TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Coal: Power of the future despite looking black now
The Indonesian stock market was one of the worst performing markets in the Asian region with a drop of well over 50 percent from the beginning of 2008
Change Size
The Indonesian stock market was one of the worst performing markets in the Asian region with a drop of well over 50 percent from the beginning of 2008.
Commodities are among the worst-hit sectors caused by the sharp plunge in crude oil & commodity prices as mounting evidence indicates that the global financial crisis may hurt world economies, consumer demand and corporate earnings.
Coal mining company Bumi Resources plunged 81 percent during this period while other coal mining companies fell by between 48 percent and 54 percent. The main reason for the sharp drop in coal stocks is that coal prices fell about 46 percent from their peak of US$192 per ton in July 2008 to $103 currently.
The bigger fall in the Bumi share price, relative to other coal stocks, was partly due to a drop in investor confidence following the suspension of trading in its shares on the stock market, as its shareholder Bakrie and Brothers negotiated the sale of its 35 percent stake in Bumi.
Although coal stocks seem to be stuck in the treacherous doldrums, I believe that this situation is unlikely to persist for long as the business outlook for Indonesian coal remains good. There are several strong reasons why the prospects for the coal business remains excellent.
Coal is currently widely used all over the world for power generation, steel production, cement manufacturing and other industrial processes. Coal fuels about 40 percent of the world's current electricity requirements and this important role is expected to continue in the foreseeable future.
The biggest market for coal is Asia which is right on the doorstep of Indonesia. Asia accounted for about 60 percent of global coal consumption in 2007, but this is expected to increase further to 64 percent by 2010. With vast coal resources, Indonesia has become the world's largest exporter of thermal coal.
Despite fears of carbon pollution in many developed countries, I expect coal to remain a major source of energy rivaling other sources of energy for purely economic reasons. Coal use should increase under any foreseeable scenario because it is simply the cheapest and most abundant source of energy.
It is estimated coal can provide energy at the significantly cheaper cost of between $1-2 per million British thermal units (mmbtu) compared to $6-12 per mmbtu for oil and natural gas.
Coal is the largest source of energy in Asia accounting for 50 percent of total fuel consumption of 9 billion tons of oil equivalent.
More important is that coal is a sustainable source of energy for consumption as global coal reserves are about 847 billion tons, which would be sufficient to meet global consumption for the next 133 years, or at least for the next four to five generations.
In Indonesia, we have huge coal resources of 93 billion tons mainly located in Sumatra and Kalimantan. Fortunately, most Indonesian coal produces lower emissions of sulphur and nitrogen oxides, as well as lower production of waste. The implication for users is that this would reduce equipment maintenance and ash disposal costs.
Coal demand from the U.S. and Europe have imposed more stringent regulations restricting power plants from using coal with high sulphur content which is favorable to Indonesian coal producers.
Another positive point is that most coal mining companies in Indonesia adopt the open-cast mining method as the coal seams are relatively close to the surface. This makes Indonesian coal mining one of the lowest cost coal production industries in the world.
On the domestic front, coal production is expected to increase in the future to meet rising demands from power plants here. The government plans to convert 7,753 megawatts (MW) of diesel-fired power plants into coal-fired plants and is building an additional 10,000 MW of new coal-fired capacity by 2009 to 2010.
A major deterrent for foreign investors into the coal sector in Indonesia is legal risks. The uncertain regulatory and legal environment is one of the main reasons for Indonesia having lower proven coal reserves despite being the world's largest exporter.
Inevitably, investors are reluctant to commit significant investment for exploration of coal resources.
If the problems are inadequately addressed and managed by the government, Indonesia may end up becoming a net coal importer in the future despite its vast resources, like the current appalling state of the domestic oil industry.
The coal mining business is regulated by a broad spectrum of the government which include the Ministry of Energy & Mineral Resources, Ministry of Environment, the Investment Coordinating Board, Ministry of Finance, Ministry of Communication and Regional Governments in the respective mining locations.
There are different laws and regulations applied by these various government departments that can control different aspects of coal mining activities. Cost of full compliance to all the complex regulations can have a significant impact on mining operations and profitability.
If the problems are properly managed, coal mining can be an extremely lucrative business.
Indonesian coal mining conmpanies are currently facing some serious challenges in the short term. Equity investors with a longer term investment horizon should find the coal sector very attractive at its current distressed valuation.
