Indonesia’s 2015 Coal Output May Slide 24 pct As Low Prices Hit – Association

Coal production in Indonesia, the world’s top exporter of seaborne thermal coal, could drop by up to 24 percent this year as producers stop ramping up output and concentrate on business stability, the country’s main coal association said.

A global oversupply has cut benchmark Asian coal prices by more than 20 percent over the past 12 months, pushing more and more firms into the red.

Previously, producers increased output to maintain cashflow and service debt, exacerbating the oversupply and the downward pressure on prices, but the picture is changing, said Pandu Sjahrir, newly appointed chairman of the Indonesian Coal Mining Association.

“People are no longer chasing cashflow, or increasing their EBITDA figure on income statements. Now they are more focused on guarding business stability – where they have to have enough cash in hand,” Sjahrir said.

“What this means is that most of the players have started to reduce production – all the more so if that production is not profitable.”

Coal production could drop to between 350 and 400 million tonnes in 2015 from 458 million in 2014, Sjahrir said. That would be the second year in a row that output has declined after rising for at least 30 years.

Stripping ratios and the removal of overburden – the amount of dirt miners remove to expose mineral deposits – have declined by 15 to 20 percent, indicating further output declines can be expected. “You can see a lot of players have reduced their stripping ratio by about 15 percent overall.”

Annual domestic coal demand in Southeast Asia’s largest economy is currently around 90 million tonnes, Sjahrir said, noting the industry was now monitoring a government programme to build 35 gigawatts of new power stations by 2019.

“In the next six to nine months, we’ll know what Indonesian demand will be like. Even if only half of it happens – 17 gigawatts – let’s say around 60 percent of that would be coal. That means 150 million to 200 million tonnes of extra coal would be needed.”

If firms sign power purchase agreements this year, their power plants would take 2 to 2-1/2 years to complete, Sjahrir said.

“Indonesia is the biggest swing factor in the world. If Indonesia’s demand can increase from 90 million tonnes to 200 or 250 million tonnes, that could influence Newcastle prices, but that’s a big if,” he said, referring to the Asian coal benchmark.

With annual returns on power projects of only 10 to 12 percent, Sjahrir said, the country would continue to struggle to attract investors. “Not many can do it.”

Goverment Gets Serious About Renewable Energy Development

Following a major overhaul in the country’s fuel subsidy program, the Energy and Mineral Resources Ministry is now striving to explore new and renewable energy resources.

Indonesia is currently heavily dependent on fossil fuel, particularly oil and coal, despite possessing abundant potential sources of renewable energy, primarily geothermal and solar energy.

Located in the “ring of fire”, the country is rich with volcanoes providing abundant geothermal sources. In addition, the country also receives sunlight throughout the year, making it ripe for solar power development.

Despite this potential, efforts to exploit these resources have been few and far between.

Concerns have risen over the country’s energy security, particularly with the growing demand for energy amid declining supplies. To make matters worse, attempts to find new hydrocarbon sources appear to have been fruitless. 

Six months after taking office, Energy and Mineral Resources Minister Sudirman Said has revealed his plan to make significant changes to the management of the new and renewable energy resources, including by allocating more funds to related projects. 

“The ministry will no longer use the obsolete platform inherited from the past administration where new and renewable energy sources took a back seat. In the next state budget, we will propose a much higher budget for the new and renewable energy sector,” the minister said.

He added that the new and renewable energy sector would probably be allocated around 40 percent of the ministry’s total budget

In the 2015 state budget, the Energy and Mineral Resources Ministry received Rp 14.9 trillion, of which only Rp 1.69 trillion is earmarked for the development of infrastructure related to new and renewable energy.

“The money will be spent on a range of uses, possibly including state-owned enterprise investment in the new and renewable energy sector,” Sudirman added.

Apart from the greater allocation to the new and renewable energy sector, Sudirman is also planning to establish a new directorate general for energy conservation. 

Under the existing organizational structure, energy conservation is included in the remit of the directorate general for new and renewable energy and energy conservation.

Sudirman argued that the establishment of the new directorate general was necessary as conserving energy was as important as creating or finding new energy sources. 

He added that his ministry was currently working to propose the plan to the Administrative and Bureaucratic Reform Ministry.

A member of the House of Representatives’ Commission VII overseeing energy, Satya W. Yudha, claimed that legislators would support the ministry’s agenda to prioritize new and renewable energy because those energy sources were sustainable, unlike oil, gas or coal.

However, he said, the ministry would also need to encourage the sector through incentives such as tax exemptions.

“The problem with new and renewable energy is that its development is expensive. Therefore, the government should think about how to make it more economical, for example by offering subsidies. The economics of these projects are important, particularly amid declining oil prices, which makes the commodity far cheaper than renewable energies,” Satya explained

However, he disagreed with the ministry’s plan to establish a new directorate general for energy conservation. 

He argued that the Ministry needed only to improve the existing energy conservation section rather than increase its status to directorate general level.

Coal Output Falls as Prices Continue to Lag

Coal output dropped by 21 percent in the first three months of the year as low prices for the commodity forced mining companies to reduce activities to cut production costs.

Data from the Energy and Mineral Resources Ministry’s directorate general for minerals and coal shows the total output for the first quarter of the year amounted to 97 million tons, down from 124 million tons in the same period last year.

“The decline is probably due to the low prices as miners have cut production. There are also small companies that may no longer be in production,” the ministry’s director for coal, Bambang Tjahjono said.

Coal mining companies have been struggling to stay afloat amid low prices for the commodity due largely to slower demand from major coal consumers as a result of the sluggish global economy of the past few years. Hopes of a recovery in coal prices have been dimmed by the current plunge in oil prices.

The benchmark price at Newcastle Port for 6,300 kcal/kal coal delivered on a freight on board (FOB) basis was US$55.25 per ton early this month, according to figures from Platts, the global energy and metals information provider. 

Meanwhile, Indonesia’s coal -price reference (HBA) for 6,322 kcal/kal coal was $64.48 per ton for April, lower than the $67.76 per ton a month earlier.

Indonesian Coal Mining Association (APBI) chairman Pandu Sjahrir was uncertain about the coal output data and called for further verification of the government’s first quarter data. In the past, the official coal output figures in the country have frequently changed due to poor data management and illegal mining the data for which is not recorded.

Pandu said the current coal price was beyond the tolerable level. “Having seen pressures in the last few years, mining firms have tried to cut costs. The industry is now very efficient. As the price continues to decline, companies have no other choice other than cutting down production,” Pandu said.

According to him, of 14 publicly listed companies whose production makes up around 80 percent of the national output, only five reported net profits last year. Thus, he said, smaller firms were suffering more in the current situation and many had decided to discontinue business.

The significant first-quarter decline in production was the first in the country for a number of years. 

Even with plunging prices, Indonesian coal output used to continue growing because miners tried to maintain their profits by balancing the drop in price by ramping up production volume. Last year, the country’s total production reached 458 million tons.

Despite the production decline in the first quarter of the year, the mineral and coal office still expects to meet the national production target of 425 million tons by the year end, according to Bambang. 

The target is lower than last year’s total output as the government is trying to regulate production levels so the country will have enough coal supply for future use. 

However, capping coal production rarely works as the country still needs income from the sector amid declining contributions from mineral exports and oil production.

The mineral and coal office earlier said it might increase the production target to 455 million tons this year as part of an attempt to meet the target of a Rp 52 trillion contribution to state income.

Of the total production of 97 million tons in the first quarter, 79 million tons were exported and only 18 million tons were absorbed by the domestic market.

Economy in Brief: Coal Association Seeks Bigger Role in RI

The Indonesian Coal Mining Association (APBI) is seeking a bigger role in the rule-making process for the country’s coal industry, a new chief has said.

The newly elected chairman of the association, Pandu Sjahrir, said coal utilization, incentives, slowing investment and royalty payments would be key issues that the association would address in the near future.

“The important KPI [key performance indicator] for us is how to increase the investment in the mining industry instead of increasing production. In the last few years, capital expenditure in mining has been declining not only due to plunging prices but also due to unfriendly policies that increased costs,” Pandu said.

He cited that during the 2011 to 2014 period, the capital expenditure disbursed by mining firms declined by about 70 percent, which was partly driven by higher royalties and bigger payments needed for the use of forest areas.

Pandu, the president director of Jakarta-listed PT Toba Bara Sejahtra — a subsidiary of PT Toba Sejahtra founded by current presidential chief of staff Luhut Panjaitan — was elected as APBI chairman in a Wednesday meeting. He replaces previous chairman Bob Kamandanu.