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CHAPTER I

INTRODUCTION

1.1 Background

Based on ECLAC data, the contribution of GDP from mining sector in

several countries such as Latin America, Canada, and Australia has grown 6.1 %,

4.5%, and 19% respectively in 2011. According to Bernal (2011), Mining has

gained relevance in virtually all of the Latin America economies since the

commodities super cycle started to emerge in the early 2000s. Meanwhile, the

other countries including Chile, Colombia and Bolivia, have stated the strongest

growth supported by mining sector. In Chile, mining sector has contributed from

5.2% of GDP in 2001 to 15.2% in 2011. Colombia also showed its mining sector

grew from 4.9% to 11% in the same period, while Bolivia stated its mining sector

jumped from 6.3% to 15.5%. This trend also occurred in Indonesia along with

agricultural, manufacturing, and other sectors. The contribution of mining sector

to Indonesia’s GDP reached up to 11% in 20111. Mining industry in Indonesia has

grown rapidly since the past 8 years. As illustrated on Figure 1.1, the contribution

of mining industry to the GDP has increased significantly from 8.9% in 2004 to

11.9% in 2011 and moreover, it is increasing more in 2012 for 12.1%.

Figure 1.1 Contribution of Mining Sector

1 Badan Pusat Statistik Indonesia data. Indonesia GDP berdasarkan contribusi sektor.

http://www.bps.go.id/. Retrieved December 23rd

2012

8.9

11.1

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11.2 10.9

10.6 11.2

11.9 12.1

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9

11

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2004 2005 2006 2007 2008 2009 2010 2011 2012

gro

wth

in p

erc

en

tage

Mining Sector's Contribution to Indonesia's GDP

Source: BPS, 2012

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Indonesia, as a developing country, continues to be a significant player in

the global mining industry with significant level of production of coal, copper,

gold, tin and nickel. According to Price Water House Coopers (2012), Indonesia

remains among the world’s largest exporters of thermal Coal. It also indicates that

investments’ prospect in coal mining companies in Indonesia would offer

favorable advantages to the investors in order to invest their funds through foreign

direct investment (FDI) and foreign portfolio investment (FPI).

The distinction between FDI and FPI is FDI refers to international direct

investment in which the investors would obtain a lasting interest in an enterprise

in another country; otherwise, FPI represents passive holdings of securities such

as foreign stock or bond in a company2. This study will focus on FPI because

many investors have put their portfolio investment in coal mining companies in

order to acquire high benefits from the margins. It is easier for investors to sell or

pull out the securities anytime (Levin, 2013). When the investors invest in stocks,

they will have privileges to get dividend, capital gain, and voting right in

company’s decision making (Bapepam-LK, 2010). However, stockholders are

exposed to higher risks because they have a lower priority than bondholders when

a firm faces financial problems (Eakins and Mishkin, 2009), also stockholders

would face stock price volatility caused by macroeconomic factors.

Figure 1.2 Several Factors that Affect to Stock Price Movement

2 Quote from Diffen (2012), Economies series. Retrieved December 23

rd 2012

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Pulungan (2012) mentions that coal mining companies’ stock prices are

influenced by many factors both internally and externally. As illustrated on the

Figure 1.2, those external factors are macroeconomic factors (interest rate,

exchange rate, inflation rate, government policy and international economic

conditions), company and world events, global supply and demand, substitutes,

and human psychology. Internal factors consist of financial performance of a

company such as Return on Asset (ROA), Debt to Equity Ratio (DER), Quick

ratio, etc. Those factors can influence the fluctuation on coal mining companies’

stock price which eventually offers uncertainty situations among investors.

The large players in thermal coal mining industry in Indonesia such as PT.

Bumi Resources, Tbk, PT. Adaro Energy, PT. Borneo Lumbung Energy, PT.

Bayan Resources, and PT. Indo Tambangraya Megah export their products mostly

to China and India. As main exporters, in 2011 PT. Bumi Resources Tbk exported

its thermal coal 18.9% to China and 18.5% to India respectively, as illustrated on

Figure 1.3. Based on United Nation statistics, China is the world’s top consumer

of global coal energy in 2011 (as shown on Figure 1.4). In China, 80% of

electricity capacity is dependent on coal-fired power plants. However, the recent

economic slowdown that caused industrialization and urbanization to drop in

China has affected its coal demand as illustrated on Figure 1.5. China coal

demand has decreased from 15.90% in year 2010 to 8.9% in year 2011,

respectively. This indicates that economic condition in coal importer countries

would affect the performance and eventually the stock prices of coal mining

companies in Indonesia.

BUMI’s Data, 2011 Data, 2011

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Source: EIA

Figure 1.5 Coal Demand from Asia Region

Other factors that commonly affect stock prices on coal mining companies

are the fluctuations of crude oil and international coal prices. Agusman (2008)

mentions that, crude oil prices that reached up to USD 145 per barrel in 2008 as

we can see on Figure 1.6, which triggered an increasing price in commodities

including gold and coal, in turn, comforting global inflation and slowing

economic growth.

Source: WTI spot price

Figure 1.6 Crude Oil Prices 2007-2011

15.90%

8.90%

2.30%

9.20%

13.30%

-2.10%

9.60%

4.40%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

2010 2011

China

India

Japan

South Korea

53.4

145

41.53

84.14

116.32

105.36

0

20

40

60

80

100

120

140

Jan

-07

May-…

Sep

-07

Jan

-08

May-…

Sep

-08

Jan

-09

May-…

Sep

-09

Jan

-10

May-…

Sep

-10

Jan

-11

May-…

Sep

-11

Crude oil Price

CrudeoilPrice

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However, Derianto (2008) states that an increase in oil price will bring on

immediate decrease in stock price of coal mining companies. He finds that an

increase in oil price will lead to a higher of production cost of a company to which

potentially distracts the company’s financial performance and bring negative

influences to the company’s stock price.

Not only crude oil prices could influence stock prices of coal mining

companies, but also global coal prices. Industrialization and urbanization in many

regions, especially in Asia, drive a global demand for coal. Credit Suisse (2012)

states that global export of thermal coal has grown at a rate of 6.1% from 1997 to

2011. However, the global economic slowdown leads to a decrease in coal

demand from net-importing countries. This situation will lead to a decrease in

global coal price which potentially affect companies’ stock prices.

As it fluctuates overtime, it is relatively hard for an investor to track

specific trend of coal mining companies’ stock price, due to the stock price

volatility that brings an uncertainty risk to investor (Beaudry and Portier, 2006).

Recently, many investors have relied on their financial advisors such as

Investment Bank institutions in investment’s decision making. Investment Banks

provide analyst recommendations which include target price and stock

recommendations, for investors to decide their investment portfolio. By definition,

an Investment bank is a financial institution that assists individuals, corporations

and governments in raising capital by underwriting and acting as the client’s agent

in the issuance of securities3. Investment banks also offer equity research analysis

as a service to recommend investors in trading portfolios. Among many

investment banks in Indonesia, there are Barclays, RBS, JP Morgan, Merril

Lynch, CIMB, Credit Suisse, Mandiri Securities, Bahana, BNP Paribas, and

Goldman Sach. However, sometimes the predictions of investment banks do not

reflect the actual conditions of stocks in a market. Supposed for example, Credit

Suisse owns large portion of BUMI’s share. It would potentially issue stock

3 Fleuriet Michel Investment Banking Explained: An Insider’s Guide to the Industry Mc Graw-Hill

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recommendation buy to gain profit. In fact, this condition would lead to

company’s stock price volatility.

The object of this research is PT Bumi Resources, Tbk (IDX Code:

“BUMI”) as the largest thermal coal mining company in Indonesia. Based on the

cumulative data of Indonesia Stock Exchange (IDX) from 2009 to 2011, BUMI’s

stock was the most active share by trading value and market capitalization. In

2011, BUMI’s market capitalization was up to Rp 69,591 billion. BUMI’s stock

also listed as the most liquid stock in LQ45 index (Ivalandari, 2010). In June

2008, BUMI’s stock price reached up to Rp 8,850 per share4. As the largest coal

exporter in Indonesia, BUMI was quite attractive to investors.

The time period of this research is from 2007 until 2011 due to several

conditions. After year 2005, coal consumption became the new trend in the world

because of the power of electricity that relied on coal mining. In this trend,

Indonesia became one of the world largest coal mining exporters. In line with this

new trend, the demand of coal mining automatically escalated along with high

consumption. This condition was affecting BUMI as the largest exporter coal

mining company in Indonesia to experience a significant increase from Rp. 700 to

Rp 8,850 in its stock price. Another reason, the crisis that happened between year

2007 and 2011, which are subprime mortgage crisis and Eurozone crisis, gave an

impact toward BUMI’s stock price. Due to these conditions, the author chose to

use time period of 2007 until 2011 in this research.

A number of literature discuss about the effects of macroeconomics

variables on stock prices. For example, Kesuma (2012) studied about the analysis

of the influence of exchange rate, world gold price & oil prices on IHSG of

mining sector in Indonesia Stock Exchange. She finds that oil price and gold price

have significant influences toward the stock price of mining sector. Dermawan

(2012) also finds positive relationship between oil prices and mining sector

indices. Kuworno (2011) mentions that crude oil prices do not appear to have any

4 Historical stock price from finance.yahoo.com. Accessed November 23

rd 2012

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significant influences on stock market returns, while Derianto (2008) states that

oil prices do not have significant impacts on mining industry stock returns.

Furthermore, Rudianto and Sutawidjaja (2012) find that external factors

have no significant effect on price to book value (PBV) of shares. A research by

Wang (2010) on the relationship between economic activities, stock price, and oil

price evidence from Russia, China, and Japan, finds that there is no relationship

between real economic activity on stock price in China or Japan. On a contrary, a

research by Antonios (2010) on empirical analysis of stock market and economic

growth in German, states that there is unidirectional causality between stock

market development and economic growth in Germany. These two contradictive

researches encourage this study to reveal the effect of economic activities in

China and India to the stock market, based on IMF reference case.

A research by Kadan and Zach (2005) about conflict of interests & stock

recommendations mentions that there are still any conflicts of interests affect the

analysts’ recommendations. This statement is also supported by a research from

Michaely and Womack (1999) who find that recommendations by Investment

Banks’ analysts show a significant evidence of bias. This research indicates that

there are conflicts of interests and financial bias on analysts’ recommendations

affects the investors’ behaviors to buy, hold, or sell their stocks portfolio.

Despite the numerous studies conducted analyzing the effects of certain

factors to stock prices, there has not been much research about the overall effects

of international economic conditions and investment banks recommendations

toward stock prices. This study, is entitled “The Effects of Major Consumers’

GDPs, Energy Prices and Investment Bank Recommendations on the Stock

Price of a Coal Mining Company (a Case of PT Bumi Resources Tbk)” will

then be able to offer a new perspective for investors to examine several factors

affecting BUMI’s stock price, as well as taking into account which factors

influencing their investment decision making.

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1.2 Statement of Research Problems

In line with the background, this study will seek to cover the research gap of

the previous studies by examining external variables particularly GDP, crude oil

prices, and global coal prices of a stock price. Moreover, this study will also

explain the effect of investment banks analyst’s recommendation on a stock price.

The object of this study is PT. Bumi Resources Tbk (BUMI) as the largest thermal

coal exporter in Indonesia. This research will examine the effects of China and

India GDP toward BUMI’s stock price. Both countries are the main export

destinations of BUMI.

Specifically, several questions of the research can be concluded as follows:

1. Is there any significant effect of China GDP on BUMI’s stock price?

2. Is there any significant effect of India GDP on BUMI’s stock price?

3. Is there any significant effect of crude oil prices on BUMI’s stock

price?

4. Is there any significant effect of global coal prices on BUMI’s stock

price?

5. Is there any significant effect of investment banks analysts’

recommendations on BUMI’s stock price?

1.3 Scope of Work

As mentioned on the background, the writer covered this research based on

these following scopes:

a) The object of this research is PT. Bumi Resources, Tbk.

b) The period of research for data is from 2007 to 2011.

c) The indicators of external variables are GDP of China and India, crude

oil price, and global coal price.

d) The indicator for investment banks analysts’ recommendations is stock

recommendations.

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1.4 Problem Limitation

The external factor that considered in this research might not give a

significant impact towards BUMI’s stock price. However, the internal factor

could potentially give another impact towards BUMI’s stock price.

1.5 Objectives and Contributions

1.5.1 Objectives of the study

The objectives of this particular study are as follows:

1. To examine whether or not there is a significant effect of China GDP on

BUMI’s stock price.

2. To examine whether or not there is a significant effect of India GDP on

BUMI’s stock price.

3. To examine whether or not there is a significant effect of crude oil price on

BUMI’s stock price.

4. To examine whether or not there is a significant effect of global coal price

on BUMI’s stock price.

5. To examine whether or not there is a significant effect of investment banks

analyst recommendation on BUMI’s stock price.

1.5.2 Contributions of the study

This study is conducted to provide benefits to various stakeholders, i.e.

academic, investors, and companies. These contributions are as follows:

1. Academic Contribution

This study can be a further research in previously similar topics.

Meanwhile, this study will add existing literatures and give empirical

evidences on the effects of external variables particularly China and India

GDP, crude oil price, global coal price along with investments banks

recommendations on stock price.

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2. Practical Contribution

This study can be an input for PT Bumi Resources, Tbk to see its stock

performance from 2007 to 2011. It can also give insights in terms of what

factors the companies should focus on in order to make BUMI’s stock

price stable.

3. Investor

This study can be used as a reference for investors in foreseeing the

external factors to be focused on to evaluate PT. Bumi Resources Tbk

performance in mining sector in Indonesia.