Coal Rush
Shirley Christie, Francezka Nangoy and Ririn Radiawati Kusuma | September 30, 2011

In the 1980s and 1990s, rich Indonesian families wanted to have a bank for the prestige it brought, apart from the support it would provide their business. Nowadays, the status symbol of choice among family-controlled companies and corporations alike is coal.

Earlier this year, media magnate Hary Tanoesoedibjo entered the coal mining industry through his investment company, acquiring more than nine mining concessions in South Sumatra and Kalimantan.

Hary expects a total of 6 million tons of coal this year from the concessions but he remains very close-mouthed on the acquisition cost.
Two ‘coal-hungry’ state-controlled companies are cement maker Semen Gresik and power utility PLN. Privately owned companies getting into coal including heavy equipment distributors United Tractors, Trakindo and Intraco Penta. Medco Energi Internasional, the country’s biggest listed oil and gas company, is among the latest of a spate of companies jumping into the coal business.

Even Myoh Technology, a publicly traded information-technology solutions company that has a large number of clients in the mining industry, plans to switch its core business to coal mining.

“With the current situation in the coal market and coal trading at a good price, it’s only natural that companies want to grab the opportunity,” says Frederick Daniel Tanggela, an analyst who covers the coal sector at state-controlled brokerage Bahana Securities.

And, Frederick stresses, there is no indication of an oversupply in coal, since demand is constant. He forecasts the average coal price based on the Newcastle global coal index — Asia’s benchmark — to fall to $120 per metric ton this year, but then rise to $125 next year and $130 in 2013. The Newcastle price stood at $124.32 per ton as of September 9.

“Even with the declining oil price, it’s proven that coal is a cheaper alternative for power plants, so I think there will always be demand for the commodity,” says Frederick.  “Indonesia mostly produce thermal or steam coal, which is used for power. Indonesian and Australian companies’ biggest markets are Japan, China and Korea.”

Semen Gresik and PLN, which need large amounts of coal for their own operations, are among those keen to establish interests in coal, expanding outside their core business.

Semen Gresik recently announced that it had set aside Rp1 trillion to acquire within one year a majority stake in a local coal mining company.
Owning a coal company “will become a trend, especially for companies that require a lot of energy,” says Dwi Soetjipto, Semen Gresik’s president director. “Companies like PLN or Semen Gresik will be heading in that direction to secure a reliable supply.”

Gresik, which currently gets all of its revenue from cement, seeks a miner that has reserves adequate for up to 10 years and a capacity to produce medium-grade coal — with a calorific value of at least 5,000 kilocalories per kg — that is used primarily for fueling power plants.

“We know that it will be more difficult (to secure coal) in the future,” says Dwi. By owning its own coal operation, he expects the East Java-based company will be able to guard against fluctuations in global coal prices.

Extending lifetimes

Indeed, securing energy sources is a matter of longevity for Indonesian companies. According to the Energy Ministry, existing proven reserves of crude oil will last 23 years, natural gas for 55 years. With current coal deposits at 21 billion tons, coal will last an estimated 83 years.
Gresik is planning to train local engineers to support its coal mining unit. It plans to secure 10% of the company’s coal needs - estimated at 4 million tons - by next year. In five years, it hopes the subsidiary will provide 25% of Gresik’s total coal needs to fire up its plants for production.

As energy prices increase, companies like Gresik would find it difficult to pass on the increasing cost of production to consumers due to stiff competition in the industry. As of August, Indonesia’s coal reference price was $117 per metric ton, up 4.5% from January, according to the Energy Ministry. Meanwhile the coal industry is fragmented at best, with a few large producers but many small players extracting coal, mainly from Sumatra and Kalimantan.

For PLN, the biggest consumer of coal in Indonesia, securing its own reserves seems like a natural fit. The company has contracts with 53 suppliers to provide 55.8 million tons of low to medium-calorie coal but it has failed to lock down prices.

In January, PLN had to ask the government to help mediate with coal miners to get a better price. Coal accounts for 35% of its fuel sources, making up 9,452 MW of generation capacity in 2010. PLN’s coal suppliers include Arutmin Indonesia, Tambang Batubara Bukit Asam, Kaltim Prima Coal and Berau Coal.

“Theoretically, creating our own coal unit is cheaper than buying coal from the market. It also secures our supply and reduces the risk to the company from coal price volatility,” Dahlan Iskan, president director at PLN told GlobeAsia.

He admits that establishing a coal mining unit will require a large amount of capital. “We can take the risk in order to win the advantages we will get.” PLN plans to set up a subsidiary for coal mining operations, to be called PLN Batubara, and is waiting for a government permit to commence production.

Medco established Medco Energi Mining Internasional as a coal mining unit two years ago. The new company went on to acquire two mining concessions in June 2009: Duta Tambang Rekayasa and Duta Tambang Sumber Alam, both at Nunukan in East Kalimantan.

It said on September 7 that production at the two sites will begin this year so it can capitalize on rising Chinese demand for the commodity. “They are in line with our portfolio plan, which is to develop our non-oil and gas energy business,” Arie Prabowo Ariotedjo, the mining unit’s chief executive, said on August 7.

The company has set aside $18 million for capital expenditure this year, Arie stated, adding that the Rekayasa field would start production in November this year while Sumber Alam would open in 2014. “This will be our first coal production project. We are selling to China through a European trader,” he said.

Annual production is expected to start at about 500,000 tons of high-calorie coal and will reach 1 million tons by 2014, Arie said. The entire output will be exported to China.

Steady growth predicted

Coal production in Indonesia, Asia’s top exporter of thermal coal, is estimated to increase at least 10% annually over the next five years, with industry groups expecting production to reach 340 million tons this year.

Still, some analysts believe that companies are only getting into the coal business in order to secure deposits without planning to mine a single site – at least not until the price rises far higher. “I think they will hang on to the commodity after securing their supply,” says Reza Priyambada, an analyst at Indo Surya Asset Management. The coal units are not likely to grow quickly and would not become big enough to export coal.

Top Indonesian coal miners like Bumi Resources, the country’s biggest thermal coal exporter, posted strong earnings for the first half of this year, thanks to higher prices.

Bumi posted a 3% rise in first half net profit compared to the same period a year ago. Net profit in the first six months was $278.6 million, compared to $271 million in the first half of 2010. Net profit in full-year 2010 was $134.6 million.

According to data from energy giant BP, global coal consumption is forecast to grow 7.6% to 216 million tons of oil equivalent this year, while coal production only grew 6.3% to 219 million tons. That excess supply could soon turn into a shortfall, and prices will inevitably move up.   GA

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