The Indonesian Coal Industry Sunrise to Sunset: 1988-2020 Ross Hilton firstname.lastname@example.org
1. INDONESIAN BACKGROUND 3 Geography: 3 People: 3 History 4 Conclusion: 4 2. INDONESIAN COAL: 5 History: 5 Internal Use: 6 Reserves: 6 Value to Indonesia: 6 Locations: 6 Quality: 7 Conclusion: 7 3. CUSTOMERS: 8 China: 8 India: 9 Conclusion: 10 4. POLITICS, POLITICAL INTERFERENCE AND OWNERSHIP: 11 Conclusion: 11 5. ECONOMICS: 12 Price: 12 Cost: 12 Extraction Process: 12 Quality and Yield: 13 Transportation: 13 Conclusion: 14 6. THE FUTURE: 15 Conclusion: 15
1. Indonesian Background Geography: Indonesia comprises of 17500 islands straddling the Equator, between latitudes 11°S and 6°N, and longitudes 95°E and 141°E. These islands have a total land mass of 1,919,440 square kilometers, making Indonesia the worlds 16th largest country. Only 6000 of the islands are inhabited, and the largest are Java, Sumatra, Borneo (shared with Brunei and Malaysia), New Guinea (shared with Papua New Guinea), and Sulawesi. The average population density is 134 people per square kilometer. Indonesia is located on the edges of the Pacific, Eurasian, and Australian tectonic plates making it the site of numerous volcanoes and frequent earthquakes. Indonesia has at least 150 active volcanoes, including Krakatoa and Tambora, both famous for their devastating eruptions in the 19th century. Lying along the equator, Indonesia has a tropical climate, with two distinct monsoonal wet and dry seasons. Humidity is generally high, averaging about 80%. Temperatures vary little throughout the year; the average daily temperature range of Jakarta being 26–30 °C. People: Indonesia has a population of 237.6 million, with high population growth at 1.9%. This population is expected to grow to around 265 million by 2020 and 306 million by 2050. 19 July 2010 24 PESD WP# 93Figure 1 Kalimantan and Sumatra are more favorably located to Asian markets than Australia.Source: http://www.surftrip.com/image/maps/indonesia-map.jpg
The population can be divided into about 300 ethnic groups, each with cultural identities developed over centuries, and influenced by Indian, Arabic, Chinese, and European migration and colonialisation, and from ethnic origins. The largest ethnic group is the Javanese, who comprise 42% of the population, and are politically and culturally dominant. The Sundanese, ethnic Malays, and Madurese are the largest non-‐Javanese groups. Despite this wide range of ethnicity a strong sense of Indonesian nationhood exists alongside strong regional identities, and society is largely harmonious Although there are over 740 languages and dialects spoken within the country, the official national language is Bahasa Indonesian, a form of Malay based on the prestige dialect of the Johor-‐Riau Sultanate. This somewhat simplistic language had been promoted by Indonesian nationalists in the 1920s, and was declared the official language on the proclamation of independence in 1945. Bahasa Indonesia is the language of business, politics, national media, education, and academia. However most Indonesians speak at least one of the local languages and dialects, often as their first language. History Indonesia has had a complex history, and has only really existed in its current form since direct presidential elections were introduced in 2004. Prior to this Indonesia has a history of virtual dictatorships and external religious and trade influences: 2004 – current: Direct Presidential elections, regional autonomy and democratic processes. 1998-‐2004 Transition to current state. 1968-‐1998: Military led New Order Administration of General Suharto 1949-‐1968: Authoritarian government of Sukarno 1800-‐1949: Dutch Colonial rule as the Dutch East Indies. 1600-‐1800: Religious/political influence from Arab traders 1300-‐1600: Hindu/political influence under Gadah Maja. 700-‐1300: Srivijaya naval kingdom and Hindu influences. Conclusion: The fact that democracy in Indonesia has less than a ten-‐year history means that the nation and its people are still adjusting to new found freedoms and responsibilities.
2. Indonesian Coal: History: Although Indonesia has a long history of coal mining, the first commercial operations only commenced in 1849, when NV Oost Borneo Maatschappij began mining in Pengaron, East Kalimantan. This was followed by exploiting activity in Ombilin, Sawah Lunto, and Bukit Asam in South Sumatra. The discovery of oil in East Java in 1884, which was cheaper and easier to move by pipe from remote locations, reduced interest in coal mining. By 1924 Indonesia was producing over 60,000 barrels of oil per day, and by the start of world War 2 Indonesia was the largest supplier of oil in the Far East, producing 180,000 barrels a day, and by 1960 this had risen to 400,000 barrels a day. The coal mining operations on the other hand remained small scale, peaking at about 2 million tonnes in 1941, and mainly supplied the shipping industry. As ships moved to oil fired engines the industry declined to almost nothing, producing just 200,000 tonnes of coal by 1972. The political interference of the Sukarno government further restricted mining by discouraging foreign investment (and therefore limiting access to mining technology). This changed with the new US influenced Soeharto government, who introduced the Foreign Investment Act of 1967 and the Mining act of 1967. By 1973 oil embargo resulting from the Yom Kippur war tripled oil prices, and reignited interest in coal as a fuel, especial in the booming Japanese and Taiwanese nations who were worried about reliance on oil. This relaxing of foreign investment and interest in an alternative led to a slow but steady increase in coal mining activity in Indonesia, initially through Rio Tinto Zinc and a subsidiary of the Shell company. Interest in Indonesian coal continued slowly through the 1980s and by 1983 five companies had obtained rights to 20 million tonnes of coal deposits. These mining activities were licensed under two agreements, contracts of work (CCOW) between the Government of Indonesia and locally registered foreign companies, and Kuasa Pertambangan (KP) or contracts with local investors that could be issued at Regency, Province or central government level. By 1990 the industry was enjoying 30% growth a year, and by 1995 Indonesia was exporting over 30 million tonnes of coal a year. By the end of the decade this had risen to almost 55 million tones a year as they supplied the booming Japanese economy with energy.
Between 2000 and 2009 domestic investors gained majority ownership of Indonesia’s coal producers with the support of the government of Indonesia, and Provincial and Regional governments began to extend their influence and control on the mining industry. The local ownership and increased regulation slowed growth to 12% per year, but despite this Indonesia became the worlds largest exporter of steaming coal in 2005, with 117 million tonnes. By 2009 this had risen to 176 million tonnes. Coal mining operations grew to keep up with this expert demand. From less than 5 million tones in 1988, mining grew by 66 times to over 300 million tonnes within less than 25 years. • Extracted 0.2 million tonnes in 1972 • Extracted 4.43 million tonnes in 1988 • Extracted 22.5 million tonnes in 1992 • Extracted 56 million tonnes in 2000 • Extracted 151.6 million tonnes in 2005 • Extracted 217 million tonnes in 2007 • Extracted 330 million tonnes in 2012 Internal Use: Only 82 million tonnes of that coal is used internally, about 24%. The rest is exported. The state owned power generator PLN use about 50 million tonnes of the locally used coal. Reserves: As of 2012 Indonesia has known Coal Reserves of around 104 billion tonnes, with some 22 billion tonnes of proven reserves Value to Indonesia: The value of that coal to Indonesia • Rp 5.8 trillion in 2007 • Rp 20.8 trillion in 2012 It is interesting to note that although coal extraction increased by only 52%, in five years, the coal revenue went up by 358%. Locations: Indonesian coal deposits are widely distributed, but the largest fields are found on the Islands of Sumatra and Kalimantan. 52,44 M T51,92 M T0,014 M T0,23 M T0,002 M T0,15 M TRESOURCES104,76 BILLION TONRESERVE20,99 BILLION TON11,54 M T7,17 M TCoal Resources and ReservesDESCRIPTION REALIZATION PLAN2006 2007 2008 2009
Sumatra has known reserves of around 64.00 billion tonnes, located in three main coal basins: • Central Sumatra Basin • South Sumatra Basin • Bengkulu Basin However only 10% of the Sumatran deposits are winnable for three reasons: • The yield rates are too low to make mining economic • The quality of the coal is low • There is limited transport infrastructure to move the coal to port. Kalimantan has known reserves of around 60.00 billion tonnes, located in four main coal basins: • Tarakan Basin • Berau Basin • Kutai Basin • Barito Basin About 35% of the Kalimantan reserves are winnable. There are also small reserves in: • Sulawaesi (0.23b/t) • Maluko (0.002 b/t) • Palua (0.15 b/t) • Java (Jatibarnag Basin) (0.01 b/t) Quality: Indonesian coal is predominantly medium quality steaming coal, suitable for power generation: 1% Very high quality (>7100 Kcal/Kg) 13% High quality (6100 -‐ 7100 Kcal/Kg) 62% Medium quality (5100-‐6100 Kcal/Kg) 24% Low quality (<5100 Kcal/Kg) Conclusion: Indonesia is now a world leader in the supply of steaming coal.
3. Customers: China: China has 170 billion tonnes of coal, and is home to the second largest reserves in the world, with about 19% of the entire global reserves. Until 2009 it was a net exporter of coal, and coal is the key to its economy, providing 77% of its energy requirement. China now imports around 180 million tonnes of coal a year, despite having its own huge resources. The Chinese coal resources are located in the western and northern inland provinces. The two provinces of Shanxi and Shaanxi and the autonomous region of Inner Mongolia alone account for nearly 70 percent of China’s proven coal reserves and more than half of national coal output. However the coal consuming centers are located along China’s heavily populated eastern and southern coastline, and coal must be transported long distances via railways, roads, inland rivers and via coastal shipping from the west to the east and from the north to the south. The privatisation of the ports in the more relaxed Eastern and Southern coastal areas in the 1990s allowed the development of high capacity modern ports capable of handling high volumes of imported coal. In contrast, the more restrictive government run Ministry of Railways refused to allow foreign investment in new railway lines and infrastructure, especially in a new southbound railway lines. As early as 1995 China had planned to open up the railways to foreign investment and increase track length by 50% from 50,000Km to 70,000 Km by the year 200. The plan included building three railways linking Shanxi, Shaanxi and other coal production centres with east coast ports. (These still have not been built). Han Zhubin, the Chinese Minister for Railways 1992-‐1998, was a political appointment with no college education. His power came from being one of party leader Jiang Zemin’s “Shanghai Gang”. Although Zhubin decided to issue Railway Construction Bonds in 1995 these raised only moderate funds for expansion. In 2007 these bonds had only raised 60 billion Yuan. It was not until the late 2000’s that substantial expansion funds became available with the release in 2008/9 raised a further 100 billion Yuan ($14.6 billion) worth of Bonds. By 2010 they had raised 700 billion Yuan. This expansion funding came too late and coal sent from local mines by railway has fallen from 70% of total usage to below 50% in the last 30 years, whilst imported coal has gone from zero to around 40% of total usage. The existing lines are running over capacity with the Daqin Railway line transporting 440 million tonnes of coal in
2011, 4.4 times the original designed capacity. This makes the lines and the rolling stock unreliable, and the other lines are also struggling to keep up with demand. The Houyue railway transported 184.13 million tonnes of coal, an increase of 3% or 5.39 million tonnes from a year ago, and the Shuohuang Railway hauled 177 million tonnes of coal in 2011 and had a target for 2012 of 191 million tonnes. The unreliability of the overworked lines is further affected by the weather, and bad winters can severely impact rail delivery. The result is that local coal cannot be transported to the user regions economically, whereas Indonesian coal can be shipped straight into the Chinese ports. The completion of the Shanxi and Shaanxi railways will alleviate some of these problems. However, the lack of investment that created the transportation bottleneck has also impacted the Chinese mining industry. Many of the mines are small, and are owned by township and village enterprises. They are labour intensive and low productivity underground operations, without the ease of open cut or the high technology of longwall seam mining. Where the resources are suited to open cut, in Inner Mongolia, there is social resistance to the land seizure activities required for mine expansion. Given the above problems China has little option but to continue importing coal in the foreseeable future. India: India has 236 billion tonnes of coal, with 114 billion proven reserves, about 6% of global reserves. Despite these reserves, India is a major importer of Indonesian coal. In fact Indonesia supplies more coal to India than it does to China. The reasons are three fold: 1. India has similar but less pronounced problems with transport from the mines to the consumers as China has. Although India has a well developed railway network, transporting the coal from the mines to the population centers adds greatly to the cost and puts tremendous strain on India’s struggling railway system. 2. India doesn’t currently have the mining capacity to supply domestic demand especially as the Indian coal is deep underground and requires complex mining technology to extract it. 3. Indonesia coal, because it is easy (and cheap) to win and is mined close to the port, is far cheaper. Therefore India is buying cheap coal to supplement local demand and subsidise the economy. However Indonesia is unhappy about selling cheap coal to subsidise India, and in 2009 introduced the Mining Act, which stipulates that coal must be sold at the
international market rate (The Newcastle Australia Power Station rate). This has impacted sales to India, where power stations had forward purchased coal. Conclusion: For technical and commercial reasons, Indonesia has become a major supplier of coal to nations with larger coal deposits.
4. Politics, Political interference and ownership: In 2009 the Indonesia Government introduced the Mining Law (Law No.4 of 2009 on Mineral and Coal Mining (Law No. 4/2009) This covered a number of areas, but in typical Indonesian legal fashion, it only did so at a high level and was open to wide interpretation. It introduced a new mining licence system that replaced the mining authorizations (Kuasa Pertambangan, or KPs) that previously were only available to wholly owned Indonesian companies as well as contracts of work (CoWs) and coal contracts of work (CCoWs). This (in theory) opened up the Indonesian mining industry to foreign ownership. There was a resulting boom in interest in Indonesian coal mining. However, subsequent regulation No.23/2010 introduced in 2010 clarified this ownership, with a minimum 20% level of domestic ownership required through divestment, effective 5 years after the commencement of commercial production. Even worse, the procedure that must be followed to divest shares so that 20% local ownership could be achieved is complex. The divestment shares must first be offered to the central and the relevant regional government. If the central government or the regional government declines such offer, the divestment shares must then be offered to state owned and regional entities and if such entities decline, then offered to private entities. And in 2012 with the new GR24/2012 the Indonesian government again changed the law, now stipulation that foreign owned mining operations had to divest 51% interest by the 10th year of commercial production. These legal revisions introduce two problems for mining: • Loss of controlling interest • Lack of confidence in legislative stability Conclusion: New legislation and growing national identity will result in a loss in investment and more difficult access to technology.
5. Economics: Price: The prices in Asia for steaming/thermal coal are benchmarked against Power Station prices at Newcastle Port, Australia. Prior to the Mining Act of 2009 Indonesia allowed its miners to sell at prices well below this standard. This was possible because it costs Indonesian large miners between $30 and $55 to extract a tonne of coal and transport it to a port. This makes it the cheapest steaming coal in the world, and only some South American mines can match the price. This is why Indonesia is the largest coal exporter in the world. It is about price. It costs Australian miners at least $80 to extract and deliver to port a tonne of coal. Chinas domestic price of coal is around $98.5 per tonne of coal, due to difficulties in extraction and transportation Cost: The three determinants of cost in coal mining are extraction process, quality and yield, and transportation. Extraction Process: Coal extraction can be by either open cut or underground working. In open cut mining an open quarry operation is conducted, utilising a large hole in the ground, usually terraced, with extraction carried out by blasting and loading the resulting material onto dump trucks. It is simple and cheap, but uses large areas of land. Underground extraction involves subterranean tunneling using complex drilling machines and long wall mining equipment, and extraction via lengthy conveyor systems. By its very nature underground extraction is only suited to high yield deposits, with the underground tunnels targeting high yield seams. Open cut on the other hand is more suited to low yield deposits, removing entire contents and then extracting the coal using washing technology such as floatation tanks and hydrocyclones. Other than the cost differential between underground and open cut workings the technology costs are reasonably constant. Both processes are machine and technology reliant and are therefore relatively unaffected by human resource costs.
Quality and Yield: Coal quality (measured in calorific content) and yield vary even across different areas in the same mine. The most profitable mines have the height yield of the highest calorific content coal per tonne of extracted material. An average yield for an open cut mine would be about 1:1, or for every tone of coal extracted there is a tonne of waste. A longwall operation has a far better recovery yield of about 4:1, recovering four tonnes of coal for every tonne of waste, due to the targeted nature of following a coal seam. However the coal needs to be separated from the waste (usually shale) in all but the highest yield deposits. This process, called washing, is carried out as close to the extraction site as possible, to avoid shipping waste material. The need to wash even all but the best yielding underground material has given open cut mining a distinct advantage over the last 25 years. The calorific value of coal is an important trade off between quantity and quality. The highest quality, known as Antracite, has a calorific value of around 8,000 kcal/kg, Bituminous coal has around 7000, Sub Bituminous around 5000 and Lignite around 4000. High calorific coals like Swansea Anthracite were specifically mined in the Victorian era for the Royal Navy due to its high energy per tonne of coal on the ship. It was also valued for its smokeless properties, both from a naval perspective and after the London smog of 1952 for its environmental properties. Modern coal fired power stations are far less fussy about the calorific value of the coal they consume, and run with a thermal efficiency of around 35%, requiring around 0.4Kg of Bituminous coal to produce 1Kw/h of energy. A typical Australian thermal coal contains 6,080 kcal/kg of usable energy, Transportation: Transport to a port, and shipping costs to port of destination are proving to be the real cost determinants of coal mining. The tonnage and volumes are high, and road transport is prohibitively expensive. Only rail and ship/barge transportation can prove cost effective. In Australia where the coal is transported via rail the transport costs account for around 25% of the cost of a tonne of coal, compared to labour costs of 22% and operational costs of 21%. At $80/tonne this would mean around $20 per tonne just for transport to the port. Rail is also expensive and difficult to establish, involving engineering feats such as bridges, cuttings and tunnels, and is subject to complexities of government and labour control. Indeed it is more a factor of the establishment and investment in the rail network than the actually running costs that provide the real advantages.
The reason behind the cost effectiveness and success of the Kalimantan coal basins therefore relates to simple factors. Easy open cut mining alongside the extensive river networks that traverse the tropical rain forests and swamps allow the coal to be shipped by barge to one of 23 coal loading terminals, many of them floating. Eight of those terminals are in South Kalimantan, and 15 are in East Kalimantan. There are a further 29 smaller transition or temporary coal loading facilities operational in Kalimantan. By comparison there are only 5 terminals in Java and 8 in Sumatra. These rivers provide free and prebuilt transport networks out to the open ocean. Conclusion: Indonesia currently has a strong competitive advantage though low cost open cut coak mining operations close to low cost transport facilities (rivers).
6. The future: 1. The US is switching to shale gas energy. This has two effects: a. Cheaper energy costs and high unemployment are reducing the costs of manufacture in the USA, whereas the revers in happening in China. Companies are now starting to pull back from China manufacture to local production. (Apple just announced that some of its products will now be manufacture in the USA). b. The surplus coal from the switch to shale gas will be sold cheaply on the international market, competing against Indonesian coal. 2. China is fixing its railway problems. China will strive to expand rail lines from Shanxi, Shaanxi and western Inner Mongolia to Caofeidian Port, from central and southern Shanxi to Shandong coastal ports, etc. and build new lines from Ordos and Shaanxi to central China like Hubei, Hunan and Jiangxi. This will lift local carrying capacity to 3 billion tonnes by 2015. This will greatly reduce the cost of local coal. 3. By 2015-‐5 new streamlined and cost efficient coal mines in the USA, Australia, Russia, African and South America will come on stream. 4. By 2018 at current extraction rates, the easy to win coal in the Balikpapan region of Indonesia will have become exhausted. The increased transport and/or winning costs of further stocks will remove the price advantage that Indonesia currently holds. Conclusion: It is therefore hard not to conclude that by 2020 the Indonesia coal boom will be over.