Moody's Investors Service says excess coal supplies and continued weak prices for the commodity over the next 12 to 18 months will cause significant financial stress on countries in Asia Pacific that produce the least amount of liquid coal, increasing their risk of default.
"We expect weak coal prices through 2014 to increase pressure on the credit quality and liquidity of most coal producers in the Asia Pacific region in the next 12 to 18 months," Moody's Vice President and Senior Credit Officer Simon Wong said in an official release made available to The Jakarta Post on Tuesday.
Wong was citing a recently-released Moody's report titled "Liquidity Is Vital for Asian Coal Producers amid Oversupply and High Leverage."
"We are particularly concerned about Winsway Coking Coal Holdings' liquidity position after it completes its debt exchange that was proposed last month, given its already inadequate liquidity buffer of less than three months," he said.
"We are also concerned about the liquidity levels of Hidili Industry International Development, Bumi Resources and Mongolian Mining, as they all face significant liquidity and refinancing risks over the next 12 months," he went on.
According to the report, Moody's has revised down the estimated average benchmark Newcastle thermal coal price for the rest of 2013 to between US$80 and $85 per ton, and the benchmark Queensland hard coking coal price to $150 per ton.
Moody's report says global coal supplies will continue to outstrip demand, as low-cost producers are likely to increase production to maximize cash flows from operations.
In terms of leverage, Moody's report says Ba to B-rated coal producers in Asia Pacific should see their debt/EBITDA levels increase to an average 4.25 times to 4.75 times for all of 2013 from 3.40 times in 2012.
Nonetheless, the report points out that most of the coal producers rated by Moody's are taking steps to preserve capital and weather the prolonged weak market conditions.
"Because coal prices have fallen close to or below the marginal cost of production, coal producers have suspended their capital expansion plans and cut their greenfield investments. They are also improving operating efficiencies, and those with very weak liquidity are considering selling non-core assets," Wong said.
Moody's report says producers with strong cash positions, well spread out debt maturities and low coal production costs, and producers who are large and diversified operators with solid credit quality, are most insulated against the challenging operating environment.