The Indonesian government introduced its reference coal price in 2009 in order to make a transparent benchmark to calculate coal royalties for Indonesian miners. On a year-on-year basis, the government’s reference price has fallen 17 percent in May from the same month last year.

The coal oversupply in recent years has been caused by falling global demand amid reduced economic activity (particularly in China). However, the oversupply has been exacerbated by miners’ efforts to increase production volumes in order to generate more revenue and maintain a healthy cash flow, while enhancing cost-efficiency in their operations. However, as global coal prices kept falling, coal miners have reportedly curbed production volumes (or stopped production altogether) in 2015 as free cash flows of various Indonesian coal miners turned negative. Current conditions in the coal mining industry of Indonesia are particularly tough for the smaller coal miners, while the midsized and larger coal miners still have sufficient cash reserves (although margins are declining).

Declining rates of coal production should have a positive impact on global coal prices toward the future. However, more importantly, global economic growth should accelerate (especially in China) in order to push coal prices back up.

Previously, the Indonesian government announced that it would raise coal royalties in May 2015 by nearly 100 percent in order to generate more funds for its development goals. Stakeholders in the coal industry have objected fiercely to this policy as conditions are already extremely tough for miners amid the low coal prices.

The government targets a coal production rate of 425 million metric tons in 2015, about one-fourth of which to be allocated for the domestic market (the remainder for export purposes). However, Pandu Sjahrir, Chairman of the Indonesian Coal Mining Association (APBI), expects that Indonesian coal production may decline to about 375 million metric tons in 2015, down from 458 million tons in 2014 as the economic slowdown of China is worse than expected. In the first quarter of 2015 Indonesian coal output fell 21 percent (y/y) to 97 million tons.

Indonesian Production, Export and Consumption of Coal:

     2007    2008    2009    2010    2011    2012    2013    2014
Production     217     240     254     275     353     412     474     458
Export     163     191     198     210     287     345     402     382
Domestic      61      49      56      65      66      67      72      76

in million tons
Source: Indonesian Coal Mining Association (APBI)

Further Reading:

Coal Mining Update Indonesia: Coal Production to Fall in 2015
Coal Production Indonesia Surprisingly Low in First Quarter 2015
Earnings Indonesian Coal Miners Down on Weak Global Coal Prices
Coal Mining News: Indonesia Plans to Raise Coal Royalties in March
News from Indonesia’s Coal Mining Industry: Production & Export
Coal Mining Industry Indonesia: Higher Royalties for IUP-Holders
Illegal Coal Shipments from Indonesia Form a Persistent Problem
Coal Mining in Indonesia: Safeguarding Future Energy Sources
Indonesia Coal Update: Export, Production and New License System
Overview of the Coal Mining Industry in Indonesia