OPINION: Indonesian Coal: Where does the future lie? - By Graeme Robertson (Part 2)

(Part 2 of 2)

INDONESIAN INFRASTRUCTURE
Most coal mines in Indonesia are located close to coastal areas or inland waterways. Generally companies develop dedicated haul roads from minesite to river loading facilities, however. Bukit Asam utilizes railway transport to carry coal 400 km to its Tarahan Port on the Sunda Strait and Kaltim Prima Coal conveys coal over 13 km to its Tanjung Bara Port in East Kalimantan. Truck transport ranges in capacity from 10 tonne dump trucks using local roads to Adaro?s 160 tonne three trailer road trains which side tip into, receiver hoppers at Kelanis, one of the world?s largest river coal ports. The utilization of truck to barge transportation gives flexibility and price competitiveness to Indonesian producers over their overseas competitors.

Barges range in size from 3,000 dwt to 12,000 dwt capacity and are mainly towed by tugboats from the river loading port to the ship transfer point or directly to the consumer. Barges provide an economic and flexible transportation system when compared to rail transport in Australia and China where rail haulage capacities are limited. Several ambitious projects are being mooted for railway development in South Sumatra and Kalimantan. Double trucking existing rail and strengthening line capacity is important for Bukit Asam and coal development in South Sumatra, however, proposed railway development in South and East Kalimantan is unlikely to benefit producers economically in the medium term.

Existing barge loading, transshipment and port operations in Indonesia are capable of handling some 120.0 Mtpy which can readily be increased. Bukit Asam, Kaltim Prima, Arutmin, Indominco and Kideco own dedicated ship-loading terminals, while Adaro uses the public Indonesia Bulk Terminal port on Pulau Laut as well as an extremely effective capesize capacity floating crane trans-shipment operation which has enabled the full loading of vessels to more than 200,000 dwt. Kideco is also using floating transshipment cranes and Berau utilizes a newly built floating loading terminal. Both Kaltim Prima and Arutmin Indonesia ports are capable of loading capesize bulk carriers. Dermaga Prakasa Pratama coal terminal in Balikpapan and Indonesia Bulk Terminal are common-user terminals which can provide blending and loading facilities to multiple users. Smaller producers either directly barge or use geared vessels to load directly from barges at protected trans-shipment anchorages. Table 4 illustrates the capacity of Indonesian ports and trans-shipment operations.

INDONESIAN COAL MARKET
With Asia having emerged as the world's largest thermal coal import region, Indonesia has been strategically located to directly benefit from the supply of its coal to fuel Asian growth. Increased production of 106.6 Mt in 2002, of which about 74.6 Mt was exported and 29.0 Mt supplied domestically, has ranked Indonesia not only as a leading thermal coal exporter, but as the world's largest exporter of sub-bituminous coal, comprising nearly 75% of Indonesian coal production. While the two leading coal export nations - Australia and China - have continued to compete in the market with similar quality bituminous thermal coal, Indonesian sub-bituminous coal has carved a niche position not only in domestic and Asian supply but also European and American markets where low sulphur and nitrogen thermal coal is required. Table 5 illustrates estimated Indonesian supply of thermal coal to world markets.

(i) Expert Markets
The major area of thermal coal demand is North Asia with Japan, South Korea and Taiwan constituting strong market regions particularly for sub-bituminous coal and Indonesia is the third largest supplier to these countries behind Australia and China. Both South Korea and Taiwan have a defined tender process for low sulphur Indonesian coal whereas increasing demand is evident from Japan for low ash product to offset high costs of fly ash disposal. However, the real impact of Indonesian coal is in ASEAN nations where Indonesia is the largest supplier with a higher percentage of product in the overall consumption mix. Market demand is expected to increase in Asia with higher Japanese off take and coal-fired power generation in Malaysia coming on stream. Coal pricing remains the major issue with price being sacrificed for tonnage without recognition of the advantages of low sulphur and ash Indonesian coal over its competitors.

Niche markets for Indonesian coal in Spain and Italy and emerging opportunities for environment friendly coal in other European countries provide a steady market, although with limited expansion. In 2002 Indonesia exported more than 10.3 Mt to EU countries and should remain one of the larger suppliers of thermal coal to Europe subject to shipping costs, a major component of competitive supply.

A growing potential for low sulphur and nitrogen coal supply exists in the Americas, where Indonesia is the third largest exporter of the thermal coal. With increasing compliance legislation in USA restricting power stations from consuming traditional high sulphur and nitrogen eastern coal, and distance of east coast utilities from mid-western Powder River Basin sub-bituminous coal mines, opportunities exist for the supply of more clean Indonesian coal.

(ii) Domestic Markets
Domestic coal requirements grew from 22.3 Mt in 2000 to 29.0 Mt in 2002 but with limited expansion potential until 2006 when the 1400 MW Tanjung Jati power station commences operations. The completion of the southern Java transmission system at end 2004 will enable Paiton-based power stations to reach their installed capacity of 3,200 MW, an increase on the present transmission take of 2,400 MW with an additional coal requirement of approximately 2.0 Mtpy from 2004. Other power stations have been proposed for development after 2006 including additional units at Paiton and Tanjung Jati. To support growth in the Java Bali area to 2020 at least 20,000 MW of new capacity will be required of which 75% will be coal- fired. Some 60.0 Mtpy of new coal supply will be needed over current domestic demand by 2020. In the short term there will be minor increases in domestic coal supply for higher generation output in Java and smaller scale power plants in Sumatra and Kalimantan. Longer term there is a pressing need for more minemouth generating plants in both areas.

Resource planning will be a critical priority for Indonesia's long term coal development. There are several large reserves of lower rank sub-bituminous coal which should be allocated for domestic consumption and are sufficient to fuel electricity generation for the balance of this century. Long term planning and implementation will support a viable coal industry and domestic supply while maintaining exports at a level greater than the 100 Mtpy expey expe /U be reached in 2006.

INDONESIAN COAL FUTURE
The Indonesian coal industry will be driven by two demand trends - continuance of export growth over the short to medium term (3-5 years) and dynamic growth in domestic demand over the medium to long term. The export market will consume bituminous and higher heating value clean sub-bituminous coal whereas the domestic market will be orientated to lower heating value clean sub-bituminous resources. This will benefit national development with export earnings coupled with base load clean coal supply supporting power generation and reducing the need for expensive clean coal technology. However, to become a reality this requires long term resource planning by Government and incentives to encourage exploration and infrastructural construction related to resources allocated to domestic consumption. Decentralization of resource management may defeat the benefit to Indonesia of coal as a national strategic fuel for future growth.

Another trend will be the ongoing involvement of domestic capital and expertise in increasing coal output. It will be important for future production for Indonesian mine owners to avoid the ?get rich quick? philosophy inherent in sacrificing long term stable output to ?spot market? short term stripping of only low ratio coal.

With these factors in mind, Indonesian coal does have a bright future with current production of more than 100 Mtpy and the challenge of reaching 200 Mtpy with clear vision by 2020. (end of paper)