Rains affect KPC coal production

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.