Long-term prospects are strong because coal is the most important energy source for electricity generation. Despite being a polluting energy source due to its high proportion of carbon and its negative impact on the environment, other vital energy sources (for example natural gas) are significantly more exhaustive and more susceptible to price fluctuations on the world market. Therefore, the world's industries have increasingly shifted focus to coal. As giant economies such as China, India and Indonesia - despite experiencing a temporary economic slowdown - need to supply increasingly more electricity to their immense populations, coal has an important role to play.

Indonesia plays a key role in the global coal industry because it is one of the world's largest producers and exporters of coal. Since 2005, when it overtook Australia, the country is leading exporter of thermal coal. A characteristic of Indonesia's thermal coal is that it consists of a medium-quality type (between 5100 and 6100 cal/gram) and a low-quality type (below 5100 cal/gram), both well suited for usage in electricity generation. Indonesia's coal is competitive on the world market as it lies close to the earth's surface and due to the country's low labor costs. Moreover, Indonesia is geographically strategically located near China and India. As such, Indonesia is in a great position to supply coal to these two economic giants.

While global demand for coal has declined, Indonesia's domestic demand for coal is expected to increase as the Indonesian government wants to enhance the role of coal in the country's energy mix (particularly for coal- fired electricity generation).

     2006    2007    2008    2009    2010    2011    2012    2013
Production     194     217     240     256     275     353     383     421
Export     144     163     191     198     208     272     304     349
Domestic      49      61      49      56      67      80      79      72

in million tonnes
Source: Ministry of Energy and Mineral Resources

However, as mentioned before, coal is currently experiencing a difficult time and this may last for a number of years. China's demand for coal is expected to be stagnant in 2014 as economic growth in the world's second largest economy is estimated to slow slightly from 7.6 percent to 7.4 percent. Coal demand from India, on the other hand, is expected to rise in 2014 as the country's economic expansion is forecast to accelerate from 3.8 percent to 5.1 percent. Moreover, India's dependence on imported coal has increased (due to a shortage of domestic production). However, it will not be enough yet to make global coal prices reach pre-2011 levels.

East Kalimantan remains Indonesia's main source of coal production and export. This province exported 265 million tons of coal, roughly 75 percent of Indonesia's total coal exports, in 2013. Its main export destinations were China (30.2 percent of East Kalimantan's coal exports), followed by India (27.2 percent) and South Korea (11.5 percent).

A number of big players in Indonesia's coal scene include: Bumi Resources (leading producer and exporter), Adaro Energy, Indika Energy, Berau Coal Energy, and Tambang Batubara Bukit Asam.

Indonesia's controversial new Mining Law No.4/2009, which can be labeled 'resource nationalism', brings a number of important changes to the coal industry in Indonesia (and which are not to the liking of foreign investors). Most importantly, the new law stipulates that foreigners with a Mining Business License (Ijin Usaha Pertambangan, or IUP) to divest at least 51 percent of the mining company to an Indonesian party (private company, state-owned enterprise or government) after ten years of operation.

Other bottlenecks to Indonesia's coal sector, which are particularly troublesome for foreigners, are conflicting regulations between the country's mining and forestry, lack of coordination between the central and regional governments, bureaucracy, legal certainty, corruption, land acquisition, and issues with local communities.

Lastly, Indonesia's Ministry of Energy and Mineral Resources plans to set royalties for all types of coal at 13.5 percent (of net sales) as part of a revision of Government Regulation No. 9 - 2012 on Tariff and Types of Non-Tax Revenue. Currently, the percentage of royalty depends on the quality of the coal that is extracted as well as the type of permit that is issued to the coal miner. Apart from higher coal royalties, the Indonesian government also proposes a windfall profits tax in case there is a sharp upward price correction. For smaller mining companies this aggravates financial troubles.

Further Reading:

Coal Mining in Indonesia