OPINION: Indonesian Coal: Where does the future lie? - By Graeme Robertson (Part 1)

By Graeme Robertson (PT Adaro Indonesia), presented at Coaltrans Asia Conference, June 8-11, 2003 in Bali.

Editor?s note: This paper, which is divided into two parts for readers? convenience, appears on Petromindo.Com with Mr. Graeme Robertson?s permission.

(Part 1 of 2)

The Indonesian Coal Industry has registered an average annual growth in production of nearly 10% since 2000. This has outstripped average annual growth rates both for international seaborne traded thermal coal and domestic demand. Driven primarily by dynamic Asian industrial and power generation requirements for competitively priced fuel and assisted by niche markets in Europe and America, demand for Indonesian coal has remained strong.

Supply of coal has been supported by open pit operations located close to inland waterways and coastal areas enabling Indonesian coal mines to quickly bring on stream new production as well as expand existing capacity.

While short term growth in production and exports will continue at a rapid pace, this is unlikely to be sustainable over the longer term. As a finite resource, as with other fossil fuels, the short term intensified extraction of low ratio coal to the detriment of maximizing economic reserves sterilizes potential commercially mineable resources and reduces mine life. A critical component of maintaining growth and stability in Indonesian coal production over the longer term is properly formulated mine planning. Another important aspect is the ability to attract investment in exploration and infrastructural development to open-up less accessible coal resources to maintain longer term production which will be required to fuel domestic growth.

The Indonesian Coal Industry operates in a non-subsidized competitive but high tax/royalty regime with an estimated 55-65% Government ?take? which reduces the incentive for new mine development. Maximizing production from low strip ratio coal in the short term is an unfortunate response to increasing costs and lower operating margins. In a current environment of excessively low thermal coal prices, there is a strong case for Indonesian coal producers to control output in the short-term to take advantage of future strengthening prices. As a leading Indonesian growth industry with average production increases and resultant socio economic benefits domestically far in excess of an average 3.5 percent GDP growth, there is a strong argument for better fiscal treatment by Government to support coal industry development rather than penalize it.

This paper surveys the Indonesian coal scene to determine whether its future will be a continuance of its past and present success.

INDONESIAN COAL PRODUCTION
There are basically three types of coal mining companies in Indonesia. The majority Government-owned PT. Bukit Asam which has recently been publicly-listed and operates a large-scale sub-bituminous coal mine in South Sumatra. Contractor companies who produce some 80% of Indonesian coal mined from Kalimantan operating under Coal Cooperation Agreements or Coal Contracts of Work with the Indonesian Government. The third category includes small scale production companies and cooperatives operating under Mining Permits.

Approximately 90% of coal is produced from South and East Kalimantan and 10% from Southern Sumatra. Some 75% of Indonesian coal production is younger sub-bituminous product and the balance is bituminous coal. Indonesia is the world leader in the export of sub-bituminous coal. Generally, Indonesian coal quality consists of low ash, sulphur and heating content with high volatile matter and moisture content. The indicative coal specifications of Indonesia?s five largest producers in 2002 are displayed in Table 1.

All coal mining in Indonesia is from open pit operations which are conducive to conventional truck and shovel techniques with the exception of Bukit Asam which additionally utilizes continuous bucket wheel excavators. Most coal mines make extensive use of sub-contractor companies for the mining, haulage and transportation of coal with the exception of Bukit Asam and Kaltim Prima who own a substantial portion of their operating equipment. Coal mining is subject to a stringent regulatory framework which requires proper environmental and safety controls and rehabilitation to international standards. Extensive training of Indonesian personnel is encouraged, which has reduced the involvement of overseas technical expertise to specific technical, managerial and marketing positions. Exploration by coal companies has determined significant proven coal reserves with Adaro, Arutmin, Berau, Bukit Asam, Kaltim Prima and Kideco recording individual reserves in excess of 2.0 billion tonnes. Further exploration is ongoing by smaller producers as well as by companies exploring substantial inland coal deposits.

In 2002, four mines produced more than 10.0 Mt each, including the giant Adaro Tutupan Mine which produced more than 20.0 Mt, making it the largest single open pit coal mine in the Southern Hemisphere. A further three mines produced more than 5.0 Mt with the remaining companies producing less than 3.0 Mt. Table 2 shows the production of each operating company from 2000 to 2002 and forecasts production for 2003/4.

An increasing percentage of production growth in the future will come from newer small and medium scale coalmines owned by domestic investors. There has been little foreign investment in coal mining over the last five years. Overseas coal mining companies and investors that are currently large players ? Rio Tinto/BP, New Hope Corporation, BHP Billiton, Banpu and Samtan Co. Ltd. among others ? have been involved in the industry for many years with investment made between 1985 and 1997.

Positive Indonesian economic data - a higher level of foreign exchange reserves, appreciation in Rupiah/USD exchange rates, lower inflation and a decline in historically high domestic lending rates is loaning support to internal Indonesian investment. Together with an increasingly higher level of trained Indonesian management and technical staff and experienced sub-contractor support there is little need for new foreign investment or ownership in the Indonesian coal industry. This will support the trend to the increasing Indonesianization of coal production although overseas expertise and investment will be required to explore and support development of potentially large coal deposits located inland in Central/East Kalimantan.

Major growth in Indonesian coal production has been dominated by the large scale producers which is expected to continue in the short term. Long term planning by these companies will provide a support base for the bulk of Indonesian production into the future as more mines such as Jorong Barutama Geston, Bukit Baiduri and Gunung Bayan Pratama reach a 3.0 Mtpy output. The year 2002 evidenced increased output of 11 .3 Mt over the previous year of which 8.0 Mt came from the seven large-scale producers as indicated in Table 3. First Quarter 2003 results compared with the First Quarter 2002 show continued improvements in production with Adaro, Kaltim Prima, Kideco, Arutmin and Berau registering positive gains and supporting forecast production increases in 2003.