Since 2008 (with the exception of the temporary rebound that occurred in the 2009-2010 period) coal prices have continued to slide amid sluggish global economic growth (particularly in China), and there are still few to none signs of a rebound. In the first four months of 2015, coal production in Indonesia declined by 11 percent (y/y) to 130 million metric tons as coal mining companies cut production rates and some small miners have ceased production altogether. In China, the world’s largest coal consumer, coal imports were down nearly 40 percent in the first five months of 2015.

Stakeholders in the coal mining industry fear that prices may touch USD $50 per metric ton soon. On 5 June 2015, the benchmark Newcastle thermal coal index was around USD $60 per metric ton, down 10 percent from the year-start and had more than halved compared to its peak of USD $136 per metric ton in January 2011. With the current low coal prices it is believed that about 55 percent of Indonesian coal miners are selling coal below productions costs, implying that the more coal they produce, the more losses they incur.

Indonesian Government Coal Policy

Apart from low coal prices, Indonesian coal miners are also troubled because of new government policies such a looming royalty hike, changes in mine plans by the government’s Minerals and Coal Office, and renegotiations of a number of Coal Contracts of Work (PKP2B).

The looming royalty hike was first announced by the government last year as the government wants to generate more funds for structural economic and social development. However, this hike still awaits approval from the Indonesian Finance Ministry. The royalty hike will nearly double royalties for the country’s coal miners. However, Indonesian Minister of Energy and Mineral Resources Sudirman Said recently confirmed that low-grade coal will be exempted from this planned hike.

Following the introduction of the 2009 Mining Law (Law No. 4/2009 on Mineral and Coal Mining), the government is also eager to renegotiate numerous long-standing Contracts of Work (PKP2B) as the new law introduced the Mining Business Permits (IUPs) and which replaced the PKP2B. However, before the existing long-standing PKP2Bs expire, the central government tries to adjust several matters in the existing PKP2Bs in order to generate greater profits. The 2009 Mining Law changes the relationship between the private miner and the (local) government from being based on a “contract” to a “license”, giving the government a superior position.

The seven main matters that are being renegotiated are the royalty adjustment, the maximum size of the mining area, obligations for downstream activities, the continuance of operations after current contracts expire, share divestment, a future export tax, and the mandatory usage of local goods and services. The government wants to finish these renegotiations before the end of the year. However, in many cases PKP2B-holders are reluctant to agree as these new rules are not in line with the existing contracts. In case no agreement can be reached then arbitration will be the next step.

The Indonesian government targets to see a coal production figure of 425 million metric tons in 2015, down from last year’s realization at 458 million metric tons. However, Chairman of the Indonesian Coal Mining Association (APBI), Pandu Sjahrir, expects to see Indonesia’s coal output to slow to between 350 and 400 million tons in 2015 as more miners may cease production amid low prices.

Meanwhile, a government official stated that domestic consumption of coal is expected to grow to 167 million metric tons by 2024, from 71 million tons in 2015, due to growing power demand (and supply) in Indonesia. Coal-fired power plants in Indonesia currently contribute around half of the country’s existing 47 gigawatts of installed power plant capacity (therefore the Indonesian government is also eager to curb excessive coal exports in order to safeguard future supplies for power generation). Over the next five years, the government targets to add 35 gigawatts, which would absorb an additional 70 million tons of coal per year, implying that Indonesian coal exports will decline and global coal prices should be supported.

However, it is doubtful whether Indonesia can realize this ambitious power plant building program as it cannot rely on a good track record. Earlier this decade, a similar program only delivered a mere 10 percent of planned capacity additions. Therefore, the current administration decided not to depend on state-owned electricity provider Perusahaan Listrik Negara (PLN) to build additional power plants but also to invite independent power producers. However, Sjahrir said that the market expects to see only 12 of the 35 gigawatts delivered by 2020.

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 Industry Indonesia: Troubled Licenses & Falling Prices
Indonesia’s Reference Coal Price Hits All-Time Low in May 2015
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