Coal miners gear up for higher production

Coal miners gear up for higher production

Indonesia's major coal mining companies are gearing up for
higher production to take the advantage of the surging overseas
demand and a turn-around in the government's energy policy.

PT Kaltim Prima Coal (KPC), one of the country's major coal
producers, has set a target to increase its production by about
15 percent to about 25 million tons this year to meet higher
demand from both domestic and international markets.

Like KPC, other coal miners such as PT Adaro Indonesia and PT
Berau Coal have also set higher production targets to meet the
higher demand.

PT Adaro plans to increase production by 26 million tons from
24 million tons in 2005, while PT Berau will increase its
production by 10 percent to 10 million tons.

Mahyuddin Lubis, the head of the coal and mineral mining
division at the Ministry of Energy and Mineral Resources,
estimates that the country's total production will increase by 19
percent to about 155 million tons in 2005 from about 130 million
tons in 2004.

The rise in coal production will further strengthen
Indonesia's position as a major world coal producer. At present,
Indonesia is the second largest exporter of thermal coal (for
power plants) and fifth largest exporter of ordinary coal (a
lower grade used by steel plants) in the world.

Indonesia is likely to surpass Australia as the second largest
thermal-coal exporter this year due to continued increase in its
thermal-coal exports.

Indonesia's coal production has shown a significant increase
over the past 10 years, reaching an average of 135 millions tons
per year.

About 70 percent of total production is exported to Japan,
Taiwan, South Korea, China and India. The other 30 percent is
used by domestic users, mostly comprising of power, pulp, steel
and cement industries.

The government's plan to reduce the use of oil fuel in
industrial activities certainly gives a more promising outlook to
the country's coal mining companies. At present, coal represents
only about 13 percent of the country's energy use, which is still
dominated by oil fuel and gas.

Under the new policy, recently unveiled by Coordinating
Minister of Economy Aburizal Bakrie, new industrial plants will
be no longer be allowed to use oil fuel in their production
activities in order to help reduce the use of oil fuel. Existing
industries that still use oil fuel, will be gradually required to
convert to coal or gas.

"If the use of fuel can be pushed down, we can export a larger
part of our oil production," Aburizal told the media following
the announcement of the new energy policy.

Indonesia, which in the past promoted the use of oil as its
main energy, has no to choice but to seek other energy
alternatives to cope with the continued depletion in the
country's oil reserves.

Although many analysts doubted that the new policy could be
effectively implemented, given the lack of coal transportation
facilities, the policy would certainly offer a more promising
business outlook for local coal producers.

With the new policy, production of low-grade coal, which
accounts for the larger part of the country's 50 billion tons of
coal reserves, will be more promising. Low grade coal, which is
not so competitive on export markets, can be used to meet the
needs of local industries.

Domestic coal sales remain low compared to export sales. The
Ministry of Energy and Mineral Resources estimates that domestic
coal sales will reach about 45.5 million tons this year, an
increase of 11.8 percent from 2004.

Most of the country's coal producers plan to boost their
production to exploit the high coal prices on the international
market.

The coal price, which has fluctuated around US$28 per ton
during the period 1999 to 2003, surged to $44 per ton in 2003
after major coal producer China stopped exporting to meet its
growing domestic needs. The price is expected to remain stable
thanks to the continued increase in international demand.

Mahyuddin acknowledges that it will be difficult for Indonesia
to take the advantage of the higher coal demand from overseas
buyers given the lack of new investment in exploration
activities.

Existing major coal producers, including state-owned coal
producer PT Tambang Batubara Bukit Asam, in general lack
financial sources to further develop new coal mines.

"We certainly need new investors to enable us to benefit from
the more favorable business outlook," he says.

Jeffry Mulyono, chairman of the association of Indonesian coal
mining companies, says that most of the country's coal miners
sell their production overseas due to low demand in the domestic
market.

He estimates that total coal exports (of various types) will
continue to increase to 193 million tons by the year 2010 from
about 91 million tons in 2004, and about 104 million tons this
year.

The demand for Indonesian coal from China alone is projected
to increase by 18 percent over the next five years, while demand
from India is expected to surge 16 percent over the same period.

"Indonesia will be a reliable worldwide coal supplier as we
are committed to raising output to more than 200 million tons a
year by 2010," he says, as reported by Bloomberg recently.

Jeffry, who is also president director of PT Berau Coal, says
that PT Berau Coal is set to increase its coal production by
about 10 percent to 10 million tons this year.

The company produced about 9.1 million tons in 2004, an
increase of 20 percent from 7.7 million tons in 2003. From this
year's production of 10 million tons, PT Berau Coal expects to
gain total revenues of between $230 million and $240 million.

"We are upbeat about being able to achieve the target by
improving productivity and efficiency," he says, admitting that
the higher production volume and better coal prices in
international markets have played an important role in the
company's financial performance.

About 70 percent of Berau Coal's production has been allocated
to meet export demand, mainly from Taiwan, Hong Kong, Japan,
India, Thailand, and countries in North Asia.

"For domestic market, we supply PT Jawa Power and PLTU
Suralaya power plants, amounting to about 2.4 million tons a
year," he adds.

Philips Gasteen, marketing and logistics senior vice president
at Banpu Plc, estimates that Indonesia's thermal coal may
increase by 14 percent to 16 million tons this year, surpassing
Australia as the largest thermal coal exporter.

According to Gasteen, the rise in overseas demand will partly
come from south China and Indonesia's east coast, traditional
markets of Indonesian coal producers.

Banpu, which operates coal mines in Indonesia through its
local subsidiaries, also exports most of its production to other
Asian countries.

High overseas demand will further drive local coal miners to
boost their production, although the changes in the government's
energy policy will not have an immediate impact on domestic
demand.