ANALYSIS-Indonesia coal exports curb will take time to bite

JAKARTA Nov 19 (Reuters) - Indonesia's plans to cap coal exports to satisfy demand at home are unlikely to crimp global supplies for as long as five years, when new power plants will finally fire up domestic demand in the top thermal coal exporter.

Coal traders are growing increasingly worried over the prospect of Indonesia switching more coal to home use and away from exports, particularly given the rapid import demand growth from Asian giants China and India at the same time.

A government plan to cap coal exports at 150 million tonnes a year, which could kick off as soon as 2010, aims to supply new power stations coming on stream as part of a crash programme to boost generating capacity and ease power shortages.

But Adam Worthington, head of Asian utilities and coal at Macquarie Securities, said there was little risk the move would hurt exports soon, since Indonesian output is set to outstrip local demand for the next few years as miners increase capacity.

"Investment is being made at all of the major miners such that they are very easily able to meet exports and domestic demand," Worthington said.

For a graphic on coal output, exports and domestic demand, click: here

Indonesian coal production has increased by about 20 million tonnes a year over the last decade and that trend could continue until 2020, he added.

Coal output is forecast to reach 405 million tonnes by 2025, up 75 percent from an estimate of 230 million tonnes this year, data from Indonesia's energy ministry shows.

Delays in the crash programme to supply an additional 10,000 MegaWatts (MW) of power may also leave more room for exports.

Financing problems have forced the delay of the first phase of the programme, which will take up about 32 million tonnes of coal a year, to 2011 from 2010.

A second 10,000 MW government programme will also focus on coal, as well as renewables such as geothermal and hydro power.

"It will take about 5 to 6 years before local demand grows high enough that exports need to be capped at 150 million tonnes," said Singgih Widagdo, director of the Indonesian Coal Society, which groups traders and producers.

Indonesia's domestic coal demand may reach between 125 million and 130 million tonnes by 2016, Widagdo said.

The estimate is below a government forecast for domestic demand to hit 140 million tonnes by 2015, then reach 209 million tonnes by 2025 and outpace exports at 196 million tonnes.

Coal for power generation accounts for more than 60 percent of Indonesia's total coal consumption.

LONG-TERM IMPACT ON PRICES

With production set to outpace local demand, Indonesia's move to allocate more for coal for the local market under a 2008 mining law is unlikely to hit coal prices in the short term.

Australian thermal coal prices, a benchmark for Asia, stood at $83 a tonne this week, having jumped about 50 percent from a near two-year low of around $58 in March.

Worthington of Macquarie Securities estimated coal prices may hover at $70 a tonne in 2010 as drier weather than usual means Indonesian output may be as high as 250 million to 260 million tonnes this year and Chinese demand slows from its July peak.

"All of that should typically mean we are looking at kind of soft, stable prices in the short term."

China, the world's largest coal producer and consumer, has shifted to becoming a net coal importer after clamping down on small miners and facing higher demand for power.

But prices may rise from 2011 onwards as more new coal-fired power plants in Indonesia start operating and India steps up coal imports in 2012 for its power projects, Worthington said.

India could lift its thermal coal imports by 30 million tonnes to about 80 million tonnes by 2012, or as high as 100 million tonnes if its own production lags, Worthington said.

"If you get Indonesia executing, India executing, that is when you are looking at the prices materially higher than where they are now," he said. Macquarie's 2011-2012 price forecast is $80, but it sees an upside risk. "It could be $90 very easily."

INVESTMENT BOOST OUTPUT

Booming coal demand from India and China could lure more investment to Indonesia's coal sector and drive up output.

Indonesian output may also be boosted by government plans to cut royalty payments on low-quality coal that is increasingly being used globally as higher-quality coal reserves get depleted. [ID:nJAK502096]

"Low-calorie coal is expected to drive the growth of future Indonesian coal production," Rania Rahmundita of CIMB Securities Indonesia said in a research note.

Bigger Indonesian coal firms, such as Bumi Resources (BUMI.JK) and Adaro Energy (ADRO.JK), could benefit from the cut.

Of Indonesia's total coal resources of 104.76 billion tonnes, about 87 percent is low-calorie coal with heating value less than 6,100 kcal/kg on an air-dried basis (ADB).

Indonesia's coal sector has seen a steady stream of investment and U.S. coal miner Peabody Energy (BTU.N), Dubai-based coal trader Coal & Oil, and Mercuria Energy Group have recently opened office in Jakarta to push coal sourcing.

But a recent energy ministry decree limiting the outsourcing of contracting work, a rule ushered in by a new mining law, could scare off new coal investment, some experts say.

Without clarity over the new regulations, most future investment would come mainly from existing miners rather than new entrants opening mines, said Russell Neil, director and chief development officer at PT Bayan Resources Tbk (BYAN.JK), Indonesia's eighth-largest coal producer in volume terms.

"The majority of foreign investment in Indonesia would be through tie-ups with existing producers and large offtake contracts in conjunction with minority equity stakes," he said, adding this was the path expected by Indian and Chinese buyers.

Bumi Resources sold a 30 percent stake in two coal units to India's Tata Power (TTPW.BO) in 2007, while Korea Electric Power Corp (015760.KS) bought a 1.5 percent stake in Adaro Energy in July, securing the firm 3 million tonnes of coal annually.

For FACTBOXES on Indonesian coal, click on [ID:nJAK86364] and [ID:nJAK513393] (Additional reporting by Tyagita Silka; Editing by Ed Davies)