The two types of permits that are issued by the (local) government to coal miners are the Mining Business License (Ijin Usaha Pertambangan licenses, or IUPs) and Coal Contracts of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara, PKP2B). The royalty for PKP2B is already set at 13.5 percent, while those for IUPs depends on the quality of the coal. IUP-holders with a coal quality of below 5.100 cal/gram pay 3 percent, between 5.100 and 6.100 cal/gram pay 5 percent and over 6.100 cal/gram pay 7 percent as royalty.

By giving this equal treatment to miners, the government aims to raise more revenue from Indonesia's mining sector. However, it also threatens profit margins of smaller companies. Producers of higher-quality coal may be more able to absorb the extra royalty costs.

Another negative impact of higher royalties is that it hollows regulatory certainty in Indonesia. In the past, the government provided this incentive (lower royalties) to miners to stimulate investments in (lower quality) coal mining. As a result miners purchased bank loans to finance their business expansion but are now facing significantly raised royalties and thus lower profit margins.

Indonesia is one of the world's largest producers and exporters of coal. A significant portion of this exported thermal coal consists of the medium-quality type (between 5,100 and 6,100 cal/gram) and the low-quality type (below 5,100 cal/gram). Click here for a detailed overview of Indonesia's coal mining sector.

Indonesia's Production, Export and Domestic Consumption of Coal 2008-2013:

     2008    2009    2010    2011    2012    2013    2014¹
Production     240     256     275     353     407     421     397
Export     191     198     208     273     304     293     324
Domestic      49      56      67      80      90      89      73

in million tons
¹ forecast
Source: Ministry of Energy and Mineral Resources