Source: Energy and Mineral Resources Ministry

Business players have thrown their support behind the government’s plan to set a cap on coal production, a move they believe could lead to stronger coal prices.

Indonesian Coal Mining Association (APBI) executive director Supriatna Suhala said businesses basically agreed to control coal production and meet the domestic market obligation (DMO).

The association is calling on the government to convert all coal mining business permits (PKP2Bs) into special mining permits (IUPKs) to control trade. At present, a PKP2B does not contain any stipulation on export taxes.

“There is no firm regulation stipulating the supposed export tax, so coal producers are currently free to trade their coal,” Supriatna told The Jakarta Post on Wednesday.

If the production cap is successfully implemented, APBI predicts that coal supply to the international market will gradually decrease and prices will soar in response to high demand among Asian countries that have been going all out to boost the development of coal-fired power plants, including Malaysia, the Philippines and India.

The monthly average price of Asian benchmark Newcastle thermal coal reached US$111.43 per ton in November 2016, the highest since March 2012, before stabilizing at an average of $80.12 per ton in May 2017.

The government previously stated it was looking to limit coal production to a maximum of 400 million tons a year starting in 2019 and prioritize production for domestic use to balance against a lack of new coal discoveries.

Last year, the country produced 434 million tons of coal, surpassing the original target of 419 million tons of coal. Of the production volume, 124 million tons was used domestically, and 310 million tons were exported.

Indonesia had coal resources amounting to 128.06 billion tons and coal reserves of 28.46 billion tons by the end of 2016. These resources are mostly in Kalimantan and Sumatra.

The government estimates that domestic consumption will soar to 240 million tons a year in 2019 from only 111 million tons last year, in line with the ongoing development of various coal-fired power plants across the country.

The government may completely stop coal exports when domestic consumption reaches the same level of production of 400 million tons of coal.

Indonesian Mining Association (IMA) chairman Ido Hutabarat said his association supported the government’s plan as coal would remain the cheapest source of energy for years to come.

“Each major coal producer has started to preserve supply for its own domestic market, including India and China, even though they still need imports,” Ido said.

“This is something that Indonesia can follow in a bid to maintain coal supply, let’s say, for the next 50 years.”

India, which produced 638.05 million tons of coal in 2015 to 2016, is in dire need of coal with the ongoing construction of 50 gigawatts (GW) of coal-fired power plants across the country.

China, which mined 3.36 billion tons of coal last year, aims to develop coal-fired power plants with a capacity of 205 GW during a period of 2016 -2020.

In Indonesia, the government plans to build an additional 31.9 GW of coal-fired power plants during the 2017-2026 period and coal is projected to account for 50.44 percent of the national energy mix by 2026.

World Coal Association CEO Benjamin Sporton said as Indonesia’s a major supplier to the seaborne coal market, reduction in supply from the country might cause tightening in the market.

To prepare for this, Indonesian coal producers are preparing to allocate a bigger portion of their production for the domestic market.

Publicly listed PT Adaro Energy plans to increase its domestic coal allocation from 30 percent at present to 50 percent by 2020, when its coal-fired Batang power plant in Central Java is slated for commercial operation. The facility will need about 7 million tons of coal a year. 

State-owned PT Bukit Asam says it can jack up its domestic portion above the current 60 percent level as the government aims to procure 35 GW of electricity by 2019.

Despite its support, APBI is also calling on the government to offer incentives and reduce red tape to boost reserves.

Among the regulations considered off-putting include permits from the Environment and Forestry Ministry with requirements that are difficult to meet.

There are several regulations on property taxes and royalties that overlap and cause uncertainty as well, APBI says. 

A report recently issued by BMI Research, a unit of Fitch, has stated that because of the government’s apparent preference for revenue over energy security, it is unlikely that it will implement any export ban in order to preserve reserves within the next two years, especially since Indonesia is feeling the crunch of declining non-tax revenues from the oil and gas sector. 

BMI predicts that there will be a much higher risk of coal export restrictions in four to five years as electricity consumption increases.

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