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INDONESIAN COMMERCIAL NEWSLETTER
March 2012


DEVELOPMENT OF COAL MINING INDUSTRY IN INDONESIA


Current Issues

World's coal market

The world's coal consumption has increased used as a source of energy since the soaring prices of oil in 2008. Coal trade grew sharply in the world  notably since 2009.

The increase in coal market  followed growing demand  especially from China and India, two large economies  which are growing fast amid the global economic slowdown. Increase was also recorded in coal demand in ASEAN  as countries in this region are also seeking cheaper energy as alternative to expensive oil.

In the past five years, coal trade volume has shot up from 755 million  tons  in  2004  to  938 million  tons  in  2010. Meanwhile, the world's coal consumption   was estimated to reach 7,586  million  tons in  2011.

The type of steam coal, which is used as boiler fuel or to generate electricity has been growing more dominant in coal trade in the world. In 2000, trade of steam coal in the world totaled only 421 million  tons, but in 2010, the figure shot up to 668 million tons.

Meanwhile trade of coking coal, which is used widely in iron smelters totaled only 188 million tons  in 2000, growing more moderately to 270 million  tons in 2010.

Indonesia second largest coal exporter in the world

Indonesia has boosted its coal exports taking advantage of the growing demand in the world market placing itself the world's second largest exporter after Australia.China and South Africa fell in position among coal exporters as the two countries have curbed exports to meet growing domestic demand.

Other countries continuing to boost coal exports include Colombia, Russia  and the United States.

Japan is the world's largest coal importing country. Japan is one of major industrialized economies heavily dependent on imports for sources of energy including oil, gas  and coal. In 2010, that country's coal imports totaled 187 million  tons.

China, which is the world's largest coal  producer  and previously was a major coal suppliers to the world market, now has become a net importer because of fast growing domestic requirement.  India is also one of a big coal producers , but rapid economic growth necessitating  larger coal supplies.

Indonesia,  the second largest coal exporter, is  only the seventh largest among coal producing countries. The largest is China with production of 3.52 billion  tons of coal in 2010, but it is also the largest consumer of coal  in the world, followed by South Korea  and India.

The world's coal production was estimated at 7,586  million  tons  in 2011, down 4.9% from 7,985 million  tons in the previous year. The production did not include brown coal  or  lignite  which has low calorific value.
                        
China and the United States are both world's largest  producers and at the same time largest consumers of coal. In 2010, China's coal production reached 3.52 billion tons and United States produced 1.08 billion tons. Most of their coal production is for domestic consumption. Indonesia's coal production is not very big but it is the second largest exporter of that commodity as most of its production is exported. The country, however, begins to curb exports to meet growing domestic demand especially for power plants of state electric company PLN. PLN is building coal-fired power plants with a total capacity of 10,000 megawatts. The program in the electricity sector will continue that coal consumption in the country is expected to grow faster especially as most new cement plants and steel factories use coal for fuel.


World's coal consumption

According to the EIA, world's total coal consumption reached 7.58 billion tons in 2011, or down 4.9 % from 7.98 billion tons in 2010.

In 2012, the world's coal consumption is forecast to rise to 7.98 billion tons,  or an increase of 5.5%  from 2011.

The largest coal consumer is China reaching  3.54 billion  tons or around 46.7% of the world's total consumption in 2011. The second largest consumer is the United States with consumption of 977 million  tons  or around 12.9% of the world's  consumption.

The United States holds the largest coal reserves, accounting for 27.1% of the  world's total coal reserves, followed by Russia, China and India. World's  proven coal reserves,  according to the World Energy Council in 2008 totaled  860 billion  tons, and 246 billion tons of which are in the United States, which has the largest proven coal reserves in the world.

Based on data of the World Energy Council, Indonesia had only proven coal reserves of 5.3 billion tons in 2008  or 0.6% of the world's proven reserves. The Energy and Mineral Resources Ministry, however, said the country had proven reserves totaling 6.9 billion tons in 2008. Later in 2011, after intensive explorations, the proven reserve grew to 21.13 billion tons. Explorations have been brisker to follow growing demand  as a result of the soaring oil prices.


Types and specifications of coal

The types of coal include hard coal and brown coal each with different characteristics.  Following are the types of coal found in Indonesia.

Hard coal, is one having calorific value of more than 5700 kcal/kg (23.26 MJ/kg). Hard coal includes steam coal, coking coal, bituminous coal and  anthracite.

Brown coal is one with low calorific value  including lignite  and  sub-bituminous coal. This type of coal is generally used to fuel power plants.

Steam coal is one used by boilers/steam generators and hearths, and stoves. The type of steam coal includes anthracite  and  bituminous coal with gross calorific value larger than 23,865 kJ/kg (5700 kcal/kg)  and lower than that of coking coal.

Coking coal is one used widely to produce coke as a reductant at steel blast furnace. The gross calorific value of coking coal is larger than 23,865 kJ/kg (5700 kcal/kg) free from ashes.

Sub-bituminous coal is one having gross calorific value from 17,435 kJ/kg (4165 kcal/kg) to 23,860 kJ/kg (5700 kcal/kg).

Anthracite is coal with the highest  quality  having the highest calorific value of  more than 6900 kcal per kg. This type of coal has similar characteristic as those of steam coal.

Lignite is coal having gross calorific value of less than 4,165 kcal/kg (17.44 MJ/kg) with volatile matter more than 31% in dry condition. Lignite is often called Low Rank Coal  or Brown Coal.

Coke is the result of carbonization of steam coal at a high temperature used as a reducing agent  in iron ore  smelter (blast furnace).

Most of coal reserves in Indonesia are of tertiary age formed around 65 million  years ago. Most or 83% of them consists of brown coal included in the category of lignite to sub-bituminous coal with bituminous coal and anthracite making up a   smaller part or less than 20%.

Indonesian coal is known to have low content of ashes and sulfur, therefore, most of the country's coal is more valuable if used  as fuel or as steam coal  causing less pollution.


South Sumatra has he largest coal deposits

Coal resources in Indonesia are found in a number of big islands  such as Sumatra, Kalimantan, Java, Sulawesi  and  Papua. Sumatra and  Kalimantan have he largest resources . Based on data in 2011 at the geology and mineral  resources directorate general,  Sumatra has a total coal resource of 52.483 billion  tons  and Kalimantan  52.326 billion  tons.

According to the data at the energy and mineral resources ministry  in 2011 Indonesia's coal resources  reached 105.1 billion  tons, but only 21.113 billion  tons were categorized as proven reserves or deposits that are commercially feasible to be exploited.  The size of the proven deposits  depend on the coal prices. The higher the price the larger the proven deposits will be.

Currently, the  largest proven  reserves of coal are found in South Sumatra. Reaching 9.54 billion  tons. State coal mining company PT Tambang Batu Bara Bukit Asma has the largest coal mines in  this province located at Bukit Asam.

Other provinces having large coal reserves are East Kalimantan  and  South Kalimantan where the mines are owned by big miners including PT Adaro, PT Kaltim Prima Coal, PT Arutmin, etc.


Contract of work replaced

Coal mining industry has expanded rapidly since 1983  when the government  invited both foreign investors and domestic private investors to take part in exploiting the country's mineral wealth including coal under Contract of Work (CoW) scheme. Previously coal mining was monopolized by two state companies which are later were merged into one PT Tambang Batubara Bukit Asam        (PT BA).

Contract of work of the first generation was signed in 1983 involving 10 companies and currently 9 of them have been operational  and become the largest coal producers in Indonesia such as  PT Adaro, PT Kaltim Prima Coal,  PT Arutmin, etc. The second generation CoW was signed between 1993 -1996 involving 18 companies including 8 now operational and 4 no longer active or  having their licenses cancelled.

In 1996, through the presidential decree No. 75/1996, the government  renewed the system of coal mining contract concerning investment aspect through deregulation, simplification of bureaucracy and contract. Contract agreement was changed from Coal Cooperation Contract (CCC) with Coal Contract of Work (CCOW), for coal contractors both with the status of foreign investment (PMA) and domestic investment (PMDN).

Currently the era of contract of work has ended after the House of Representatives approved the Law on Mineral  and Coal Mining in January, 2009. The law No. 4  of 2009 put an end  to  the era of contract of work  in mining industry in Indonesia after 41 years. The new law  replaced the law on mining  No.11 of 1967. Through the new law the government issues license for mining operations.

The change in the form of management to licensing is important as being the licensing authority the position of the state is higher than mining companies. Under the contract of work the mining companies are at the same level as hat of he state  that any change in the contract  will need  approval from both sides.

The Law on mineral and coal also makes  clear decentralization of authority in mining management. The provincial, regency and city  administrations also have the authority to issue mining license in heir respective areas.

The law on minerals  and coal also recognizes the existence of people's  mining activities. Another  crucial matter   under  the new law is that mining companies are required to have their products processed in the country before being exported. They either build their own factories or have other companies to processed their raw minerals. With the law exports of raw minerals  will be banned.

However, there are still controversies over parts a, b and c of  article 169 of the law  that becomes  polemic  among observers. The part a of article 169 says when he law is effective  contract of work  and coal mining working agreement will remain effective until heir expiration.

Many observers see that article as discriminative against new contractors, which are facing tight restrictions while old contractors, which are considered exploitative continue to enjoy certain incentives at least until their contracts expire. Part a of article  169  is seen as giving protection for the old CoW holders.


Control over coal resources

Most known coal resources are controlled by holders of CoW of first generation like  PT Adaro, PT Arutmin, PT Berau, PT Kaltim Prima Coal and PT Tambang Batubara Bukit Asam. 

Holders of  contract of work of third generation having resources of more than      1 billion tons are PT Pendopo Energi Batubara in South Sumatra and PT Yamabhumi Palaka in West Kalimantan, but the two companies have not been commercially operational. They are still in the process of explorations..

PT Yamabhumi is the only holder of CoW in West Kalimantan discovering coal resource of 4.21 billion  tons, much larger than the official data issued by the geology and mineral resources directorate general  that in January 2004, that province had only coal resources of 527 million  tons.


Coal production  up 12.4% per year

In the past 10 years, the country's  coal production  has increased rapidly. In the period of 2002-2011, the country's coal production grew 12.4% a year from 104.2 million  tons  to 290.0 million  tons. Demand for coal is growing with he soaring prices of oil as many countries have used coal instead of oil for fuel. The growing demand has boosted coal  production in  Indonesia mainly for exports.

Indonesia's coal is good for fuel  especially to fuel  power plants because of relatively low sulfur content, therefore, causing less pollution. Demand for coal is expected to grow in the country  especially from power plants of PLN.

According to the Indonesian Coal Mining Association, in 2012 the country's coal production is projected  to rise 10% to 380 million  tons. The  country exports 70% - 80% of its coal production.


Production by provinces

Kalimantan contributes more than 90%  to the country's total coal production. By province, East Kalimantan is the largest producer accounting for 162 million tons of the country's total production in 2011.

South Sumatra  has large coal resource  but the resources are not yet sufficiently exploited. PT BA is the only large coal producer in that region.



Production  by companies

Coal production in Indonesia is dominated by six large producers accounting for more than 80% of the country's total production. The largest producer Bumi Resources Group with subsidiaries KPC, Arutmin and Berau Coal recorded production of 94 million tons in 2011 or 32.4% of the country's total coal production.

Individually the largest  producer is PT Adaro Indonesia with production of 48 million  tons in 2011, followed by PT KPC with production of 41 million  tons,  and PT. Arutmin  33 million  tons.





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