September 5, 2012 / 11:23 AM / 6 years ago

UPDATE 1-Governor of top Indonesia coal region calls for output cap

(Adds quotes, background)

By Fergus Jensen

BALIKPAPAN, Indonesia, Sept 5 (Reuters) - The governor of Indonesia’s main coal-producing region called for an output cap to promote sustainability, adding to regulatory uncertainty in a sector at a time of falling prices.

Governor Ishak Faroek said East Kalimantan, which produces two-thirds of Indonesia’s coal, would benefit if output was limited to 150 million tonnes, around 30 percent below this year’s expected production.

Indonesia is the world’s biggest exporter of thermal coal and counts China and India as major clients.

Faroek floated his idea in a presentation to mining executives at an industry conference in East Kalimantan after showing them a video of environmental damage caused by mining.

“This is for the benefit of the next generation. If we reduce output to 150,000 tonnes you could produce for a longer period,” he said.

At current production rates of about 240 million tonnes a year, East Kalimantan reserves of 8.5 billion tonnes would last over 35 years.

Industry sources said the idea would not be taken seriously though because it would mean a sharp drop in government revenue, particularly federal, and would hurt coal producers.

Still, Faroek’s comments raise fresh uncertainty in Indonesian mining after a series of new regulations aimed at tightening controls on the sector. Mining constitutes 12 percent of GDP in Southeast Asia’s largest economy.

The new rules are aimed at boosting local industry, preserving natural resources for future generations, a nd protecting the environment. But they have caused deep unease among investors already nervous about prices.

Asia’s benchmark coal price, based on the price of Australian coal exports from Newcastle, has dropped around 20 percent since the beginning of the year. Indonesian coal prices often track the Asian benchmark.

Analysts say one rationale for their introduction is a trend towards so-called economic nationalism that could accelerate as the country heads towards elections in 2014 when President Susilo Bambang Yudhoyono steps down after two terms in office.

Indonesia is a favourite of emerging market investors and recently received investment- g rade sovereign status from two ratings agencies.

“SCARCELY BELIEVABLE”

Faroek said his advocacy of the production cap represented a personal opinion and was not the position of the government. It was based on his experiences in Australia, Denver and South Africa, which had production caps in place.

“I am thinking about extending the lifetime of our mines, instead of us depleting them,” he said in a speech that followed the video presentation.

The country’s new regulations have come under fierce criticism from an industry that says it is struggling to meet growing costs, thinning profit margins and declining demand.

The new rules include a requirement that all foreign mining companies sell down stakes in mines and increase domestic ownership to at least 51 percent by the 10th year of production, as well as a ban on unprocessed mineral exports by 2014.

The effect is to scare off investors, said Bart Lucarelli, director of Roleva Energy.

“The stuff that is going on in the ministry right now is scarcely believable, but what makes it even less believable is that they are doing it to themselves and the coal industry at a time when it can least afford to have that kind of behaviour,” he said.

Although coal is excluded from some of the new regulations, it is included in rules under which foreign mining companies must sell down stakes in mines and increase domestic ownership.

One analyst at the conference who declined to be named said few in the mining industry would take the governor’s statement seriously.

“I don’t think the 150 million tonne a year quota he mentioned is going to be achievable,” the analyst said in a view echoed by others. (Editing by Matthew Bigg)

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