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COLUMN-Indonesia may set Asia's coal market on a wild ride: Clyde Russell
March 14, 2012 / 11:18 AM / 6 years ago

COLUMN-Indonesia may set Asia's coal market on a wild ride: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

NEW DELHI, March 14 (Reuters) - Investing in Indonesia’s mining sector has never been for the faint-hearted, but government proposals that could potentially disrupt Asia’s coal markets have raised the blood pressure of foreign investors.

The government has outlined three policies which play well to its domestic audience but which have set alarm bells ringing, particularly in India, which hopes to meet much of its need for imported power-station coal from Indonesia.

The proposed measures include introducing a benchmark price, which would determine spot and long-term contracts, as well as taxation and export duties.

Another policy calls for all miners in Indonesia to set aside a certain amount of output for the domestic market and there is a also a mooted requirement for foreign investors to divest 20 percent of their project to locals within five years of initial production and 51 percent within 10 years.

To make things even worse, the Indonesian government also plans to ban the export of low calorific value coal altogether as part of its plans to ensure that all minerals have value added prior to export.

And there’s more.

The process of gaining mining licenses has also changed, giving considerably more power to regional authorities, which risks making the process less transparent, more bureaucratic and less certain from a legal standpoint.

Taken all together, this means that investing in a coal mine in Indonesia just got a whole lot more expensive. Getting your coal production exported also got a whole lot more difficult.

This is particularly the case for Indian investors and buyers, who typically seek the cheaper low-value coal for use in power generation.

Indonesia has gone from a potential saviour to a major predicament for India, given the seeming inability of state-controlled Coal India Ltd. to boost production and distribution fast enough to meet demand.

Now, Indian investors face the prospect that they won’t be able to export the low-value coal they seek and they will have to sell it at reduced prices to Indonesian utilities.

And even if they can export it, they will have to pay more royalties, sell half their project to locals and spend more money in the communities in which they operate.

In a worst case scenario, up to half of Indonesia’s coal output may be banned from export, potentially cutting as much as 200 million tonnes a year from the market.

This depends on where the cut-off is set, with a calorific value of between 5,100-5,700 kilocalories per kilogram being mooted as the range.

Since the bulk of Indonesia’s coal output is below this level, the potential disruption to exports is enormous.

Given that India, Indonesia’s largest coal-export market, may need an additional 70 million tonnes of imports this year, on top of a similar amount last year, and the shortfall is projected to grow even more in the next few years, it’s not hard to see why Indian coal consumers are worried.

Speaking to several end users at the Coaltrans India conference in New Delhi, it became clear that many businessmen, while committed to their investments in Indonesia, are scrambling to find alternative sources of supply.

Some are hopeful that the Indonesian government will “see sense” and water down or eliminate the proposed changes, as they would reduce income from the sector and harm the economy.

But as Bill Sullivan, a Jakarta-based advocate at Christian Teo Purwono & Partners who specialises in Indonesian mining law, told the conference, it’s all about the politics.

Indonesia has a presidential election in 2014 and most of the mining proposals are more about pleasing a domestic audience than providing a sustainable, long-term vision for coal exports.

Sullivan believes it’s likely that the proposals will be enacted in some form or another, but could be watered down once the election is out of the way.

This means investors in, and buyers of, Indonesian coal are in for a rough ride for at least the next two years, with the final outcome still far from certain.

Whatever the outcome, one thing does appear clear: expectations that Indonesia is going to meet much of the rising demand in Asia for thermal coal are probably misplaced.

Buyers seeking long-term security of supply may be forced to look at Australia, which is relatively safer but more expensive to buy coal from, or further afield to South Africa and its neighbour Mozambique, or even half-way across the globe to the United States, where coal producers are turning to exports as the shale-gas revolution squeezes coal-fired generation.

Editing by Miral Fahmy

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