On the face of it, Indonesia is something of an outlier in a coal sector on the receiving end of a monumental slump. Between January and April, while the likes of Peabody Energy, Arch Coal and other firms were collapsing under the weight of growing anti-fossil-fuel sentiment and falling prices, domestic coal consumption in Indonesia – the world’s third-biggest producer – was racking up double-digit growth.
Despite a prolonged downturn in prices, stable to high production targets are virtually unchanged among the country’s top names in mining. And all things considered, their expectations are decidedly rosy for what, to some, is considered a dying industry.
This year, Indonesian mining stocks have performed admirably, and the mining index itself has climbed over 10 percent. An ever-so-slight rebound in coal prices has given rise to speculation that a turnaround may be on the cards. However, as positive a story as this is for King Coal, a dearth of opportunities abroad means the market is no closer to escaping the clutch of shrinking commodity prices and the slurry of environmental damages it leaves in its wake.
For one, Indonesia’s staple of medium-to-low-quality supply is barely enough to keep its major export partners in China and India satisfied. On top of that, critics are growing increasingly restless about the sector’s impact on the environment, not to mention the repercussions this could bring for sectors aside from mining.
Scattered throughout the islands are the scars left by abandoned mining operations, and a failure to pay reclamations for these sites has many concerned about the country’s ability to make use of what was once fertile ground for growth.
Indonesia’s transition from authoritarian to democratic rule gave local leaders the power to hand out thousands of mining licenses
It seems the reasons for this issue are rooted in the country’s political upheaval in years past: its transition from authoritarian to democratic rule gave local leaders the power to hand out thousands of mining licenses and, according to the Centre for International Forestry Research, the number of nationwide permits soared from 650 in 1999 to more than 8,000 in 2010. This same upheaval also allowed district-level politicians to trade coal concessions without much in the way of scrutiny, and while the going was good when prices hovered around the $200-per-tonne mark, a $40 equivalent has doused the dying flames of enthusiasm for coal.
Despite the quiet whisperings of a revival in Indonesia, the reality is that coal is partway into a slump from which there is no reasonable chance of return, both for the industry and the communities that depend on it. Outside the country’s top mines, thousands have shut up shop, and nowhere is this clearer than on the treeless hillsides of Samarinda, where the government is trying – and failing – to make mining licence holders accountable to the funds they owe by law.
Even the aforementioned gains between January and April are 6.8 percent short of the same period a year before, and thermal power generation – for which the country is renowned – is down 3.2 percent over the same period. Thermal coal exports have risen eight-fold over the last 13 years, reaching a peak of 420 million tonnes in 2013. However, over the last two years exports have fallen by a quarter, and according to Tim Buckley, Director of Energy Finance Studies, Australasia at the Institute for Energy Economics and Financial Analysis (IEEFA): “The decline is continuing into 2016 as loss-making mines generally acquired or built with debt finance close or go into administration.”
Heavy financial leverage acquired over the course of the coal boom in 2010-12 also adds to extreme operating leverage in the face of a 60 percent decline in thermal coal export prices over the last five years.
China’s net thermal coal imports declined 10 percent in 2014, 30 percent in 2015 and are down another 18.7 percent a year to date on January to April. Coal consumption, meanwhile, declined three percent in 2014, four percent in 2015 and 8.7 percent a year to date in 2016. In IEEFA’s view, the loss of share by thermal coal imports is permanent and will be terminal by 2020.
In the case of India, the government has set a target to cease thermal coal imports within two to three years – and with coal imports down 18.7 percent a year on January to April, this goal looks entirely plausible.
“The turning point came in 2013, when China’s coal imports started to fall rapidly but were still being offset by increasing imports from India”, Lauri Myllyvirta, Senior Global Campaigner on Coal at Greenpeace, told World Finance. Now India’s imports are also falling, demand is simply evaporating.
For energy firms Indo Tambangraya Megah, Adaro Energy and Harum Energy, the selling price of coal for the first quarter of 2016 was down 21 percent, 17 percent and 12 percent respectively. And as much as these producers have shifted focus to emerging economies such as Vietnam, Thailand and the Philippines, the demand is barely enough to offset the shortfall. Ultimately, for as long as dwindling prices remain a feature of the sector, Indonesian miners will be forced to rely mostly on domestic consumption.
Wood Mackenzie’s Asia Pacific Principal Coal Analyst Rory Simington pointed out in an interview with World Finance: “Like other coal-exporting regions, there has been rationalisation of high cost production because of low prices, and we expect this will continue.” In order to maintain the level of investment required to sustain current levels of production, Simington said, Indonesia must enhance policy clarity and reduce regulatory uncertainty.
The sector’s saviour
According to Bambang Gatot, Director General for Coal and Minerals at Indonesia’s Energy and Mineral Resources Ministry, the domestic sector will weather the storm for at least the next two years. Estimated to reach 419 million tonnes in 2016, and a lesser 409 tonnes in 2017, the numbers will continue to tumble for as long as major buyers favour higher-grade coal.
The concern for the Indonesian public is not just the extent to which miners have been allowed to decimate the landscape, but whether an economy hooked on hydrocarbons can survive once coal fever has run its course. Surely demand for low-grade coal is no more – in major export markets, at least – and the devastation wrought on the environment has gone some way towards handicapping otherwise fruitful sectors of the economy, tourism and agriculture among them?
Run-off water from abandoned pits is polluting nearby rice paddies and rivers, while sites in need of reclamation are being put to alternative uses before the previous owners have paid their dues. Elsewhere, open-pit mining has drained water tables and acid mine drainage has released toxic chemicals into important waterways.
Coal-fired plants in Indonesia cause an estimated 6,500 premature deaths each year
The go-to method of open-air strip mining, which Indonesian miners utilise mostly on account of its low cost, together with the use of cheap, non-unionised labour, has devastated agricultural regions. With production having increased approximately fivefold since 2000, the consequences of Indonesia’s coal drive have been grave, and the question of whether this oversupply can be sucked out of the market is one that few – if any – have the answer to.
Fortunately, as much as oversupply and pollution are issues for the majority of coal-producing nations, Indonesia’s situation is slightly different in that the issues of energy access and infrastructural deficiency are among the nation’s two greatest challenges. According to the Renewable Energy Policy Network’s 2015 Global Status Report, approximately 22 percent of the population – close to 50 million people – lack reliable access to electricity.
A continued focus on coal could go some way towards handing the country a greater degree of energy independence and lifting millions out of energy poverty. However, this same focus harbours serious risks. Coal-fired plants are responsible for hundreds of thousands of tonnes of pollution each year, and some are concerned about the consequences both for the environment and public health.
According to a recent Greenpeace report on the human cost of coal power, air pollution is responsible for more than three million premature deaths every year, not to mention increased risk of lung cancer, stroke and heart and respiratory disease. The report also noted that existing coal-fired plants in Indonesia cause an estimated 6,500 premature deaths each year, and for each new coal plant constructed, another 600 deaths will be added to that tally.
Unfortunately, financial and not human costs are the driving force behind Indonesia’s energy strategy. “Coal is still the cheapest resource for power generation”, according to Bob Kamandanu, Chief of the Indonesian Coal Mining Association, in an interview with Oxford Business Group.
Simington said the “coal mining industry is an important generator of revenue and employment in Indonesia. It is also important to Indonesia’s energy security and power generation strategy going forward”. Yet the fear holds that almost $1trn in global coal investment could become stranded if policymakers honour the commitments set out at last year’s COP21 meeting in Paris, according to Boom and Bust 2016, a joint report by the Sierra Club, Greenpeace and CoalSwarm.
Tonnes of Indonesian coal produced, 2015
of the Indonesian population lacks reliable access to electricity
Number of premature deaths caused by Indonesia’s coal-fired plants every year
According to Buckley: “There is a clear and immediate risk that Indonesian export coal mines will be a stranded asset from a financial perspective.” Once the debts have been written off, many of these mines will be converted to a domestic focus, given the growing electricity needs of the Indonesian domestic economy. Buckley continued: “But with exports taking 80 percent of total coal mined at its peak, this transition to the domestic market will take a long time, and will be held back by the corruption undermining the billions of dollars of foreign investment required to build out domestic coal rail freight lines and electricity power transmission assets.”
Greenpeace is of the opinion that dozens, if not hundreds, of coalmines have already become stranded in the past couple of years. According to Myllyvirta, the business model for new coal-fired power plants in the country was built on a cross-subsidy, where coal miners have to sell coal to the domestic market at a steep discount in order to gain the permission to export.
Myllyvirta said: “This worked nicely when coal prices were high, but now that the miners are collapsing under low prices, coal supply to the power plants is uncertain. If the coal price to domestic power plants has to be raised to a level that can support investments needed to keep mining going, they will either start to make a loss, will have to negotiate higher tariffs from the state power company, or will have to extort subsidies from the government – they are currently pursuing the last option.”
What’s more, although Indonesian policy is not as accommodating for renewables as perhaps it should be, the sector’s increasing competitiveness is threatening to chip away at coal’s dominance. According to Buckley: “With solar and wind getting 10-20 percent cheaper every year, even this domestic market will be increasingly challenged by inevitable technology change, combined with global climate policy pressures relating to COP21 commitments and anti-pollution unrest by local communities.”
As renewable energy gains a cost advantage first over new coal power plant projects and second over existing plants, coal plants will likely become redundant well before the end of their planned lifetimes.
As of now, renewables make up a small yet significant (five or six percent) share of the archipelago’s energy mix, and a medium-term target of 25 percent by 2025 means investment in the sector will likely sell coal short. The government already has plans to inject another $38bn into the sector and, for as long as coal prices continue to suffer, the incentives to sustain the sector are few and far between.
There’s still hope for coal
The industry line still reads that the contributions of coal to societal progress are far-reaching, with the resource having lifted hundreds of millions out of poverty and contributed no end to the country’s economic development. The more modern interpretation, meanwhile, counters that continued investment in coal for these reasons just will not do. Returning to the Sierra Club report, rather than solve a global crisis, investment in coal could send trillions of dollars down the drain in the form of stranded assets.
“Worldwide coal use has dropped for the past two years, but the industry continues to ignore this trend and build new coal plants”, the report noted. “This is not surprising, given that no industry wants to admit it is obsolete, but the staggering lack of foresight will only accelerate the collapse of coal.”
Of course, it’s worth noting Indonesia does not enjoy the luxury of having other, equally as profitable sectors to turn to. However, it’s for this very reason that it is imperative policymakers ensure coalmines do not impinge on the ability of alternatives, such as agriculture, to pick up the slack, as a failure to recognise these risks could inflict major pains on the economy and environment.
“Coal corruption is rife across Indonesia and India, Australia and China”, according to Buckley. “As such, the politics of ‘brown paper bags’ is compelling to politicians.” As a measure of corruption, Wood Mackenzie has long reported 50-100 million metric tonnes per annum of coal was illegally exported from Indonesia at the height of the boom. At $60 per tonne, this amounts to theft of between $3bn and $6bn annually. “That pays a lot of bribes, given the resulting eight-to-13 percent royalty payments are missed, as is corporate tax. Indonesia has also relied on coal export revenues both for government royalties and to balance the trade deficit.”
Investment in coal could send trillions of dollars down the drain in the form of stranded assets
Myllyvirta posited the country has long been torn on the issue of coal exports, seeing it as a very low-value industry that doesn’t contribute to long-term economic development. “Now that the market has gone into structural decline”, he said, “the sceptics have been proven right”.
The government has traditionally been very supportive of new coal-fired power plants as a relatively low-cost way to power the country, especially compared to oil, which is still a significant source of power generation in Indonesia. According to Myllyvirta: “Even as the competitiveness of renewable energy has been revolutionised by cost advances, institutional problems have largely prevented Indonesia from benefiting from the clean energy boom.”
It seems a decision not to turn away from coal flies in the face of all economic and environmental reasoning. Despite production having fallen to more than 30 million tonnes below last year’s projections, the Indonesian Government has quadrupled the number of operational coal-fired plants. These 117 or so plants will provide an additional 10,000MW of generating capacity, which, while important, runs contrary to the country’s commitments on climate change.
Even Vietnam, which many hoped would one day fill the hole left by China and India, is retreating from coal in favour of “accelerated investment in renewables”, according to a government statement.
Here there are signs of a rethink. Indonesia’s President Jokowi recently said “as much as possible” of Indonesia’s 35GW power investment plan should come from renewable energy. According to Myllyvirta, this is itself “recognition of the devastating impacts of coal power on communities in the country”.
Should Indonesia choose not to relinquish its close ties with coal, the influence this destructive industry exerts over the country will only be further entrenched. Environmental degradation and polluted waterways aside, this commitment could sell Indonesia desperately short in a post-coal global economy. Coal has served the national economy well in the past, though policymakers would be unwise to invest quite so enthusiastically in a sinking ship.