"Indonesia probably has the world's largest untapped coal resources," Paul Mazak, managing director of Churchill Mining, told OBG. Churchill Mining released its preliminary findings in April of its maiden drill programme at the East Kutai coal project in Kalimantan, which revealed occurrences of thermal coal in multiple seams.
"Most coal industry experts believed Indonesia has only just started its ascendance as the world's largest thermal coal exporter," Mazak said, noting that between 2006 and 2007, Indonesia surpassed Australia as the world's largest thermal coal exporter. Most of those coal exports came from only eight coal companies in Indonesia, he said.
Globally, strong economic growth and rising demand for power, especially in China and India, is fuelling an increase in coal consumption. China's coal exports fell after a government drive to promote coal to the domestic market. Meanwhile, India's rapid economic growth has led to a shortfall in domestic coal supply, leading the country to turn to foreign sources for its coal-fired electricity generators. Estimates for 2007 anticipate a 144m tonne gap between India's coal demand and supply. In both cases, Indonesia has stepped in to fill the gap.
The McCloskey Group's Colin Gubbins, director of consultancy, told OBG that much of the foreign investment in the Indonesian coal industry is expected to come from these two countries, citing the recent purchase of 30% of PT Bumi Resources by India's Tata Power as one example.
Other companies have expressed interest in Indonesia's coal reserves, including India's biggest coal user NTPC, which has been scouting for blocks in the country and Coal India, which recently announced it is considering acquiring Indonesian mines. Indian company JSW Energy, which acquired exploration and mining rights of a mine with reserves of 300m tonnes, and China National Technical Import and Export Corporation, which announced it will invest $430m to develop a 600-megawatt coal-fired power plant in Indonesia, have also shown interest.
Transportation infrastructure is one area where Indonesia is finding leverage among its global competitors. Geographically, Indonesia is well located to all the major buyers such as China, India, South Korea and Japan said Mazak. "This gives Indonesia and its coal companies significant shipping and price advantages over other major coal producers such as Australia."
Indonesia has also benefited from the losses of its major competitors - South Africa and Australia.
South Africa, the third largest exporter of thermal coal after Australia and Indonesia, experienced heavy rainfall and rail service disruptions in 2006 that led to a slight fall in exports.
The chairman of the Australian Competition and Consumer Commission, Graeme Samuel, recently told the press that Australia is suffering from chronic port delays, which, at its largest port, could take up to July 2007 to resolve. However, industry insiders believe it may be until 2008-2009 before capacity can meet demand. The delays are a result of a new loading system and rail network disruptions caused by ongoing infrastructure improvements.
Indonesia's location stands it in good stead for the future, according to McCloskey's Gubbins. "The accepted wisdom is that the future development of the coal industry will involve mining lower calorific value coals. [...] with major demand growth being in countries where Indonesia is better placed geographically than its competitors, the delivered cost of these lower grade coals will still be attractive to the customers."
A drawback to future investment is the uncertainty lingering over a new mining law that is being held up by parliamentary deliberations.
One of the main contentious issues is that under the proposed law, the settlement of mining disputes would be transferred to local governments as opposed to the current system where they are handled by independent arbitration. A group of mining firms has made proposals to keep the existing system and industry insiders hope the delays will allow time for the mining firms' pleas to be heard before the law is expected to be passed in June.