More good times ahead for miners
Ririn Radiawati and Muhamad Al Azhari
The mining industry is one of the main drivers of the economy. And, say the experts, there is much more to come, particularly in demand for energy as the economies of China and India continue to expand. And Indonesia’s own domestic growth will push further growth.
With high growth levels in major East and South Asian economies, the mining business in Indonesia is in the hot seat to reap the maximum advantage from expansion. Mining products are without a doubt probably the most promising sector for investment.
China and India have been leading Asia’s economic growth curve and both are well aware of the benefits of doing business with Indonesia.
“With the high growth, there will be high demand for energy and, of course, this is an opportunity for miners to expand their business,” says Singgih Widagdo, a coal mining analyst with the Indonesian Coal Society. Demand for electricity in both countries could double in the next five years, he adds.
The International Energy Agency (IEA) forecasts that total world coal consumption will grow approximately 2.6% per annum in 2005-2015. China and India, meanwhile, are the world’s largest consumers of coal and are likely to stay that way as their economies continue to forge ahead.
“By 2015, China hopes to generate 500,000 MW of power generation and India expects to generate 47,000 MW. You see how big the demand is,” says Singgih. Although China and India also produce coal, demand far outstrips domestic production, creating the need to source imports from other countries.
Domestic demand is also growing within Indonesia, where state-owned utility PLN now has to feed coal to stations producing the first 10,000 MW of ‘crash program’ power. While the second program for a further 10,000 MW of power tries to spread the sources of power, PLN will still need approximately 96 million tons of coal a year by 2015, up from its current level of demand of 58 million tons.
New markets are also emerging. Vietnam, for instance, is beginning to seek supplies of coal for its power plants. “Power plants in Vietnam are usually developed by Chinese contractors and they want to use Indonesian coal,” says Bob Kamandanu, chairman of the Indonesian Coal Mining Association (APBI).
Several companies are already in discussions on contracts with Vietnam, says Bob: “There will be several coal trade deals with Vietnam,” he says bluntly.
It’s hardly surprising that with the promising market conditions, some of the big players in coal mining in Indonesia have been working to expand production this year. State-owned coal miner Perusahaan Tambang Batubara Bukit Asam (PTBA) says it will acquire two mining sites this year. The company also plans to ramp up coal production at its main mining site in Tanjung Enim in South Sumatra as transport systems improve.
“Our project to develop a coal railway in cooperation with PT Kereta Api Indonesia will show great progress by the end of this year. We can lift our coal straight to harbor,” says Sukrisno, president director of PTBA.
PTBA has set itself a target to boost production this year by 34% to 17.6 million tons, from 13.1 million tons last year. PTBA’s coal is mostly sold to PLN. “Our loading capacity is increasing, that’s why we are able to boost our coal production,” states Sukrisno.
United Tractors (UT), Indonesia’s biggest heavy-equipment distributor, is now a strong presence in the mine contracting business and has its own coal mines. It said in July that it was close to acquiring another coal mine as it seeks to boost revenue.
Last year, UT forecast that coal mining would contribute around 30% of its total revenue during the next three to five years. That means rapid expansion, since coal mining currently accounts for only 8% of its revenue.
“We want to see equal contributions to our core business from coal, heavy equipment and distribution,” says Sara K Loebis, the company’s corporate secretary. Initially, the company is setting an initial production target of around 500,000 tons annually.
Indo Tambangraya Megah, a unit of Thailand’s largest miner, Banpu, also plans to acquire three Kalimantan mines producing 1 million tons of high-calorie coal. This will boost the company’s production to 25 million tons this year, up 22% from last year.
Expansion of these companies, says Singgih, shows that businessman see the demand picture as very promising. “Although they are taking a gamble by expanding, they will still make a profit. Everyone needs energy,” the analyst reminds.
And, adds Singgih, a number of foreign miners, especially from India, are investing in Indonesia to secure the coal to meet demand back home. “They will not open new mining sites. I predict they will acquire several small mining sites.”
The price of coal is also another guarantee of solid returns for the industry. The benchmark for the industry, Australia’s Newcastle thermal coal, has been setting higher prices in line with increases in oil prices and high demand. As of June, the coal price stood at $119.76 per metric ton.
Miners elsewhere in the sector are not as happy as their colleagues in the coal business. They are awaiting a ministerial decree that Coordinating Economics Minister Hatta Rajasa says will ban the export of unprocessed minerals within three years. Under the terms of the proposed decree, they will have to invest in smelters to create added value for Indonesia.
Hatta said in mid-July that the decree will cover gold, nickel, tin, copper and silver. Companies would have to export ferronickel instead of raw nickel. Copper exports would be required to have 99% metal content and coal at least 5,600 kilo calories, while tin would have to have a metal content of 99.85%.
The decree represents an implementing regulation of the 2009 Law on Minerals and Coal Mining. Miners say that while they agree in principle with the government’s intentions, the move will force them to increase their investments.
Others are ahead of the game. “We agree to implement the new rules not to export raw mining materials, we support the government’s plan,” says Olivier Bolligon, a spokesman for Eramet SA, the French company that owns 60% of the consortium developing the Weda Bay nickel project in Halmahera, North Maluku.
The consortium, which also includes Japan’s Mitsubishi Corporation and state-owned miner Aneka Tambang (Antam), plans to spend $4.6 billion on a nickel smelter, with construction to start in 2013. The company will export processed nickel, says Bolligon. “We will not export ore, we will produce stainless steel,” he states.
Aneka Tambang, which has a 10% stake in the Weda Bay operation, admits that the government’s position has required a re-examination of the investment required. “The ruling has made us invest more to process our commodities,” Antam president director Alwinsyah Loebis said.
In the tin sector, state-owned miner PT Timah says the ruling will not affect it, since it has been processing tin since as far back as 1976. In 2008, the company built an additional smelter to make tin solder for export to South Korea and Japan, notes Abrun Abubakar, Timah’s corporate secretary.
Independent mining analyst Priyo Pribadi Sumarno says the government decision is positive in the long run. It will produce more benefit from the sector. “I am sure that the miners will not object to the plan. It will give them more revenue than by only exporting ore,” he says.
Priyo adds that the industry should not be concerned about the market for processed minerals. “The products are usually used for electronic products. The demand is there as long as the world economy continues to grow,” he says. GA