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.