Though Indonesia was not a major coal exporter until well into the 1990s, the country’s coal producers have made up for lost time by rapidly boosting their shipments. Along the way, they have ascended to the top spot in the seaborne coal hierarchy, surpassing Australia in 2011 and maintaining the lead position through boom and bust cycles.
Rich in carbon deposits distributed across the country, the country’s coal mining industry has long been a dependable contributor supporting both its domestic mining and energy sectors. The inexpensive fuel is the most widely utilised power source for domestic electricity production and industrial demand, while prolific exploration and development of the sector in more recent decades has opened up a new source of export revenue. While the attraction of easy profits attracted a wave of new entrants as prices surged leading up to 2008, the ensuing supply glut and decrease in demand growth has forced producers to slash costs and improve efficiency or risk falling victim to weak commodity prices.
Indonesia continues to punch above its weight in the coal industry as it maintains its reign as the world’s top coal exporter despite possessing only 3.1% of global reserves at the end of 2013, according to BP’s “Statistical Review of World Energy 2014”. Proven reserves totalled 28.02bn tonnes, all of it sub-bituminous and lignite. With a reserves-to-production ratio of 67, these are expected to be depleted well before the end of the century at current extraction rates. Estimates published by Indonesia’s Ministry of Energy and Mineral Resources place the figure slightly higher than this, at around 31.36bn tonnes at the end of 2013, although many in the industry have expressed optimism that continued exploration in underdeveloped regions could also likely yield substantially more deposits in the future. This could very well prove true given that total measured, indicated and inferred resources for Indonesia tally some 100.97bn tonnes, according to the MEMR.
As energy prices climbed at the beginning of the millennium, large established coal mining companies were joined by a flood of new domestic competitors (many with limited mining expertise or experience) looking to get a slice of the black gold rush. Enthusiasm for the sector peaked in 2008, when the Asian price marker for coal hit $148.06 per tonne – up more than 400% from the $29.48 price recorded just 10 years earlier.
The lure of quick profits drove Indonesian production ever higher over this period, with annual output surging to 240.25m tonnes in 2008.
This commodity boom cycle came to a dramatic halt following the 2009 economic downturn, bringing with it a dip in coal demand and a collapse in price to $78.81 per tonne that year.
This price readjustment proved too much for many of the smaller companies, many of which were shuttered and have yet to return to the sector. The larger, established mining operations, meanwhile, have weathered the storm by slashing operating expenses and shifting into a high-volume, low-margin holding pattern to drive profits. Although prices then rebounded somewhat in 2011, to $125.74 per tonne, the global oversupply has continued to push down prices, which dipped to $105.50 per tonne in 2012 and then to $90.90 the following year.
Instead of cutting production though, the larger companies have attempted to increase efficiency, slashing costs and cutting deals with partners up and down the supply chain.
As a result of these efforts, annual production continued to climb, reaching 353.27m tonnes, 385.9m tonnes and 449.08m tonnes, respectively, each year in the 2011-13 period.
Lay of the Land
Indonesia’s coal heartland lies primarily in the East Kalimantan region, which accounts for approximately two-thirds of the country’s coal output. The region possesses 14.02bn tonnes (44.7%) of the country’s total reserves, with the next largest contributor being South Sumatra, with 12.01bn (38.6%) tonnes of total reserves.
Although there are hundreds of different coal mining licences issued throughout the country, the majority of the output is produced by a half dozen primary mining companies. The largest of these is Bumi Resources, which produced 82.1m tonnes in 2013, up 20% from 68.5m tonnes the previous year.
Bumi Resources controls two of Indonesia’s most productive coal-mining operations: Arutmin Indonesia, which produced 29.6m tonnes in 2013 and is located in South Kalimantan; and Kaltim Prima Coal, which is located in East Kalimantan and produced 53.6m tonnes of coal in 2013. The company also runs the smaller Fajar Bumi Sakti mine, which initiated production in 2014 as well as the Pendopo Energi Batubara currently under development.
Bumi also posted a 10% year-on-year (y-o-y) production rise in the first half of 2014, with production reaching 45.3m tonnes. Adaro Energy is the second-largest operator, producing 56.2m tonnes in 2014, up from 52.3m tonnes in 2013. The country’s third largest-producer in 2013, at 37m tonnes, was Kideco, which boosted output to 40m tonnes in 2014.
The notoriously fickle international energy markets have produced a series of dramatic boom and bust cycles in the Indonesian coal market over the past decade, with the current depressed trend continuing to impact exporters in particular. Previous bull runs led the government to enact protectionist policies, such as the domestic market obligation (DMO), to counter fears that too many exports would leave domestic consumers with a dearth of supply. Yet now, cheaper petroleum, sagging energy demand and increasing supplies have meant a decreasing global demand for coal.
Although Ministerial Regulation (PerMen) 34 issued December 31, 2009 applies to all types of coal and minerals compelling all regional authorities to comply, to date DMO obligations have only been applied to the coal market (new mineral processing mandates notwithstanding). Implementation of the measure is fluid in that specific set percentages of supplies are forgone in favour of a decision being made on an annual basis depending on the current market conditions. After arriving at the annual cap based on a number of criteria, including domestic supply and demand forecasts, companies participate in a cap-and-trade system allowing companies exceeding their DMO obligations to sell or transfer credits to other companies unlikely to meet their own commitment. The law also stipulates a minimum price for DMO sales subject to the same minimum price set for exports under the price benchmarking policy. For 2014 the DMO was set at 95.55m tonnes – up more than 50% on the 60.15m tonnes (18.41% of annual production) in 2011.
With current market forces already rendering the DMO less crucial to maintain domestic stocks, a focus by the new government to bolster domestic power production by around 35 GW over five years should also be a boon for coal producers.
While this new rapid deployment plan is similar to the previous “fast-track” programmes, which were somewhat successful in bringing numerous new coalfired power plants on-line, this new plan is being accompanied by legislation that should cut back on some of the red tape that undermined previous efforts (see Energy chapter). While the new plan is being implemented, however, Indonesian producers are still counting on exports to turn a profit.
A Welcome Lifeline
Intended or otherwise, this reprioritisation of domestic coal as fuel for electricity production has also been a lifeline to a coal industry battered by weak commodity prices in recent years. Not only does increased demand for Indonesia’s low-rank coal provide additional local buyers for coal producers, but these companies are able to maintain their asset and business value by utilising cost-plus-transfer pricing methodology using coal as an input for a power plant rather than writing off the decreased market value of coal as a loss.
In spite of these recent encouraging moves, a number of regulatory issues still give mining operators cause for concern. The foremost of these is the impending increase in royalties paid on all categories of coal; these now reach as high as 7%, up from previous levels in the 3-4% range. The second of these is the government’s ongoing pursuit of increasing calorific value of low-energy coal, which to date has yet to yield any economically viable technology to carry out this process on a commercial scale.
Lastly, a proposal floated by the government to restrict coal shipments to just 14 ports nationwide could cause considerable inconvenience to sector operations. While this move is intended to better regulate the sector and also cut down on the sale of coal within the informal economy – estimated to be worth billions of dollars in 2013 – many operations are located far from designated export ports and therefore would need to find new transit routes.
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