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INDONESIAN COMMERCIAL NEWSLETTER
October 2010

COAL MINING INDUSTRY IN INDONESIA


Current Issues

World's coal mining development

The world's coal consumption as a source of energy surged after the skyrocketing rise in the prices of oil in 2008. Coal trade, which  has increased from year to year since 2004,  was brisker after 2008.

The leapfrogging increase in demand for coal was attributable more too growing demand from fast expanding economies of two Asian giants, India and China. Increase was also recorded in demand in Asean countries using coal as an alternative source of energy to more expensive oil.

In he past five years coal trade surged in volume from 755 million tons in 2004 to 941 million tons in 2009.  Coal consumption was estimated to reach 4,646 million tons in 2004.

Coal has become the main alternative source of energy to oil as shown by the growing domination of steam coal in coal trade. Steam coal is used mainly to generate electricity or to fuel boilers. In 1995, the world's steam coal trade was recorded only at 297 million tons, but in 2009, the figure shot up to 709 million tons.

Meanwhile, trade of coking coal which is used mainly as fuel in iron smelter, reached 196 million tons in 1995. The coking coal trade has been relatively stable rising only moderately over the next decade to reach 232 million tons in 2009.

Indonesia is world's second largest exporter

Indonesia has continued to boost its coal exports to meet growing demand in the world market and has become the second largest supplier of the material to the world market after Australia. Meanwhile, the positions of China and South Africa among coal exporting countries had declined as a result of their growing domestic consumption. Most of their coal consumption has been used to meet domestic requirement.

Other major suppliers of coal to the world market include Colombia, Russia and the United States.

Japan has become the world's largest importer of coal. Japan, a highly industrialized country, has relied heavily on imports for energy including coal and oil and gas. In r 2009, Japan's imports of coal totaled 165 million tons

China, which once was the largest coal producer and one of major coal exporters in the world, has become a net importer because of growing domestic consumption. India, which also ranks among major coal producers, has become one of the world's largest importers of coal to fuel its fast expanding industries.

Indonesia, which is the second largest coal exporting country in the world, ranks only the 7th in production. China is the world's largest producer turning out 2.48 billion tons of coal in 2008, but it is also the world's largest consumer, followed by the United States and India.

The world's coal production was estimated at 7,271 million tons in 2008 or an increase of 3.2% from 7,047 million tons in 2007. The production did not include brown coal or lignite, the type with low calorific value or low rank coal.


China and the United States are the largest producers and at the same time the largest consumers of coal in the world. In 2008, China's production of coal reached 2.84 billion tons and the United States recorded production at 1.17 billion tons. Most of their coal production is for domestic consumption. Meanwhile, Indonesia exports most of its coal production making it the second largest supplier to the world market although it is only the 7th largest in production.  The Indonesia government, however, already started to restrict exports to guarantee domestic supply, which is fast growing especially to feed coal-fired power plants of the state electricity company PLN.

The United States has the largest coal reserves accounting for 27% of the world's total reserves, followed by Russia, China and India. World's proven coal reserves totaled 909 billion tons in 2005, according to the World Energy Council - including 246 billion tons in the United States.

According to data from the World Energy Council in 2005, Indonesia's proven coal reserves totaled only 4.97 billion tons, or around 0.5% of the world's proven reserves. The figure, however, was much lower than 6.9 billion tons, according to the Energy and Mineral Resources Ministry. The proven reserves even shot up 18.8 billion tons in 2009 as a result of brisker explorations boosted by the rise in coal prices. The world's reserves also have increased as some of the reserves considered not commercially feasible have become profitable reserves.



Specifications  of Coal

Each coal mine has coal with different characteristics. Meanwhile, the users  such as power plants need coal with certain characteristics Specifications,   therefore, are set  by the users for coal they want with a number of quality parameters. Generally the quality parameters, according to the Bahana Tambang  are as follows:
a) Calorie (Calorific Value  or CV, cal/gr  or  kcal/gr)
CV indicates the energy value found in the coal generated by the burning of carbon, hydrogen nitrogen  and sulphur.
b)  Moisture in percentage
Moisture includes free moisture (FM) and  inherent moisture (IM) both making up Total Moisture (TM). Moisture influences the use of prime air  to dry coal.
c) Volatile Matters (VM),  in percentage
VM content  influences  burning  perfection and fire intensity based on the ratio of fixed carbon  (FC) to volatile matters - called fuel ratio. The higher the fuel ratio, the more carbon in the coal not burned. If the ratio is more than 1.2, the burning is less  perfect , slowing the process of burning.
d)  Ash content in percentage
Ash will cause pollution, thirst  and corrosion of equipment.
e)  Sulphur content , in percentage
Sulphur content in coal is stated in Total Sulphur (TS). TS  determine corrosion  of the cool side of the air heating especially when working temperature is lower than the sulphur moisture point. It also affects the effectiveness  ash catching in the electrostatic precipitator.
f) Fixed Carbon (FC)  in percentage
The value of carbon content is higher for coal of  higher  quality. Carbon content and volatile matters are used  in calculating  the quality of fuel  in the form of fuel ratio.
g)  Coal size
Coal size is measured on span of fine and rough particles. The finest particles  are not more than 3 mm and the roughest particles are as larger as 50 mm in diameter
h)  Hard grove Grindability Index (HGI)
The performance of a pulverizer or mill is designed on a certain HGI. The machine for  lower HGI coal  must operate  below its standard value to turn out  coal with an equal level of fineness.

Following are examples of specifications of coal produced by state coal miner PT Bukit Asam (PTBA). This company sells  five types of coal BA 58, BA 59, BA 67, and  BA 70 with  specifications as follows:

South Sumatra has largest coal deposits  

Coal resources in Indonesia are scattered  in a number of large islands  including Sumatra, Kalimantan, Java, Sulawesi and  Papua. Sumatra and Kalimantan have the largest reserves. Based on official data  in  2009  of the Geology and Mineral Resources Directorate General, Sumatra had a total reserve of 52.44 billion tons  or the largest, followed by Kalimantan  with a total reserve of  51.92 billion tons.

According to data from the energy and mineral resources ministry in 2009, Indonesia's coal resources totaled 104.7 billion tons with proven reserves of 18.7 billion tons that commercially feasible. The commercial feasibility, however, depends on the coal price. The soaring price of coal in the last two years has resulted in a surge in the reserve categorized as proven.

The largest  proven coal reserves are found in the province of South Sumatra. Based on data  in January, 2009, South Sumatra had  coal reserves totaling 9.54 billion tons. State company PT Bukit Asam (Persero) Tbk. has a large mine in Bukit Asam.

Other large reserves are found in  the provinces of East Kalimantan  and  South Kalimantan operated by a number of companies like PT Adaro, PT Kaltim Prima Coal, PT Arutmin, etc.

Era of Working Contracts Over

Coal mining industry in Indonesia has expanded rapidly ever since the government allowed the private sector including foreign investors to operate in coal mining under what was called Contract of Work (COW). Previously, only two state companies, which were later merged to form PT Tambang Batubara Bukit Asam (PT BA)  were allowed to mine for coal  in the country.

The first generation of COW  was signed in 1983  with 10 private companies, of which nine have produced coal. Among them are now the largest producers such as PT Adaro, PT Kaltim Prima Coal  and  PT Arutmin. The second generation of COW was signed in 1993 - 1996 with 18 companies  including 8 companies now in the entering the process of production . Four other have stopped activities or have their license revoked.

In 1996, through Presidential Decree No. 75/1996, the government revised the system of coal management including in investment aspect through deregulation, simplification of bureaucracy and contracts. One of the most important revisions  concerned regulation on contract from Coal Contract of Work (CCOW) to Coal Cooperation Contract (CCC) both with foreign (PMA) and domestic (PMDN) investors.

The era of COW, therefore, was over after the House of Representatives passed the Bill in Law on Mineral and Coal Mining in January, 2009. The Law No. 4 of 2009  put an end of the era of COW  after 41 years being effective. The new law replaced the Law No. 11  of 1967 . Under  the new law, mining company operate  with license from the government instead of contract.  

The change in the system of management  is the most crucial  in the amendment to  the mining regulation  as  with the license, it gives  superiority to the  position of the state. Under the COW system the positions of both sides were equal, therefore, any revision of the contract had to be  with the approval of both sides.

The Mineral and Coal Law  also made  clearer decentralization of authority  in the management of the mining sector.  Provincial  and district administrations as well as city administrations are given the authority to issue mining licenses in their respective areas.

The mineral and coal law also recognizes the existence of  individually mining enterprises. Another crucial matter  concerns efforts to increase added value  of minerals  by obliging mining companies  to build  their processing factories  in the country.

The new law will likely force mining companies to revise their investment plans, which were earlier adjusted to the COW. The energy and mineral resources ministry said  the new law gives better investment  certainty. The ministry will have to work  immediately to wrap up draft regulations  as implementation for the new law.

The mineral and coal law, however, still has some controversial points that created polemic over transfer stipulation  which is regulated in Chapter 169  of  points a, b and c.

The point a of the Chapter 169 says: The COW  and working agreement issued before the new law was  effective will remain effective until the end of their terms.

Many saw  the Chapter as discriminative  against new investors which have to go through stricter stipulations , which the old investors under the COW continue to enjoy incentives . The point a of Chapter 169 is seen as a protection for the existing COW miners.

Control of coal resources

Most coal resources have been  controlled by companies operating under COW of the first generation like  PT Adaro, PT Arutmin, PT Berau, PT Kaltim Prima Coal and   state coal miner PT Tambang Batubara Bukit Asam .

Under the third generation of COW , there are two miners having coal reserves of more than 1 billion tons PT Pendopo Energi Batubara in South Sumatra  and  PT Yamabhumi Palaka in West Kalimantan, but the two mines have not started production. They are still in the process of explorations.

PT Yamabhumi is the only COW company operating in West Kalimantan and discovered a large reserve of 4.21 billion tons of coal. Based on the official data from the Geology and Mineral Resources Directorate General, by January, 2004,  coal reserves in West Kalimantan  were not more than 527 million tons.

Coal production  up 13.9% per year

In the past 10 years the country's coal production has grown fast. The coal production grew 13.9%  on the average annually in the period of 2001-2009 from 92 million tons  to  226 million tons.  The soaring oil prices forced many countries to look for alternative cheaper sources of energy. Coal is one of the most available  alternative. Coal producers such as Indonesia, therefore, boosted their coal production . Indonesia has exported  most of its coal production.

Coal production cost in Indonesia is relatively cheaper and Indonesian coal is very suitable to fuel power plants  as it causes no much pollution with low  sulfur  content. It is expected that Indonesia's brown coal production will increase to meet growing demand especially from state electricity company PLN to fuel its coal-fired power plants.

Production by provinces

Kalimantan accounts for  most or more than 90% of the country coal production. The largest producer among the provinces is East Kalimantan, which produced 127 million tons in 2009.

Kalimantan is strategically located  being close to fast emerging markets in Asia  notably China and India, making it more competitive facing other suppliers such as Australia.

South Sumatra has huge coal reserves, but most of the reserves are largely untapped with only PT Bukit Asam as major operator in that region.

Six companies dominate coal mining sector in the country accounting for more than 80% of he country's total production. The six companies are BUMI Energi (the owner of PT Kaltim Prima Coal   and Arutmin), which produced around 58 million tons of \coal in 2009, Adaro with production of 40.6 million tons, Kideco 24.7 million tons, Banpu Group 20.7 million tons, Berau 14.3 million tons and state owned company PT Tambang Batubara Bukit Asam (PT BA) with production of 10.8 million tons in 2009.

The largest single producer is PT Adaro Indonesia, followed by PT Kaltim Prima Coal (KPC) with production of 40.6 million tons and 38.15 million tons respectively in 2009.....

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