Indonesia may be looking to ban the exports of low-grade thermal coal by 2014, a move, which if undertaken, could have an impact on the domestic power sector that is dependent on the Southeast Asian country to bridge the coal supply shortfall in India.
"There are domestic market obligations, as we need coal for our own power producers. From 2014 onwards, we will only export value-added coal of more than 5,600 kilocalories (kcal)," Djunaedi, deputy director of oil, gas and mine products at Indonesia’s Ministry of Trade, said on the sidelines of the ninth Annual Coal Markets Conference.
As the world’s largest thermal coal exporter, Indonesia has often found it difficult to procure enough supplies for domestic consumption. Earlier this year, it implemented a series of measures to ensure that a portion of production was allocated to local industry.
However, the proposed ban on exports of coal under the 5,600-kcal mark stands to change the dynamics of the global thermal coal market, which has seen spiraling demand from Asian economies such as China and India. The latter, for instance, is currently the world’s fastest-growing coal importer.
"Such a ban will have a substantial impact on the thermal coal market, as large amounts of low-quality coal from Indonesia are exported to India and China," said Mark Pervan, global head of commodity research at ANZ.
Low-quality coal, of between 4,800 and 5,800 kcal, constitutes a significant portion of exports out of Indonesia and, considering the country accounts for about 30 per cent of the global thermal coal supply, an export ban could reduce worldwide supplies by at least 10 per cent, Pervan added.
But Indonesia’s local mining industry is pushing hard to stop the move. "We are in discussions with the government and are trying to postpone the ban. If this measure is implemented, it will hit 60 per cent of our exports and we don’t have the technology to undertake value-addition. The government must give us the technology if this is what it wants," said Bob Kamandanu, chairman of the Indonesian Coal Producers Association.
India is already among the largest buyers of coal from Indonesia, and is expected to maintain this position considering the growth in domestic demand and stagnating production of major miners such as Coal India. Earlier this month, Coal Minister Sriprakash Jaiswal said India might have to import 142 million tonnes (mt) of the fuel in the next financial year, up from the earlier estimates of 104 mt.
"There will be an overall impact on the Indian power sector, as currently about 60 per cent of the total thermal coal imports are coming from Indonesia. If the ban comes in, it could also affect domestic coal prices, apart from influencing global thermal coal prices," said Rupesh Sankhe, an analyst at Angel Broking.
Moreover, Indian firms have considerable interests in Indonesia’s coal sector. Tata Power holds a 30 per cent stake in two of the country’s largest coal mines and the Adani Group, India’s biggest coal importer, last year committed $1.6 billion to build mining-related infrastructure in that country.
"It is a draft law at present, and there will be consultations with interested parties before finalisation," a spokesperson for the Adani Group said, adding that the group was already evaluating the possibility of setting up a power plant in Indonesia that would run on locally-mined coal.
Q&A: Bob Kamandanu, Chairman, Indonesian Coal Mining Association
‘You should come to Indonesia to do proper mining, not short-term profit-taking’
‘The next big thing will be India coming into Indonesia for energy needs’
Although over 40 Indian companies are currently mining or exploring coal blocks in Indonesia, domestic interest in the Southeast Asian nation’s coal assets continue to remain strong.
There have been big-ticket buys, such as Tata Power’s purchase of a substantial stake in two of Indonesia’s largest coal mines, along with proposed infrastructure investments, including the Adani Group’s $1.65 billion for rail, port and power projects. But other players, including state-run Coal India and the RPG Group flagship CESC, in spite of scouting, have been unable to secure assets.
Indonesian Coal Mining Association chairman Bob Kamandanu, in an interview on the sidelines of the Annual Coal Markets conference, tells Devjyot Ghoshal that Indian firms should look to buy big, and that the country’s mining sector faces some of the same challenges that domestic miners deal with in the subcontinent.
There has been a lot of Indian interest in Indonesia’s mining sector in recent times. How important is this for the sector?
Of course, the interest is a good for us. But one must remember, whether (they are companies) from India or China, coal mining in Indonesia is in remote areas and is open-cast. So, that means, we are going to cut trees, open up virgin forests.
One must understand that doing mining (in Indonesia) is not cheap. It is expensive and it has to be a sizable operation so that you can have money set aside for taking care of environment and community development since lots of poor people surround these areas.
If we have big operations, with enough money set aside to do all these activities, then we can follow good mining practices. You should come to Indonesia to do proper mining, and not short-term profit taking.
Is short-term profit taking a concern for your mining industry?
A lot of people are now doing this. They are not miners. They come into Indonesia, make money and leave. So, what we want to see are the real mining companies, possibly from the government of India or owners of intellectual property rights who have the funds and knowhow. We have to focus on this, and that people acquire something sizeable.
Is environment emerging as an area of concern for Indonesia’s coal mining sector?
Yes. Not just environment, but forestry. As I mentioned earlier, a lot of forests are virgin forests. We have to look at the purpose of the forests (according to Indonesian government classifications).
Are these productive forests or protected forests or other purposes? If it is other purposes, then we can get it from the local government, but if it is protected forests, we can’t do anything at all. If it is productive forests, then we have to go with the central government programme.
How important is it for foreign companies to build infrastructure?
I wish I can say here that Indonesia is a country with pre-built infrastructure, but unfortunately it is not. Infrastructure is very important because currently, if we don’t build our own infrastructure, we will have to use public roads. And if the public roads are ruined because of our activity, then the image is damaged and the NGOs and everything will come in. But if we have our infrastructure, then it won’t bother the rest.
But some Indian companies are reluctant to come into Indonesia because of regulations?
Based on my experience, I will again say that do not acquire a small-size asset. Maybe acquire a number of small-size assets and combine them into larger ones. Because when you have a large asset, you have voice. As long as the impact is sizeable, the government may look (again) at the regulations, but if the size is small, they will go straight. I think if you want to come in, go with a bigger size and more money.
In a 5-10 year period, what do you see as the role of Indian companies in developing Indonesia’s coal mining sector?
The potential is great. I have said it all along that the next big thing will be India coming into Indonesia for its energy needs. I think we need to sit down together, between our associations, to inform each other of the right methods to come in, so that companies are here for long (periods). But if you are not communicating with someone who knows (the sector) and has experience, then you might be frustrated.