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.”