Indonesia Coal Miners Seek Output Cuts as Prices Hit 8-Year Low

Indonesian coal miners say the government should cut this year’s production target by at least 12 percent to boost global prices that have fallen to the lowest in almost eight years.

The world’s largest exporter of power-station coal should reduce output by at least 50 million tons this year and keep exports at a maximum of 300 million tons, Bob Kamandanu, the chairman of the Indonesia Coal Mining Association, said in an interview on Jan. 19. Indonesia plans to produce 425 million tons of coal this year and targets exports of 333 million tons, R. Sukhyar, a director general with the Ministry of Energy and Mineral Resources said Jan. 6.

Thermal coal, used to generate electricity, has tumbled more than half since 2011 amid supply additions and slowing demand in China, the biggest commodities consumer. Coal at Australia’s Newcastle port, an Asian benchmark price, dropped to $58.60 a ton in the week ended Jan. 16, the lowest level since June 2007, according to data from IHS McCloskey.

“If we want to change the situation, volume must definitely be reduced and it’s the government’s job to control it,” Kamandanu said. “If this didn’t happen, it may take two years for prices to improve.”

Indonesia mined 435 million tons of coal last year, more than the government’s target of 420 million, according to the Energy Ministry’s Sukhyar. Output was 474 million tons in 2013.

Indonesian coal supply this year may exceed the government’s plan as companies expand production, partly to repay debts,  Kamandanu said. PT Berau Coal Energy plans to raise output this year to 27 million tons from 24.2 million in 2014, President Director Amir Sambodo said Dec. 22.

Falling oil prices are helping miners cut fuel costs that account for about 40 percent of production costs, according to Kamandanu. Crude futures declined almost 50 percent last year amid a global supply glut.

L/C Required for Exports of Key Commodities

A new regulation set to take effect in April will require exporters of the country’s key commodities to use letters of credit (L/C) in their overseas shipments, a move that will help generate a reliable record of export earnings.

The rule, issued by the Trade Ministry last week, is set to affect four primary commodities: coal; palm oil and palm-kernel oil; oil and gas; and minerals, including tin. On average these items accounted for 41 percent of overall exports in the five years from 2009 to 2013 with an average of US$71.04 billion a year, according to the ministry’s statistics.

“By demanding the application of L/C in exports, we want to increase export earnings and at the same time get accurate records, particularly from sales of natural resources,” Trade Minister Rachmat Gobel said in a press conference on Wednesday evening. 

Based on the rule, the prices in the L/C should reflect actual transaction value. It also stipulates that without the letters, overseas delivery cannot be executed.

The measure comes at a time when Indonesia, one of the world’s main suppliers of commodities such as palm oil and coal, struggles to maintain its export performance amid continuing weak demand caused by global economic slowdown.

The government aims to reach a 25.67 percent growth in non-oil and gas exports to $192.9 billion this year from $153.5 billion estimated for the past year.

The policy demanding L/C in international trade activities was implemented in 2009 to raise foreign exchange (forex) reserves, but was lifted a year later.

It also resonates with the ongoing situation in which the local currency faces greater pressure as the US dollar strengthens and in that context, bigger forex earnings are perceived as necessary to support the weak rupiah.

The Finance Ministry’s customs and excise revenue and regulations director Susiwijono Moegiarso said that the mandatory use of L/C issued by local banks would complement the central bank’s step to better manage the flow of foreign currencies.

Since 2011, Bank Indonesia (BI) has demanded that Indonesian exporters report and keep their dollar-based export revenues in local banks within 90 days of receiving payment to help support the Indonesian currency.

Nevertheless, a significant number of exporters have yet to comply, with BI’s latest data showing that at least 20 percent of the country’s proceeds from external trade were not reported and were kept in offshore banks.

Susiwijono said that the requirement to apply L/C in exportation would help push up the rate of compliance by exporters.

“The [exporters of] commodities subject to the L/C obligation are among those that have so far not fully complied with the prerequisite to report export revenues,” he said. 

A letter of credit is a document from a bank guaranteeing that a seller will receive payment in full as long as certain delivery conditions have been met.

Coal Consumption Still Low Despite Growing Production

Indonesia’s coal production continues to grow but consumption in the domestic market remains weak, indicating snail’s pace development of power plants in Southeast Asia’s largest economy.

Total coal production last year was estimated to have reached about 435 million tons, according to figures from the Energy and Mineral Resources Ministry’s mineral and coal directorate general. That compares with national output of 474 million tons booked a year earlier.

Only 17 percent of coal produced last year, or as many as 76 million tons, was distributed to the domestic market, or far below the allocated domestic market obligation of 95.5 million tons, the figures show.

“The low absorption is due to purchase delays on account of power plant development delays. Electricity sector absorption is around 80 percent of the total domestic allocation,” mineral and coal director general R. Sukhyar said. 

The mineral and coal office tried last year to maintain production at a manageable level as part of attempts to secure the coal reserves and resources for utilization in the future. 

Indonesia is known as a major coal exporter although its reserves account for only around 3 percent of global reserves. Its main market is China and India.

Indonesia’s coal resources reached 28.97 billion tons, according to the Energy and Mineral Resources Ministry’s energy outlook report. The report also estimates that Indonesia’s coal production can only last for the next 50 years with assumptions that its production level remains at the current figure of around 431 million tons and no additional proven reserves are found.

The country’s coal production keeps growing amid declining global coal prices. Indonesia benchmark price, known as HBA, dropped by around 21 percent last year as demand was slower than the pace of supply growth.

Under the government’s strategic long-term plan (RENSTRA), coal production is targeted at 425 million tons this year. 

Out of the total, as many as 92 million tons are targeted to be absorbed by the domestic market. 

“However, the total output can hit around 460 million tons,” coal director Bambang Tjahjono said.

Higher coal output is expected to result in bigger contributions to the country. Coal has become a major state income contributor, particularly after the country started banning the export of mineral ores in early 2013. Last year, contributions from the mineral and coal sector reached Rp 34 trillion (US$ 2.686 billion), lower than the targeted Rp 39 trillion.

“The low absorption is due to purchase delays on account of power plant development delays. Electricity sector absorption is around 80 percent of the total domestic allocation.” – See more at:

Coal Sector Management Poor Amid Policy Changes

Although coal is expected to be the backbone of energy sources in the future, the country has made no progress in limiting extraction so that the mineral can be used in the years to come.

Amid a declining global price, the country’s coal output keeps growing. The government failed to meet its commitment to limit coal output to the same level as last year.

Early this year, the Energy and Mineral Resources Ministry’s mineral and coal directorate general said it would cap total coal production for this year at 421 million tons — similar to the 2013 output — partly by controlling coal diggers’ work plans. 

Until October, the policy went smoothly as the 10-month-output was in line with the full-year plan.

In November, however, things changed. It was revealed that during the January-November period, as many as 427 million tons of coal had been extracted, with around 366 million tons sent overseas.

Thus, the mineral and coal office adjusted its full year coal output’s estimation to 458 million tons, which is almost a 9 percent increase from last year’s figure.

“The increase in output is partly caused by better documentation,” the mineral and coal director general, R. Sukhyar, said in a recent interview.

The government implemented on Oct. 1 a policy requiring coal miners to obtain export licenses. The licenses require them to have a “clean and clear status”, a term referring to coal miners’ compliance to royalty and tax obligations as well as being free from conflict due to overlapping claims of ownership. 

Moreover, the ministry is also cooperating with the Corruption Eradication Commission (KPK) to crack down on illegal mining activities.

The government has been criticized for its poor coal management. There are reports that coal exports are lower than the actual volume of coal shipped overseas.

The country’s 2013 coal output was questionable. The official report repeatedly claimed the national output was 421 million tons in 2013. However, the ministry’s Energy Outlook 2014 report said that coal output in 2013 was 431 million tons. The report also said Indonesia’s coal resources reached 28.97 billion tons. 

Assuming that coal output is at the current level, the country’s coal production could only last for the next 50 years, the report added.

A domestic market obligation (DMO) for coal has been implemented for several years to ensure that domestic buyers have access to Indonesian coal. Also, the DMO is set to increase from year to year, with the government expecting producers to reduce its dependency on the overseas market.

Last year, 85 million tons were directed to local buyers. Domestic absorption is expected at 95 million tons this year and 110 million tons next year.

However, once again infrastructure hurdles made the policy unrealistic. State-owned electricity firm PT Perusahaan Listrik Negara, the biggest domestic user of coal, said that its planned coal usage was 55 million tons this year, meaning that there was uncertainty on whether the domestic obligation of 95 million tons of coal would be fully absorbed by local users.

The slow growth of power-plant development, which is caused mostly by land acquisition issues, has contributed to slower growth in domestic coal absorption compared to the pace of increases in production set by miners, which are trying to balance the weakening price by selling more.

Price pressures are expected to continue as global demand slows. The International Energy Agency’s (IEA) World Energy Outlook report reported that global coal demand grew and would increase at an average of 0.5 percent per year between 2012 and 2014, a much lower rate compared to 2.5 percent over the last 30 years. 

The growth is hampered not necessarily by a weakening economy but by new air pollution and climate policies in the main markets, particularly in the US, China and Europe.

Amid the bleak outlook and rising environmental concerns, the ministry once again expects next year’s production level to be similar to this year’s, at no more than 460 million tons. 

The public will see if the realization of the policy is as poor, as the government still considers coal as a source of state revenue amid declining prices instead of securing supply for future utilization. – See more at: