With global coal prices showing little signs of recovery, calls amongst industry players in Indonesia to limit production of coal and increase the focus on value-added operations are growing louder.
Coal is a cheap and abundant commodity in Indonesia, responsible for powering around half of the country’s electricity. The government is targeting an increase in state revenues from the coal and mineral sector this year to offset the projected decline in revenues from the oil and gas sector.
But a difference of opinion on how to address the issue of falling global coal prices has left question marks over the industry in 2015.
Pacing production
In January, the Indonesian Coal Mining Association (ICMA) advised the government to cut production by at least 12 per cent, or 50 million tonnes, in 2015 and cap exports at 300 million tonnes.
Its recommendations came after global coal prices slipped to record lows. Indonesia’s Ministry of Energy and Mineral Resources set its January thermal coal reference price at US$63.84 per tonne, down 22 per cent year-on-year and the lowest in almost six years.
In November, ratings agency Moody’s said that a slowdown in commodities demand from China is a key risk for Indonesia, which will put further pressure on the credit quality of mining companies, in particular, coal producers. It also warned that excess supply in the key coal sector looked likely to keep prices down.
In early January, R Sukhyar, the Director General for Coal and Mineral Resources at the Indonesian Ministry of Energy and Mineral Resources, said the country is aiming to produce 425 million tonnes of coal with 333 million tonnes earmarked for exports.
This compares to production of 435 million tonnes in 2014 and exports of 359 million tonnes. The government tried to cap coal at about 400 million tonnes last year. However despite efforts each year to set a maximum production target, it is normally exceeded, particularly when miners try to offset low coal prices by increasing production rates.
Sukhyar reaffirmed his position in February when he said that the government was looking to increase revenue contributions this year from the coal and mineral and coal sector, with the income mostly coming from the latter segment.
In the proposed revision of the 2015 State Budget, the government has raised state revenues from the mining sector by 28.5 per cent to 52.2 trillion rupiah (US$4.1 billion) from 40.6 trillion rupiah in the original budget, or about 50 per cent higher than 35.4 trillion (US$2.8 billion) last year.
Indonesia plans to boost income from the sector by increasing royalties for coal mining companies that hold Mining Business Permits. Under the proposed royalty rise, coal with a calorific content of between 5,100 kilocalories per kilogram (kcal/kg) and 6,100 kcal/kg will see a nine per cent royalty fee, up from five per cent at present. Coal with more than 6,100 kcal/kg calorific content, will be charged with a 13.5 per cent royalty fee, up from seven per cent.
Compounding the situation for smaller outfits, the government is also poised to revoke 4,600 mining permits from firms who do not hold the correct certification.
Value added shift
Despite the challenging operating environment, analysts expect Indonesia to fare slightly better than global competitors. According to Wood Mackenzie’s 2015 global coal outlook report, Indonesian and Australian coal suppliers will see some upside in the tough months ahead, as they continue to capitalize on their lower coal costs in the export market.
ICMA chief Bob Kamandanu is confident that coal has a key role to play in the process of modernisation in Indonesia, telling OBG that upgrading the quality of coal and increasing the focus on conversion technologies is one way forward.
“If a developing country like Indonesia wants to reach higher electrification rate, which is now around 70 per cent, we will need to continue looking at coal, but from a different and cleaner perspective,” he said.
There are two good ways in which Indonesia can achieve this, he added. “First is by upgrading the coal quality, which essentially means reducing the amount of water and impurities in the coal,” he said. “The second way is by increasing our focus on coal conversion technologies. Coal to liquid or coal to gas are options that will significantly reduce the amount of CO2 being released to the environment.”
With adding value to mining products, such as coal upgrading and coal conversion into gas, widely acknowledged as key to improving the industry’s prospects, the government has thrown its weight behind in-country processing.
Officials from MEMR met with coal producers last November to draft a policy on value-added coal mandated by law. However, the chairman of the Association of Indonesian mining professionals and practitioners association (Perhapi), Budi Santoso, told participants that the central government of Indonesia needed to be realistic about the value-added policy: “It will require big investment and certain technology in implementing the policy,” he said. “If the value-adding of coal wants to be realistically raised, it should be in form of upgrading of coal such as the production of briquettes and gasification,” he explained.
The fact that discussions on how best to aid the coal sector’s recovery are ongoing at a high level underlines its importance to Indonesia’s economic growth. Intensified value-added efforts may prove to be the answer, although expansion in this field will require clear and pragmatic goals.