Rains affect KPC coal production

By Wachyudi Soeriaatmadja

SANGATA, East Kalimantan (JP): PT Kaltim Prima Coal (KPC), one of the country's major coal producers, might not be able to meet its production target of 15 million tons this year due to heavy rains during the first half of the year, according to one of the company's senior officials.

Export and Logistics Superintendent Herlan Siagian said heavy rains had affected the company's operations, especially those related to the transportation of coal deposits from mines to the preparation plant.

"As the result, our total production for 1999 will be only 14.5 million tons -- half a million tons short of the targeted 15 million," he told journalists visiting the company's mine here last week.

The company produced 14.7 tons of coal last year.

Coal is crushed into desirable sizes and/or washed at the preparation plant prior to shipment.

Herlan said the lower than projected production was still tolerable and it would not affect the company's exports, as most of the orders were made on long-term purchase contracts.

The company has long-term purchase contracts with most of its customers, but the pricing of the coal as stipulated in each contract is subject to renegotiation every year.

"Some purchase contracts last for 10 years, but every year we have to renegotiate allowing for changing coal prices," he said adding that the price renegotiation was conducted early in the year and was effective for the whole of that year.

He declined to state the price KPC charged its customers for the coal purchased.

But he said KPC -- like other major international coal producers -- referred to the most widely used coal price reference, the "Japanese benchmark", for its pricing policy.

He said that using this benchmark the current average world coal price was hovering below US$20 per ton, compared to about $30 per ton early this year.

The cost of producing coal in Indonesia stands at about $13 to $14 per ton, according to a source familiar with the Indonesian coal mining industry.

"The coal price has been consistently decreasing since 1990 when the price was $50 per ton," Herlan said.

He attributed the low price mainly to weaker demand and the worldwide economic recession.

"Many power plant projects in developing countries in Asia and South America have been put on hold due to the economic crisis. These power plants were set to use coal as their energy source," he said.

He said however that with the company's long-term purchase contracts, KPC's target for next years production was still the same as this year, 15 million tons.

He was confident that the coal price would rise in line with signs of economic recovery in most crisis hit Asian countries.

KPC exports practically all of its coal, with Asian countries accounting for 84 percent of the total sales last year.

"Only a small amount is sold to the domestic market; the gold and copper mine PT Freeport Indonesia in Irian Jaya is our single domestic buyer," he said.

Last year KPC sold its coal to Taiwan (37 percent), Japan (32 percent), other Asian countries (15 percent), European countries including Israel (11 percent) and the United States (5 percent).

He said that only one shipment had been delayed; to Taiwan due to the earthquake in the country.

"Most of the shipments to Taiwan for this year were sent before the earthquake," he said.

Besides placing hopes in the economic recovery of the mainly Asian countries, Herlan also saw the steady high gas and oil prices as a positive sign of improving coal prices in the future.

"The high gas and oil prices will make the market switch to using coal. This will a mean higher demand for coal, which will in turn push the coal price up," he said.

Divestment

Asked about the company's preparation for fulfilling the government's mandatory divestment requirement, KPC's Commercial General Manager Graham Taggart said that such a divestment plan was still in the negotiation stage.

Taggart declined to comment on the progress of the negotiation with the government, saying that it was the shareholders' job to comment on such a matter.

"Rio Tinto (one of KPC's shareholders) will hold a press conference in Jakarta next Wednesday to explain the divestment plan," Taggart said.

KPC is owned by Anglo-Australian mining firm Rio Tinto and United Kingdom-based BP Amoco PLC. It is required to divest up to 51 percent of its stake to local investors according to its 1982 contract.

The first-generation 1982 mining contract stipulated that KPC was to gradually divest a 51 percent stake to local investors, beginning five years after it began commercial operations in 1992.

However, KPC secured permission from the government in 1997 to delay the divestment until early this year. Currently, the company must divest 30 percent of its stake to a local company.

The divestment has still not materialized because of disagreement over the share price between the government and KPC's current shareholders.

Early this month the government told KPC to complete talks on its 30 percent divestment plan by the end of this month or face a penalty.

Previously there were two investors interested in KPC: the mining company PT Tambang Timah and the local administration of East Kalimantan, the province in which KPC operates.

Rio Tinto representative Phillip Strachan earlier stated that KPC was awaiting the completion of a valuation process by an independent appraisal company before considering any investors.