to take steps to remove regulatory obstacles that inhibit economic activity. These were implemented to stimulate employment and growth in the economy. The Asian economic crisis of 1997 had stumped Indonesias growth for a period of time as foreign investors pulled out their investments in Indonesia. However, in recent years, under President Yudhoyonos leadership, Indonesia has since recovered and reemerged as one of Asias strongest and fastest-growing economies. In late 2011 and early 2012, the international credit rating agencies, Fitch Ratings, Standard and Poors and Moodys, have upgraded Indonesias sovereign debt rating to investment grade level. (U.S. Department of State 2012) Social: Indonesia has the worlds largest Muslim population, although it is not an Islamic state. Ever since the 1950s, local Indonesian merchants have felt resentment towards ethnic Chinese as they felt they could not remain competitive. In the 1970s and 1980s, Suharto had also brought in Chinese businessmen to help with his economic reforms, which further deepened this resentment. Following the Asian economic crisis of 1997 and an uncontested re-election of Suharto, Indonesian students began a series of demonstrations, which led to mobs targeting property and businesses owned by Chinese Indonesians and over 100 Chinese Indonesian women sexually assaulted. Tens of thousands of Chinese Indonesians fled Indonesia for fear of safety following these events. With the downfall of Suharto, the government has since sought to re-establish confidence of the Indonesian Chinese.

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment Technology: Indonesia has one of the worlds largest resources of natural minerals and metals. As a result, many international companies have been operating and are seeking to invest in Indonesia. The entrance of international mining players have led to technological transfers into Indonesia as companies will implement the latest technologies in order to increase and enhance productivity and output. Legal: Indonesia has long been plagued with international suspicions of corrupted practices, unclear or conflicting setting and implementation of laws, especially by various Ministries that each seemed to have their own political agendas. While the government has strived to continuously review and reform its regulatory and legal regime to stimulate and promote investments, the company will need to follow any key developments closely, in order to ensure its investments are not adversely affected by the changing laws. Environment: Indonesia lies between the Ring of Fire along the northeastern islands adjacent to and including New Guinea and the Alpide belt along the south and west from Sumatra, Java, Bali, Flores, and Timor. (Wikipedia.org 2012) In the past few years, a few major earthquakes have affected many parts of Indonesia, leading to many casualties and damage to properties. Many of the potential coal mining sites with proven coal reserves are located near these earthquake zones. Competitive Analysis Other than China, the top buyers of Indonesia coal include India, Japan, South Korea and Taiwan. India and China accounts for 50% of seaborne coal trade globally. Both China and India are scrambling to secure supplies of thermal coal globally in order to meet the demand required by their electricity generation plants domestically as they try to push ahead with economic growth. Indonesia, with its vast reserves of coal, has become a key expansion target for both countries. Due to restrictive nature of the Indonesian business conditions, foreign operators are often unable to directly own mines and hence these companies have embarked on billion dollar investments in railways, power plants and ports in exchange for supply of coal. (FT.com 2010) Indian companies have already made strong inroads in Indonesia with the likes of Coal India (stateowned enterprise from India), NTPC (Indias state-controlled power generator and largest power producer), GMR Infrastructure (backed by the likes of Temasek Holdings) etc., have invested and secured stakes in mines in Indonesia. In recent years, Chinese companies have also ramped up their activity in China with Shenhua Energy investing US$331 million into a coal project in Sumatra and Chinas sovereign wealth fund, China Investment Corp, taking a US$1.9 billion stake in Bumi Resources, a leading Indonesian natural resources company and owner of the worlds largest producer and exporter of thermal coal, PT Kaltim Prima Coal.

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment While China and India are leading the charge, Thai, Italian, Korean and Japanese companies are also actively looking for acquisition targets or sourcing for coal supply in Indonesia, intensifying the competition for China Coal Energy as it seeks to enter the Indonesian market.

Challenges and Concerns While the coal industry in Indonesia is seen to be an attractive investment opportunity for many global companies seeking to secure coal supply, there have been many challenges that have discouraged foreign investment so far. In recent years, the government had been attempting to impose new taxes on the industry. These issues have been heightened by inconsistent implementation of land use and tax policies by various government ministries, the Ministry of Energy and Mineral Resources, the Ministry of Forestry, the Ministry of Finance, and the Ministry of Trade and Industry. There have also been new regulations that seek to limit rapid expansion of coal mining operations as well as controlling the amount of coal to be reserved for domestic consumption. In 2009, the government had declared that coal companies have to sell one-fourth of their coal in Indonesia. Union unrest and illegal mining are also potential problems that have affected Indonesian coal companies before. In early 2012, Indonesia enacted a new law which decrees that within a 5-year period, foreign investors that hold mining business permits and special mining business permits will be required to divest a minimum of 51 percent of their shareholding in the mining operation to local Indonesian companies. The foreign investor must begin its divestment from the 6th year of mining production, by which time current regulations state that local entities must own at least 20 percent of the mining company. (BullionStreet.com 2012)

Recommendations The company intends to work closely with the provincial and central government from the time of the initial investment, including making investments into improving infrastructure (roads, power stations, ports etc) for the neighboring regions of the intended coal mining operations. This is done to establish a good relationship with the government officials from the get-go. The company will also identify and establish strong relationships with influential local joint venture partners to work with on a long-term basis. This is to address the requirement under the law of having to divest its stake to local Indonesian companies within the stated period of time. As the key aim is to secure a stable stream of coal supply to support its China operations and Chinas demand for coal, it is also not entirely necessary for the company to be a majority owner of the mines. The company could also explore minority stakes in established Indonesian coal companies as long as there is an explicit understanding or agreement that guarantees the supply of coal to satisfy the companys needs.

Conclusion

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment While there are potentially issues such as changing laws and restrictions on exports, Indonesia remains one of the most attractive investment opportunities for China Coal Energy, outside of China as it seeks to secure additional reserves and supply of coal in order to meet the rapidly growing demand for coal in China. In order for China Coal Energy to have a successful investment into China, the company will need to ensure that relationships with the government is well-maintained to avoid any surprises due to sudden regulatory changes which might affects its investment, find the right Indonesian partner with whom they can work with on a long-term basis and to keep themselves abreast of developments in the fast-changing regulatory regime of Indonesia and be nimble to react to any changes to avoid unforeseen stoppages of operations or loss to its investment.

WORD COUNT: 2447

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment

References:
1. BullionStreet.com. (2012). Indonesia enacts new mining law to reduce foreign investment. Available at http://www.bullionstreet.com/news/indonesia-enacts-new-mining-law-to-reduceforeign-investment/1293 [Accessed March 20, 2012] 2. 3. CCB International Securities Ltd. (2011). China Coal Sector: Supercoal leaps price control. China Coal Energy Company Limited. (2006). Available at http://www.chinacoalenergy.com/n753578/n754320/n754337/n754442/763530.html [Accessed March 8, 2012] 4. FT.com. (2010). Scramble for coal reaches Indonesia. Available at http://www.ft.com/intl/cms/s/0/986dbd40-bb5f-11df-a136-00144feab49a.html [Accessed March 10. 2012] 5. Platts. (2011). China to face more competition in Indonesian coal market: ICMA. Available at http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Coal/8794012 [Accessed March 8, 2012] 6. U.S. Department of State. (2012). Background Note: Indonesia. Available at http://www.state.gov/r/pa/ei/bgn/2748.htm [Accessed March 19, 2012] 7. Wikipedia.org. (2012). Pacific Ring of Fire. Available at http://en.wikipedia.org/wiki/Pacific_Ring_of_Fire [Accessed March 21, 2012] 8. Wood Mackenzie. (2010). Wood Mackenzie Says That Indonesian Companies Will Make Up Two of the Top Three Thermal Coal Exporters Globally by 2015. Available at http://www.woodmacresearch.com/cgibin/wmprod/portal/corp/corpPressDetail.jsp?oid=2900521 [Accessed March 11, 2012] 9. Xinhua News Agency. (2010). China, Indonesia to map out future cooperation. Available at http://www.china.org.cn/world/2012-03/09/content_24855791.htm [Accessed March 20, 2012]

Student name: Chen Lirong (G0535814R) Course name: The Global Business Environment

Appendix
1. Foreign companies that have their hands (or eyes) on Indonesia's coal - Down to Earth No.85-86, August 2010 2. 3. 4. China, Indonesia to map out future cooperation China.org President Yudhoyono`s visit to strengthen ties: China official Antara News Extracts from Mining in Indonesia Investment and Taxation Guide (May 2011) PriceWaterhouseCoopers 5. Mining for Growth: A review of outbound Mining M&A activity from China Deloitte Touche Tohmatsu Limited