Indonesia's Coal Game

By James Wellstead — Exclusive to Coal Investing News

Indonesia's Coal Game

The 8.7 magnitude earthquake that struck off the coast of the Indonesian island of Sumatra r attled local coal markets while bringing the country's importance as a thermal coal supplier to the fore.

The quake, which did not trigger a tsunami like the one experienced during the 2004 catastrophe in the same area, briefly shook investors' confidence last Wednesday, but failed to impact the country's mining industry as severely as the rising swell of investor discontent over recent Presidential decrees has done.

Initially launched in 2009, the country's new mining laws require metal producers to  refine raw ore in Indonesia before it is exported, and aim to - among other things - force international mining companies to sell off 51 percent of mines to local companies after ten years of production.

While the previous Contracts of Work arrangement had a similar clause requiring the divestment of ownership by foreign companies, many foreign coal miners have bemoaned the regulations as a step in the wrong direction that will scare off future long-term investment in the country.

Scott Jobin-Bevans, President of the Prospectors & Developers Association of Canada, has said that Indonesia is setting a "dangerous precedent" with a move that could cumulatively “push up world prices and slow global growth” if pursued by more governments.

Too tempting to leave

Despite the concerns raised by international miners, many companies believe that Indonesia's mining industry, and its coal sector in particular, is just too tempting to walk away from.

Indonesia has become a critical thermal coal supplier to much of the Asia-Pacific region, with China, Japan, and India collectively driving the brunt of the country's production boom for the past eight years. As a result, Indonesian companies have grown drastically, and in order to keep up, have continued to increase their production capacity year after year.

Indonesian coal producer Bayan Resources (OTC Pink: BYRSF) is projecting that in 2012  production will come in between 18 and 20 MT, up from 15.5 MT in 2011, while Indonesia's largest coal producer, Bumi Resources (OTC Pink: PBMRF), plans to produce between 80 and 85 MT of thermal coal internationally, up from 66 MT the year before.

Strong growth rates and continued untapped coal resources have provided Indonesia's government with the certainty that it possesses the upper hand against international capital.

“If [companies] don't want it, they can get out. We are very strong," Simon Sembiring, advisor to Indika Energy (OTC Pink: PDETY) and former director-general of the Indonesian mining department, told the Sydney Morning Herald. Sembiring also stated that companies have been lobbying the government to rescind the laws to avoid potentially losing the financial and technical capital of current or future international mining groups.

Conversely, the importance of the mining sector, and coal in particular, to the Indonesian economy has some experts taking the other side of the bet.

"The high economic importance of the mining sector to Indonesia's central and regional governments provides a strong incentive for the government to adopt reasonable regulations that do not materially dent the sector's performance or its attractiveness to investors," Standard & Poor's credit analyst Xavier Jean told Reuters this week.

Standard & Poor's believes that it is quite likely that tariffs or royalty rates will be levied and increased on coal and ore exports, but suggests that an outright ban on exports is likely to be toned down or delayed.

Coal prices sluggish

Despite the meteoric growth of the coal sector in Indonesia, benchmark coal prices out of the world's largest thermal coal exporter hit 16-month lows last week.

FOB Pinang 6150 6,200 kcal/kg thermal coal fell to US $100.85/MT, down 6.2 percent from March, while Platts reported that the FOB Kalimantan 5,900 kcal/kg 90-day spot price is steady at $90.25/MT.

Weak industrial growth numbers out of China have kept coal trading lower in recent months, while competing excess supply from the US has kept prices trading lower on the spot market and negotiated contracts within the Asia-Pacific basin.

 

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.

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