Indonesia's Coal Output Increases In 2006

UNCLAS SECTION 01 OF 03 JAKARTA 002095 SIPDIS DEPT FOR EAP/MTS AND EB/ESC/IEC DEPT PASS OPIC, EXIM, TDA DOE FOR CUTLER/PI-32 AND NAKANO/PI-42 COMMERCE FOR USDOC 4430 SIPDIS E.O. 12958: N/A TAGS: EMIN ENRG EINV PREL ID SUBJECT: Indonesia's Coal Output Increases In 2006 ¶1. Summary. During 2006 Indonesian coal production and exports increased 3.6% and 8.2%, respectively. According to unofficial statistics, Indonesia passed Australia in early 2007 to become the world's leading exporter of thermal coal, which is used mainly for power generation. Indonesian coal exporters have benefited from high global prices, which have been over $50 per ton during much of the second half of 2006. Coal was the second most valuable non-oil-and-gas export during the year. Important joint ventures and equity spin-offs featured throughout the year. On June 14, Australia's Amerod Resources Limited and Indonesia's Bayan Resources entered into a joint venture agreement to develop a coal briquette plant in East Kalimantan. Bumi Resources, Indonesia's leading coal producer and exporter, signed a high profile deal to spin off 30% equity to India's Tata Power. The GOI also issued new regulations to support coal-based alternative energy projects. End Summary Coal Output Increased Up to 3.6% -------------- ¶2. Coal production reached 159 million metric tons (MT) in 2006, up 3.6% from 2005. Kaltim Prima Coal (KPC) at 35.3 million MT and Adaro Indonesia at 30.7 million MT were the leading producers. State owned PT Bukit Asam (PTBA) saw its production remain stagnant due mostly to lack of investment and transportation difficulties. Indominco Mandiri had the largest increase in production on a percentage basis from a little more than 7 million MT in 2005 to more than 10 million MT last year, an increase of 38.3%. Table 1: Coal Production (in thousands MT) -------------- Company 2004 2005 2006 Change PTBA (state-owned) 8,707 8,607 8,667 0.7 Adaro Indonesia 24,331 26,686 30,735 15.2 Kaltim Prima Coal 21,280 28,183 35,301 27.3 Kideco 16,927 18,125 17,400 -4.0 Arutmin 15,019 16,757 16,316 -2.6 Berau Coal 9,103 9,197 9,979 8.5 Indominco Mandiri 7,103 7,449 10,302 38.3 Other CCOWs 19,408 27,468 26,095 -5.0 Local cooperatives 9,507 10,993 4,220 -61.6 TOTAL 131,385 153,465 159,015 3.6 Source: Ministry of Energy and Mineral Resources (MEMR) Coal Exports Increased Steadily -------------- ¶3. Coal exports increased 8.2% or 9 million MT in 2006 representing 75% of production. The leading exporter was PT Bumi Resources through its subsidiaries Kaltim Prima Coal (KPC) and Arutmin. KPC's export increased 28% and Arutmin also increased slightly by 6% compared with the prior year. PT Adaro Indonesia increased their exports sharply by 4.9 million MT, up 28% from 2005. Table 2: Company Coal Exports (in thousands MT) -------------- -- Company 2004 2005 2006 Change PTBA 2,713 2,492 2,848 14.3 Kaltim Prima Coal 22,404 26,622 34,153 28.3 Adaro Indonesia 15,099 17,317 22,239 28.4 Arutmin 13,796 12,517 13,277 6.1 Kideco Jaya Agung 10,966 11,831 10,966 -7.3 Indominco Mandiri 6,584 8,902 10,466 17.6 Berau Coal 6,160 5,763 6,758 17.3 Other CCOWs 11,953 20,063 15,821 -21.1 Local cooperatives 4,084 5,283 3,310 -37.3 TOTAL 93,759 110,790 119,838 8.2 Source: MEMR ¶4. Local and international industry analysts forecast continued strong demand for Indonesian coal exports to Asia due to strong macroeconomic growth and sustained high oil and natural gas prices. China virtually ceased coal exports by the end of 2006, withdrawing around 100 million MT from the world export market, due to its JAKARTA 00002095 002 OF 003 strong domestic demand for coal-fired electricity. Regional exports within Asia reached 79 million MT, almost 66% of total exports. Japan remained the largest consumer of Indonesian coal by almost 23 million MT or 19% of total exports. The European Union increased its imports significantly by 4.9 million MT or 39% from the same period last year. Malaysia and India also significantly increased their off-take of Indonesian coal, up 22% and 35% respectively. The U.S. bought about 2% of Indonesian coal exports. Table 3: Coal Export Destinations (thousands MT) -------------- --- Company 2004 2005 2006 Change Japan 19,013 24,237 22,598 -3.9 European Union 13,163 15,788 20,656 38.9 Taiwan 16,678 14,524 16,748 15.3 South Korea 9,690 9,964 10,592 7.4 Hong Kong 8,230 8,970 9,231 4.6 India 5,465 8,740 10,517 21.5 Thailand 2,217 4,256 4,100 -3.7 Malaysia 4,315 4,028 5,217 35.3 Others 14,988 20,283 20,179 -0.5 TOTAL 93,759 110,790 119,838 8.2 Domestic Supply and Demand -------------- ¶5. On the supply side, Kaltim Prima Coal, Adaro Indonesia, and Arutmin Indonesia dominated, providing over 82 million MT or 52% of total demand and 69.7 million MT or 58% of exports. Domestic coal demand decreased to 35.5 million MT during 2006, compared with 40.2 million MT in 2005. The main driver in domestic demand continues to come from power generation. The GOI has plans to increase significantly coal-fired electric power generation by 10,000 MW by ¶2009. If the GOI realizes its goal domestic coal demand will increase sharply. Coal Briquette Joint Venture -------------- ¶6. On June 14, Australia's Amerod Resources Limited and Indonesia's Bayan Resources signed a joint venture agreement to build a coal briquette plant in East Kalimantan. They intend to exploit a patented briquetting process using coal from Bayan's Tabang Mine in East Kalimantan. They plan to use the process to convert relatively poor quality coal into a higher-quality and more environmentally-friendly coal briquette. The plant will have an initial capacity of 1 million tons of coal briquettes per year with a possible upgrade up to 3 million tons capacity per year in the offing. The joint venture also includes a 5 year off-take agreement by Bayan for $100 million of coal briquettes. Both companies are now completing a feasibility study of the project. Amerod owns 51% of the joint venture while Bayan holds the remainder. Divestment of Bumi Resources -------------- ¶7. India's Tata Power announced on March 30 that it would pay $1.3 billion to purchase 30% equity stakes in Bumi Resource's two major Indonesian coal producers Kaltim Prima Coal and Arutmin Indonesia and a related trading company. Together, KPC and Arutmin produced approximately 51.6 million tons of coal in 2006 with over 95% exported. Bumi has said it plans to increase coal production by 50% over the next three years. As part of the deal, Tata Power said it would also buy 10 million MT of coal annually from KPC for two of its proposed Indian power projects, totaling 7,000 MW, it plans to build by 2012. Bumi paid a total of $685 million for the two coal mining firms in 2001 and 2003. The current deal values those assets at $4.3 billion. Bumi and Tata reached financial closing on the deal on May 23, 2007. New Coal Regulations on 2006 -------------- ¶8. On January 25, 2006, President Yudhoyono issued Presidential Instruction 2/2006 on the supply and utilization of liquefied coal as an alternative energy form. The President instructed the Minister of Energy and Mineral Resources to create the policy framework for the supply and utilization of liquefied coal and provide incentives for liquefied coal projects. The Minister of JAKARTA 00002095 003 OF 003 Energy and Mineral Resources (MEMR) issued regulation 33/2006 on May 22, 2006 to promote the development of coal-bed methane. The Minister instructed the MEMR to create the policy framework for coal-bed methane exploration and exploitation operations. The MEMR will set the terms and conditions for coal-bed methane joint ventures as well as tender procedures for bidding on work areas. HUME