Industry Review : Mood Upbeat in Coal Business

Photo Credit : APBI-ICMA

JAKARTA (TheInsiderStories) – Indonesian miners – and in particular coal players – will see improved earnings growth in 2018, driven by a vigorous rebound of coal prices and an uptick in production volumes.

Revival in investment and capital spending will also encourage Indonesian miners to increase production volume in 2018. However, they are also likely to face steep regulatory risks, concurrent with the expiration of coal concessions, according to Moody’s.

From 2014-2016, coal business prospects were bewildering – and difficult to predict. Global sentiments such as price fluctuations in international markets, exchange rates, and China’s economic recovery were more dominant influences affecting Indonesia’s coal movements.

The Indonesian Coal Price (ICP) was trending down in the first six months of this year. The ICP, however, has slowly increased in the past five months, from $75.46 per ton in June increased to $78.95 in July, $83.97 in August, $92.03 in September, $93.99 in October and further increased to $94.80 per ton in November. The rise of Indonesian coal price is in line with the rebound of global coal price indices.

Currently, the price of coal is recovering, with global prices now hovering above $90 per metric ton, and current Australian coal price benchmark reaching $96.8 per metric. That means coal prices have grown by 13.5 per cent since the beginning of 2017. But coal reversals are still possible in 2018 if demand falls away once more.

Apart from international prices, several other domestic factors affect long-run coal business prospects. Economist Berly Martawardaya from the University of Indonesia predicted coal business in 2018 will potentially move upward, supported by the government’s 35,000 megawatt (MW) power plant program, which involves both state-owned electric company PT PLN (Persero) and independent power producers.

The 35,000 MW program figure is actually higher, at 37,826 MW, of which 11,256 MW is contributed by PLN and 26,570 MW by independent power producers (IPP).

IPP’s are in fact mostly energy mixes derived from coal. In PLN’s electricity purchase contracts, a minimum PLN purchase agreement from IPP extends for 20 to a maximum of 30 years.

This has implications for the long-term demand for national coal,’ Martawardaya told TheInsiderStories.

He continued by pointing out that if all power plant projects are realized, the share of coal in the national energy mix reaches 50.4 per cent, from an initial 50.3 per cent. The additional capacity of coal-fired power plants is projected at 31.9 Gigawatts (GW) in the next 10 years.

Up until August 2017, the progress of the number of plants realized has reached 167.8 MW, of which each plant has entered the period of construction and procurement recorded 5,205 MW and 1,794 MW.

Although such a realization is still small, the incessant development for power generation is in line with the increased demand for household electrical purposes. In a relatively short time, electric cars will begin to enter Indonesia, signifying a need for an abundant supply of electricity.

In addition, PLN also intends to acquire three coal mines, intended to supply three Mine Mouth Power Plant programs in South Sumatra which are scheduled to start operating in 2022.

“Therefore, PLN is not interested in pursuing other energy alternatives. Coal will be used in full to increase the electrification ratio targeted at 97 per cent by 2019,” he predicted.

Seeing the action of the state electricity company business, the coal business is predicted to be brighter. Whatever the market price of coal is, product will certainly be absorbed by PLN. Entrepreneurs do not have to worry about fluctuations in international prices – which are always vulnerable to reverses.

Director of PT Bank Negara Indonesia (Persero) Tbk Herry Sidharta said that banking has begun to shift its position regarding lending to coal enterprises, thanks to the recent movement of international coal prices.

“Sales of heavy equipment increased more than 100 percent in the first half of 2017, a sign mining activity is beginning to wriggle,” he said.

Written by Elisa Valenta, Email: elisa.valenta@theinsiderstories.com