Opinion: Save our coal

Coal and palm oil are Indonesia’s two top non-oil and gas export commodities for years. With widening of export and current account deficits, boosting of export of the two commodities are among the highest priorities of the Joko Widodo administration in 2019. Despite the importance of the coal and palm oil (CPO) to the state economy, both commodities is facing risks due to international and domestic policy. For CPO, the future of its export is under pressure due to the recent European Union’s proposal to cap palm-oil based biofuels. As the reaction, the government stands in to defend and support CPO industry in dealing with the EU policy.

On the other hand, for coal sector, technically there is no immediate threat from international policy despite the growing pressure of climate change awareness. In the surface, at least from the perspective of public, coal sector remains steady without serious “distractions”. But in reality, Indonesian coal industry is facing foreseeable risks as well not only from international but from domestic. Therefore, for the future of the coal sector, the government needs also to step up to save the industry that has been vital to the country.

Important contribution of coal

As briefly aforementioned, coal and CPO equally play important role for Indonesia economy. When the EU plans to phase out CPO from the sources of biofuels by 2030, which will badly impact Indonesia, the Jokowi administration steps up to defend the palm oil industry.  According to data of the palm-oil industry association, export of palms oils to the EU accounted for around 15 percent of Indonesia’s 2018 palm oils with export valued around US$ 19 billion. In this regard, the Indonesian government is considering bring the EU decision to the World Trade Organization and even boycotting European products. The act of possible retaliation clearly shows that the government throws its support to the palm oil industry as the CPO industry plays strategic role to the national and local economy.

For coal industry, the pressure on the industry intensifies after the ratification of the Paris Agreement. Developed countries are committed to abandon coal as their sources of fuel. The EU moves to phase out coal in the coming years, and other emerging countries might follow the suit. On the other hand, China the world’s largest coal producers have gradually reducing its dependency on coal particularly the low calorific value coal. Meanwhile, the trade war between the US and China will also hit the coal industry as the growth of the manufacturing industry in China is weakening. The Chinese government has also predicted that its 2019 growth will be lower, of which the slowing China would impact the coal demand.

Why coal need to be saved?

The government is doing its utmost efforts to support and defend CPO industry in dealing with the possible threat from the EU policy. The palm oils industry is also enjoying “support” from the government by getting more access to the domestic market with respect to the policy on mandatory use of biodiesels B-20. The B-20 policy undoubtedly provides alternative domestic markets as the CPO industry facing uncertainty in the global market.

The B-20 policy is favor for CPO while coal miners as the user of the biodiesel have to deal with potential increase of operational cost. Meanwhile, the coal industry feels that it has not yet enjoy “the luxury” of having such all-out support from the government. The coal sector even experiences higher burden costs due to the government policy and regulations. To make the matters worse, the risk of uncertainty over the longterm investment of the coal contract of work holder increase.

In the national energy strategic plan (RUEN), coal portion in the national energy mix remains dominant as the primary energy source in spite the declining trend is projected in the long run. In the PLN’s strategic plan for 2019-2028, the commodity accounts of more than 50 percent of the power generation.

The government is also encouraging miners to undertake coal value added in particular through coal upgrading and coal conversion to gas. With these trends, the issue of sustainable coal supply does matter. Although the government has announced that our coal reserves are around 37 billion tons or at least coal will be around for more than 70 years if using the same 2018 production rate, but concern over our sustainability of the reserve remains high. Miners worried with the lack of exploration activities which has been continue practically since end of 1990s. ICMA has doubtful on the figure of the reserves, which according to the 2016 association’s internal survey, our reserves should much lower than the government’s estimates.

As our deficit on trade including trade on services still large, miners again are “targeted” by policy and regulation that will benefit our service industries in this case insurance and marine transportation services. Coal exporters have been anxious to see the progress of the implementation of the Minister of Trade Regulation No. 82 of 2017 which requires coal exporters to use national marine transportation service provider. Although implementation of the MoT Regulation with regard to shipping (or known as beyond cabotage policy) is delayed until May 2020, the anxiety is high not only among exporters but buyers in overseas as well. Coal miners are in relief mode recently as the MoT extends the implementation of the MoT 82 on the use of national insurance until May 2019. But the potential impact will be greater later next year if the technical implementation on the use of national vessel to be applied without considering the interest of the coal miners as well.

In 2019, the special coal price reference (HBA khusus) for public interest (domestic market obligation or DMO) continues despite the realization of the DMO below the 25 percent cap. The Ministry of Energy and Mineral Resource even places higher requirement for DMO to reach 26 percent in this year which would potentially trigger the same issues as in the 2018 DMO implementation. Some coal miners are likely facing difficulties in fulfilling the DMO requirement in this year. This is due to the coal quality specification issue of which some coal products could not be absorbed by domestic users. In addition, the formula price for the coal quota trading which is considered expensive by some miners.

What should be done?

There is no question that coal will still play important part to Indonesian national development for years to come. The country will rely on coal as its most affordable energy sources at least for two decades ahead. For state revenues, contribution of coal industry remains strategic as the coal prices are predicted to stay in the positive level at least for the next years. Indonesia remains the world’s biggest coal exporter. Economic development in some regions such as in Kalimantan and part of Sumatra is partially depended on coal. Therefore the government should support the industry by way of actively promoting our coal to non-traditional market overseas and providing legal certainty as well investment-friendly regulations.

The recent China’s act in limiting access of Australian coal in some ports has alerted every coal producer countries that the World’s second biggest economy can exercise its power to restrict export access. So far, Indonesian coal is yet to face the same restriction as the Australian experience, although the limiting port access of low calorific coal happened in the 4thQ of 2018 which hurt some Indonesian coal miners. However, Indonesian government should consider to explore potential “non-traditional” markets in the long run to reduce over dependency of the Chinese market. In the domestic policy, the government should encourage exploration by providing legal certainty and ease of licensing as well attractive fiscal tax incentives. Without aggressive policy to lure miners to invest in exploration, we could not take advantage of having coal reserves to support domestic use for several decades.

In addition to the support on exploration, the support on the “investment-friendly” regulation is also vital for the future of the industry. The rising financial burden from legal uncertainty and impact of the notinvestment friendly regulations will be affecting our coal reserves. For some coal miners, one of the quickest strategies to deal with the higher cost burden is by reducing the stripping ratio (S/R) of which such decision consequently will impact coal reserve conservation. In this case, the state as the owner of the resources will suffer from depleting of the reserve and lower state revenues. On the other hand, lower profitability of miners could affect the company’s decision to invest in exploration.

In view of this, it is the responsibility of all stakeholders to save our coal industry. The industry players should strictly apply good mining practices (GMP) and good corporate governance (GCC). The compliance and adherence to laws and regulation is among the principles in GMP and GCC. However, it is the government’s responsibility to provide legal certainty and to issue “investment friendly” regulation. In the absence of the legal certainty and good regulation, the uncertainty and rising cost will burden the company which will eventually affecting our coal reserves.

Therefore coal is deserved to be saved as the industry is still vital to our national economic and regional development and our energy security for years. Coal is here to stay.