Indonesia’s coal industry was hit hard when prices of the commodity dropped sharply in the course of 2012 and the first half of 2013 amid slowing global economic growth and rising stockpiles in China. In a bid to compensate for lower prices with higher volumes, major Indonesian mining companies drove up their production, thereby contributing to oversupply in the market and further eroding prices and net income. Nevertheless, production continued to edge higher even after enthusiasm in the business began to wane in 2011. The industry has certainly seen better days, but growing domestic demand and new emerging export markets are keeping Indonesian coal miners determined to ride out the current supply glut.
Indonesia’s coal-mining sector has a lot going for it. The world’s fourth-largest producer exports more coal than any other country worldwide, thanks in no small part to its favourable location between the energy hungry markets of China and India. Despite the increase in production costs, Indonesian coal remains quite competitive, as many deposits lie close to the surface and labour costs are much lower than in Australia, the world’s second-largest exporter and Indonesia’s main regional competitor. Many mines are located in close proximity to the sea, while inland waterways allow for low-cost transportation despite Indonesia’s under-developed infrastructure.
Indonesia boasts rich deposits of thermal coal, which is predominantly used in power generation. Mostly sub-bituminous varieties of medium or low calorific value (below 6,100 kcal/kg), Indonesian coal is sought after in China and India, where its typically low ash and sulphur content is appreciated. By contrast, higher-ranked metallurgical coal, which is used in iron and steel-making, is found in much rarer quantities and accounts for a tiny fraction of total exports. Its significance is set to increase, however, as the government seeks to develop domestic metal industries (See Metal Mining: Foreign Investment More Necessary than Ever).
Figures from the Ministry of Energy and Mineral Resources (MoEMR) put proven coal reserves at 28 billion tonnes, which marks an increase over three-year earlier assessments and would sustain the business for some 70 years at recent production rates. Sumatra and Kalimantan harbour most of the country’s coal resources, with the provinces of East Kalimantan and South Kalimantan dominating current output. While Indonesia has thousands of small coal miners, including many unlicensed ones, a relatively small number of larger companies dominate the business. PT Bumi Resources is the leading producer and exporter, followed by PT Adaro Energy. Other major producers include PT Indika Energy and PT Berau Coal Energy. PT Tambang Batubara Bukit Asam is the biggest state-controlled coal-mining firm.
Despite the harsher market conditions, Indonesia’s coal production continued to increase in 2013 to more than 400 million tonnes (Mt), prolonging a five-year growth trend. Roughly three-quarters of total output is shipped oversees. China is the main buyer, followed by India, Japan and South Korea.
Coal Production and Exports (in million tonnes):
Source: Directorate General of Mineral and Coal, MoEMR
Indonesia’s rapid economic development will in all likelihood see an increasing share of national coal production consumed on the domestic market to satisfy rising demand for electricity (See Indonesia’s Electricity and Power Generation Sector). The government has mandated state-owned utility PT Perusahaan Listrik Negara (PLN) with an ambitious extension of the country’s power network to reach tens of millions of Indonesians that currently live off-grid. The National Energy Policy outlined in Presidential Regulation 5/2006 projects coal’s proportion in the country’s energy mix to increase to 33% by 2025, which would make it more important than oil, gas or renewables.
Unable to meet the required increase in electricity generation on its own, PLN’s efforts will need to be flanked by the private sector. Major coal-miners and coal-focused integrated companies should be happy to step into the breach. A number have begun to invest in private power plants, thereby boosting demand for their product. While the domestic market carries political risks associated with PLN’s dominance and pricing-authority, the recent increases in electricity tariffs suggest that the government is aware of what it takes to speed up electrification.
Small mining companies were generally the first to be affected when prices began to fall in 2011, because of their greater exposure to the spot market. While bold capital spending in 2010 and 2011 left many Indonesian coal miners highly leveraged when prices turned down, it was the small firms in particular that felt the pinch, as they often lack the robust financial backing that would enable them to ride out the storm. Many were forced to close shop, and more are bound to follow. This should give rise to considerable consolidation in the industry – much to the benefit of well-funded companies.
In addition to market forces, there are indications that politics is turning against small mining operations. Government plans to hike royalties from companies working under the newer Mining Business Permit (IUP) framework would affect newcomers who have joined the field since 2009, which includes mainly smaller and medium-sized firms (See Legal Framework on Mining and Minerals). The established larger players tend to hold so-called Coal Contract of Work (CCoW) licenses, which already carry higher royalties. The plan is to raise royalties on IUPs from the current level of 3% to 7% of net sales closer to the 13.5% that CCoW holders pay. Tighter environmental and safety standards are also under consideration, which would generally hurt small mining companies more than the larger players that tend to have better compliance.
Changeable regulations
A major concern for investors in Indonesia’s mining sector is the changeable regulatory framework. Law No. 4/2009 on Mineral and Coal Mining and its implementing Government Regulations bring a host of new rules, some of which have been heavily resented in the industry.
Other regulatory issues top the list of concerns for investors in Indonesia’s coal sector, according to a survey by PwC Indonesia in cooperation with the Indonesian Mining Association and the Indonesian Coal Mining Association, published in May 2013.
Key challenges to investment:
Source: mineIndonesia 2013
In the medium-to-long term, coal demand in the Asia-Pacific region is poised for strong growth, with numerous fast-growing economies relying on coal for the lion’s share of their electricity. While political resistance has recently emerged against coal-fired power plants in China, any changes in the country’s energy composition will be very gradual. Absolute Chinese demand for coal is almost certain to rise for another two decades or more due to the vast increase in generating capacity that has already occurred and is still happening. Meanwhile, newly developing countries such as Vietnam and Myanmar are in a hurry to upgrade their power networks, much like Indonesia. As a cost-competitive form of energy, coal will likely be at the centre of these electrification efforts, which should secure demand for Indonesian coal for decades to come.
Global Business Guide Indonesia - 2014
Contribution to GDP: 3.44% (2016)
Oil & Gas Imports: $1.22 billion USD (Jan 2016)
Proven Oil Reserves: 3.69 billion barrels (2016)
Proven Gas Reserves: 2.85 trillion cubic metre (2016)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 27 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).
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