On 26 July 2015, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic subjects such Indonesia’s coal royalties, a July inflation update, the weak performance of Indonesian stocks and the rupiah, revised regulations regarding the position of foreign workers in Indonesia, and more.

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The government of Indonesia decided to postpone its plan to raise royalties for the country’s coal miners. Bambang Gatot, senior official at the Ministry of Energy and Mineral Resources, said the government will not raise coal royalties yet given the sector’s current troubled climate (referring to low global coal prices). Indonesian coal miners will be happy to hear this news as they, especially the smaller-sized coal miners, are having difficulty to survive in the post-2000s commodities boom era.

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Conditions remain tough for Indonesian coal miners in the post-2000s commodity boom. Plagued by low global coal prices since 2008, Indonesian coal miners first raised production rates in order to maintain healthy balance sheets (hence exacerbating the supply glut and putting more downward pressure on coal prices). As this backfired, they then put in place more cost-efficient policies (such as curbing the stripping ratio) in an effort to safeguard profits. However, as prices continued to slide miners are now forced to limit production to survive.

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Pandu Sjahrir, Chairman of the Indonesian Coal Mining Association (APBI), said that Indonesia’s coal production could decline by 24 percent (y/y) in 2015 as the country’s coal miners have been cutting production volumes amid the world’s low coal prices. Reportedly, the free cash flow of various Indonesian coal miners have turned negative, meaning that generated cash from coal production cannot cover companies’ operational costs. In fact, the country’s coal miners are now eager to diversify to other businesses in order to stay alive.

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Coal production in Indonesia fell 21 percent (y/y) to 97 million tons in the first quarter of 2015 as the country’s coal miners cut production volumes amid low coal prices. Some smaller Indonesian miners may even have stopped production altogether as production costs exceed coal prices. According to data from Indonesia’s Energy and Mineral Resources Ministry, 79 million tons of coal were exported in the first quarter, while the remaining 18 million tons were absorbed by the domestic market.

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The coal mining industry continued its downward trend in 2014 amid weak global coal demand and an oversupply on the market. The benchmark Newcastle port thermal coal price fell 29 percent (y/y) over 2014 and declined a further 8 percent in the first quarter of 2015. As a result, Indonesian coal miners reported mostly weak 2014 corporate earnings. However, Indonesian miners are concerned that two new regulations will cause more problems. The Indonesian government plans to raise coal royalties and introduce mandatory letters of credit.

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Bad news for Indonesian coal miners as the government of Indonesia plans to raise coal royalties in March 2015 in a bid to increase revenue from the natural resources sector. Apart from raising royalties, the government will also implement measures to enhance monitoring in the coal mining sector (as illegal coal shipments and tax avoidance are a major problem). The plan to nearly double coal royalties are particularly expected to impact negatively on smaller miners and new firms that focus on the production of low-quality coal.

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R. Sukhyar, Director General for Coal and Mineral Resources at the Indonesian Ministry of Energy and Mineral Resources, stated that the country is plagued by structural illegal coal shipments from coal-rich regions in Kalimantan and Sumatra. Sukhyar estimates that each year between 30 and 40 million tons of coal is exported illegally from Indonesia, Southeast Asia’s largest economy. Based on current coal prices, this would imply that USD $1.2 billion worth of coal is shipped illegally per year causing the government to miss out on royalties.

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Coal production in Indonesia stood at approximately 110 metric tons in the first quarter of 2014, thus little changed from the production volume in the same period last year. Indonesia's Ministry of Energy and Mineral Resources said that - despite the decline in coal prices - the first quarter result implies that a quarter of this year's production target, which is set at 421 million tons, has been achieved. Indonesia is one of the world's top producers and exporters of coal. This fossil fuel accounts for about 85 percent of the country's mining revenues.

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In the 2000s many Indonesian companies diversified their business to include coal mining (or shifting their core business to coal mining altogether) due to lucrative opportunities amid the 2000s commodities boom. However, since 2009 mining companies have had to face tough times. Especially since 2011 commodity prices have shown a declining trend and there remains little hope of a rebound on the short term as the sluggish global economic growth trend persists, particularly led by the economic slowdown in China.

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The government of Indonesia is eager to use current low coal prices as the context to push for consolidation in the country’s coal mining sector. Sudirman Said, Minister of Energy and Mineral Resources, announced that the government may revoke over 4,000 troubled mining licenses this month and install a better licensing system. Licenses that may be revoked are Mining Business Permits (IUPs), not the long-standing Coal Contracts of Work (PKP2B) that are held by companies such as Bumi Resources and Berau Coal Energy.

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On Monday (11/05), it was announced that the reference coal price of Indonesia declined 5.2 percent (month-on-month) to an all-time low of USD $61.08 per metric ton in May. This benchmark price, which is set by the government each month based on the average of four coal indexes (Indonesia Coal Index, Platts Index, New Castle Export Index and New Castle Global Coal Index), continued to plummet due to the coal oversupply in combination with weak global coal demand (particularly falling demand from China).

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The government of Indonesia plans to raise royalties for coal mining companies that hold a Mining Business Permit (Izin Usaha Pertambangan, abbreviated IUP) by revising Government Regulation No. 9 - 2012 on Tariff and Types of Non-Tax Revenue in a move to generate more state income. R. Sukhyar, Director General for Coal and Mineral Resources at the Indonesian Ministry of Energy and Mineral Resources, said that the domestic coal industry remains a vital source of state income, particularly amid diminished mineral exports.

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Despite various negative sentiments, Indonesia's benchmark stock index was able to post a 1.30 percent gain to 4,921.04 points on Monday (07/04). Due to last week's weak March US monthly jobs report, falling indices on Wall Street on Friday (04/04) impacted negatively on Asian indices today. On the domestic side, negative market sentiments were caused by the government's plan to raise royalties for coal miners working under a Mining Business License (IUP) to 10-13.5 percent as well as a luxury tax on cars and telecommunication gadgets.

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