Indonesia to have greater bargaining power in global coal market

Publicly listed coal producer PT Bumi Resources made headlines last year after it acquired thermal coal producer PT Kaltim Prima Coal (KPC) from Anglo-Australian mining firm Rio Tinto and Anglo- American energy giant BP for US$500 million.

The acquisition has transformed Bumi into the country's largest coal producer with a production of 31.2 million tons last year. Output is expected to jump to 43 million tons this year.

Aside from KPC, Bumi also controls coal producer PT Arutmin Indonesia, one of the lowest cost mining operations in the world.

Bumi president director Ari S. Hudaya shared his views with The Jakarta Post's Rendi A. Witular in a recent interview on the outlook of the global coal market in 2005 and challenges faced by Indonesia in boosting coal export.

The following is an excerpt of the interview.

How are local coal producers doing these days?

Indonesia has huge prospects to become the world's largest coal exporter. We have around 1 trillion tons of reserves, but thus far we have only been able to produce 110 million tons (last year) in total. The output is more than enough to supply domestic needs, which amount to around 35 million to 40 million tons. Due to the small domestic demand, there is a huge excess of supply of around 70 million tons, which all goes for export.

By capitalizing on the excess and the huge reserves, Bumi is expected to become the largest thermal coal producer in Asia. With such a position, Bumi, and Indonesia in general, will have greater bargaining power in the international coal market, including having a "say" in deciding the coal price.

Indonesia has never earned such power despite its huge export capacity. Why? Because most local coal exporters are not owned by Indonesians, but by foreign-based companies. And as a totally Indonesian-owned company, Bumi will try to gain that bargaining power.

Next year, we plan to produce around 54 million tons, and by 2007 or 2008 we expect to produce around 70 million tons.

How do you see the prospects of coal demand in 2005?

We expect that next year coal demand will remain bullish. Aside from being driven once more by China, the demand will also be fueled by the rising economic growth in India. As we know, India's new government expects the country's growth to reach 7 percent next year, meaning that they will need more coal for their electricity plants.

According to a study, with such growth India will need around 40 gigawatts of electricity. To maintain its power supply, India will need an additional 160 million tons of thermal coal (next year). India now produces around 350 million tons, but all of this is for domestic demand. Thus far, we have exported around 1.5 million tons of coal to India.

Other potential markets next year will be Latin America. There is a slight shortage of coal in that region following an increase in demand from the United States. Coal producers such as Colombia have to shift their coal export to the United States, leaving other countries short.

This shortage is currently being filled by Arutmin. Thus far, we have sold some of our coal to Brazil and Chile. But the volume is still small due to transportation problems.

There is also a great demand from Europe, but this is not our traditional market because it is far, and we have to compete with coal producers from Africa, which manage to sell the coal cheaper due to the lower transportation cost.

However, Bumi already has a strong customer base in Germany, Italy and France. But again there is tight competition from Africa.

As for our traditional market, that is in Asia, Japan accounts for the larger chunk of our coal. Around 40 percent of Bumi's coal export goes to Japan, with the remaining to South Korea, Taiwan, Malaysia and the Philippines.

Coal demand in Japan is likely to soar following plans by several of its nuclear-based power producers to convert their plants to coal-based plants because of environmental concerns, and the fact that the government is unlikely to extend their nuclear operating licenses.

However, until now we still don't how large their demand is. For sure, we are planning to sign several immediate contracts with producers just in case the plan materializes.

For the local market, I heard that you are currently in talks to supply to power producers Paiton I and Paiton II.

Yes, we are still in negotiations with Paiton I to supply coal following its plan to expand the capacity of the power plant. But Paiton I has not decided on the volume of the coal. For 400 megawatts, a power plant would need around 8 million to 10 million tons of coal with 5,000 calories.

For Paiton II, they need around 1 million tons. But we are still in discussion on that, we have just submitted the tender proposal.

How do you see the coal price for 2005 then?

Our coal contract in general is renewed every year. Around 50 percent of our contracts are due in March and April, meaning that we have already renewed most of our contracts.

As for coal prices, if we can achieve in average of between US$40 and $50 per ton next year that will be fantastic. It will be the best year for coal producers.

Can local coal producers maximize this opportunity?

The problem faced by local coal producers right now is not about how to seek buyers but more of insufficient infrastructure to explore and to transport the coal, to enable producers to immediately increase their output.

The government should provide adequate infrastructure needed to support the industry, such as railways, ports and vessels. The railways are needed to maximize the transportation from coal mines in remote inland areas to the coast before being transported by ship.

But most of the ships that transport our coal overseas are owned by foreign-based operators. You can just imagine what will happen if the coal is already available but there are no vessels to transport it.