slapphead_otool

Probably going to be the most boring thread ever on BE, but I wanted to start a thread on the Indonesian coal industry, for three reasons:

1. The Indonesian area doesn't get many posts. Hopefully a thread like this will pop up in searches and lead people here.

2. A lot of expats currently work in the Indonesia coal industry, or are looking at doing so.

3. Its a topic of great interest to me, and I would like to share views, opinions and information with others.

I propose to open with some background data, and then add some opinions. Hopefully this will generate some discussion.

slapphead_otool

So, some background data:

Firstly Indonesia (for those who don’t know it)
• 17,500 Islands
• 240 Million people
• 742 Languages and dialects
• 300 Distinct ethnicities
• Largest exporter of thermal coal in the world

Its coal industry:
• Extracted 56 million tonnes in 2000
• Extracted 217 million tonnes in 2007
• Extracted 330 million tonnes in 2012
(Only 82 million tonnes of that coal is used internally, about 24%. The rest is exported. The state owned power generator PLN use about 5 million tonnes of the locally used coal )

The value of that coal to Indonesia
• Rp 5.8 trillion in 2007
• Rp 20.8 trillion in 2012
(So coal extraction went up by 52%, coal revenue went up by 358%)

Indonesian Coal Reserves:
+/- 104 billion tonnes
22 billion proven reserves
(About 60 years worth at current extraction rates)
Out of interest, India has 236 billion tonnes, with 114 billion proven reserves.

slapphead_otool

Coal locations:

Sumatra: (64.00 b/t)
Central Sumatra Basin
South Sumatra Basin
Bengkulu Basin


Kalimantan (40.00 b/t)
Tarakan Basin
Berau Basin
Kutai Basin
Barito Basin

There are also small reserves in
Sulawaesi (0.23b/t)
Maluko (0.002 b/t)
Palua (0.15 b/t)
Java (Jatibarnag Basin) (0.01 b/t)


But a lot of the coal is unwinnable:
Kalimantan = 66% unwinnable.
Sumatra – 89% unwinnable.

And it is in remote locations, usually far from ports and infrastructure. At the moment most of the Indonesian coal exports are coming from the Kutai basin close to Balikpapan, because of the easy access to transport and the Balikpapan coal terminal.

slapphead_otool

Prices:

Prices for steaming/thermal coal are benchmarked against Power Station prices at Newcastle Port, Australia.

It costs Indonesian large miners between $30 and $55 to extract a tonne of coal and transport it to a port. This is the cheapest steaming coal in the world, and only some South American mines can match that price. This is why Indonesia is the largest coal exporter in the world. Its about price.

It costs Australian miners at least $80 to extract and deliver to port a tonne of coal.

Chinas domestic price of coal is around $98.5 per tonne of coal, due to difficulties in winning and transportation

Indonesia is relying upon two factors for low costs:
Easy to win coal
Close to ports.

slapphead_otool

Why China imports coal:

China has 170 billion tonnes of coal reserves, about 19% of the worlds reserves. Until 2009 it was a net exporter of coal.

The coal resources are located in the western and northern inland provinces. The two provinces of Shanxi and Shaanxi and the autonomous region of Inner Mongolia alone account for nearly 70 percent of China’s proven coal reserves and more than half of national coal output.

The coal consuming centers are located along China’s heavily populated eastern and southern coastline, and coal must be transported long distances via railways, roads, or waterways (both inland river and coastal marine transport) from the west to the east and from the north to the south.

Privatisation of the ports in the more relaxed Eastern and Southern coastal areas allowed the development of high capacity modern ports capable of handling high volumes of imported coal. In contrast, the more restrictive government run Ministry of Railways refused to allow investment in new railway lines and infrastructure, especially in a new southbound railway lines.

The result is that local coal cannot be transported to the user regions economically, whereas Indonesian coal can be shipped straight into the Chinese ports.

Coal sent from local mines by railway has fallen from 70% of total usage to below 50% in the last 30 years, whilst imported coal has gone from zero to around 40% of total usage.

The Indonesian coal boom therefore has a lot to do with the restrictive investment policies of the Chinese Minister for Railways in the 1990s.

slapphead_otool

The Indian issue:

India has 236 billion tonnes of coal, with 114 billion proven reserves. About three times the Indonesian reserves.

Despite that, India is a major importer of Indonesian coal. In fact Indonesia supplies more coal to India than it does to China.

The reasons are three fold:

1. India has similar but less pronounced problems with transport from the mines to the consumers. Although India has a well developed railway network, transporting the coal from the mines to the population centers adds greatly to the cost.

2. India doesn’t currently have the mining capacity to supply domestic demand especially as the Indian coal is deep underground and requires complex mining technology to extract it.

3. Indonesia coal, because it is easy (and cheap) to win and is mined close to the port, is far cheaper. Therefore India is buying cheap coal to supplement local demand and subsidise the economy.

However Indonesia is unhappy about selling cheap coal to subsidise India, and in 2009 introduced the Mining Act, which stipulates that coal must be sold at the international market rate (The Newcastle Australia Power Station rate). This has impacted sales to India, where power stations had forward purchased coal.

slapphead_otool

The future:
1. The US is switching to shale gas energy. This has two effects:
a. Cheaper energy costs and high unemployment are reducing the costs of manufacture in the USA, whereas the revers in happening in China. . Companies are now starting to pull back from China manufacture to local production. (Apple just announced that some of its products will now be manufacture in the USA)
b. The surplus coal from the switch to shale gas will be sold cheaply on the international market, competing against Indonesian coal.

2. China is fixing its railway problems. China will strive to expand rail lines from Shanxi, Shaanxi and western Inner Mongolia to Caofeidian Port, from central and southern Shanxi to Shandong coastal ports, etc. and build new lines from Ordos and Shaanxi to central China like Hubei, Hunan and Jiangxi. This will lift local carrying capacity to 3 billion tonnes by 2015. This will greatly reduce the cost of local coal.

3. By 2015-5 new streamlined and cost efficient coal mines in the USA, Australia, Russia, African and South America will come on stream.

4. By 2018 at current extraction rates, the easy to win coal in the Balikpapan region of Indonesia will have become exhausted. The increased transport and/or winning costs of further stocks will remove the price advantage that Indonesia currently holds.

5. By 2020 the Indonesia coal boom will be over.

RedDragon2008

Great thread mate, soaking up the information

When you say unwinnable does this still mean potential ie building of new ports or is the cost benefit just too swayed to investigate further?

slapphead_otool

Thats an interesting point and one I am currently researching.

My take on it at the moment is its a combination of economically unwinnable (costs too much in the current market), technically unwinnalbe (deep, fragmented etc) and logistically unwinnable (in the middle of mountain ranges etc.)

slapphead_otool

The Chinese Minister for Railways who caused the problem was Han Zhubin, Minister of Railways 1992-98. A political appointment with no college education, Zhubin was one of party leader Jiang Zemin’s “Shanghai Gang”.

As early as 1995 China planned to open up the railways to foreign investment and increase track length by 50% from 50,000Km to 70,000 Km by the year 2000.

This plan included building three railways linking Shanxi, Shaanxi and other coal production centres with east coast ports. These still have not been built.

However in 1995 Zhubin decided to issue Railway Construction Bonds, which raised only moderate funds for expansion. In 2007 these bonds had only raised 60 billion Yuan.

A new release in 2008/9 raised a further 100 billion Yuan ($14.6 billion), by 2010 they had raised 700 billion Yuan.

slapphead_otool

Political interference and ownership

In 2009 the Indonesia Government introduced the Mining Law (Law No.4 of 2009 on Mineral and Coal Mining (Law No. 4/2009)

This covered a number of areas, but in typical Indonesian legal fashion, it only did so at a high level and was open to wide interpretation.

It introduced a new mining licence system that replaced the mining authorizations (Kuasa Pertambangan, or KPs) that previously were only available to wholly owned Indonesian companies as well as contracts of work (CoWs) and coal contracts of work (CCoWs). This (in theory) opened up the Indonesian mining industry to foreign ownership. There was a resulting boom in interest in Indonesian coal mining.

However, subsequent regulation No.23/2010 introduced in 2010 clarified this ownership, with a minimum 20% level of domestic ownership required through divestment, effective 5 years after the commencement of commercial production.

Even worse, the procedure that must be followed to divest shares so that 20% local ownership could be achieved is complex. The divestment shares must first be offered to the central and the relevant regional government. If the central government or the regional government declines such offer, the divestment shares must then be offered to state owned and regional entities and if such entities decline, then offered to private entities.

And in 2012 with the new GR24/2012 the Indonesian government again changed the law, now stipulation that foreign owned mining operations had to divest 51% interest by the 10th year of commercial production.

These legal revisions introduce two problems for mining:
• Loss of controlling interest
• Lack of confidence in legislative stability

The result will be a loss in investment and more difficult access to technology.

bakedbean

I'm interested (nosey) in why you are most interested in it. From an environmental standpoint?

I just wish they'd stop burning all those forests so we can have some haze-free days in Penang in the summer But I suppose that is a bit off-topic?

slapphead_otool

Three reasons really:

1. its quite a interesting phenomena. From being a zero exporter of coal to bing the largest in the world in a few years, with as many twists and turns as a good mystery novel. Its interesting to understand why.

2. There is money in it. LOTS of money in it. hopefully some for me.

3. It has huge impacts economically for Indonesia, and many other countries. If it goes wrong it will backlash across the world in many ways.

eddie007

I remember watching a fairly shocking documentary on the lives of coal truck drivers in (?) India once.... Don't remember too much detail, other than the shonky vehicles, children grubbing for fallen coal and risking their lives riding the trucks to steal coal....

What is the social/environmental impact on the communities involved?

slapphead_otool

Despite this letter in the Jakarta Post:

http://www.thejakartapost.com/news/2...n-or-bane.html

the environmental impacts at the moment don't seem so bad. Although the open cut mines are huge, they are insignificant in the scheme of things. The miners probably will not reclaim and rehabilitate the land, but the jungle grows quickly, the pits will flood with the incessant tropical rain, and I suspect that in 20-30 years you wont realise a mine was ever there.

The coal is usually transported by barge down the extensive wide river networks. Spillage or contamination isn't really going to be a problem. its coal we are talking about - not cadmium. The coal loaders are often floating platforms, and will be towed away for scrap etc.

The social impacts are a bit different. The mining towns are booming, and there is a rise in thing like prostitution and drinking (just like any other mining boom)

but at least its providing jobs in these remote places.