Coal and the Global Energy Crisis
Indonesia’s coal reference price (HBA), which combines three international indices (the Newcastle Export, Global Coal Newcastle, and Platts) and the Indonesia Coal Index (ICI), increased sharply to $161.63 per ton.
Didie SW
"The sky is the limit" is the appropriate idiomatic expression to describe the current increase in coal prices, which are continuing to skyrocket. It is not easy for anyone to predict at what level the coal prices will stop.
Coal prices this month surpassed the highest level in the last 13 years, or US$190.95 per ton in early July 2008.
NewCastle coal futures price penetrated $231.90 per ton. In fact, the CIF Amsterdam-Rotterdam-Antwerp (ARA) price penetrated $301 per ton for the European market (Atlantic market) in early October (5/10/2021).
Indonesia’s coal reference price (HBA), which combines three international indices (the Newcastle Export, Global Coal Newcastle, and Platts) and the Indonesia Coal Index (ICI), increased sharply to $161.63 per ton.
Indonesian coal is mostly absorbed by the Pacific market, with its main market China being a key player in global coal prices.
The coal crisis in China has been driven primarily by a surge in coal demand after the Covid-19 pandemic, and the Chinese government is struggling with policy implementation to encourage national coal production.
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China's coal output to mid-2021 grew 4.1 percent compared to the same period in 2019, while electricity generation grew 7.4 percent in response to rising energy needs in the property and industrial sectors.
China currently has only around 14 days of coal supply. China has only two choices, either to increase imports or ramp up domestic production.
In response to the coal crisis, the Chinese government, through the National Energy Administration (NEA) and the National Development and Reform Commission (NDRC), is encouraging increased domestic production from its coal mining hubs in Shanxi, Shaanxi and Inner Mongolia.
The current energy crisis puts China in a quandary between its long-term vision to reduce coal and a short-term policy to meet current energy needs.
There is an interrelationship between high dependency on global energy and the energy supply chain (fossil fuel).
The fluctuation in coal prices seems to be a message about market complexity and the energy commodity’s fragility in the wake of the anticipated complexities in the imminent energy transition. There is an interrelationship between high dependency on global energy and the energy supply chain (fossil fuel).
Coal prices are not only influenced by demand and supply. In addition to the global energy supply chain, energy policy evaluations and the future plans of other countries also weigh on the price fluctuation.
The coal market is no longer less elastic. The price of coal, which has soared 300 percent since mid-December 2020, proves that coal prices are very volatile. Likewise, a decline in coal prices could happen anytime.
The high price of coal is certainly very beneficial for our country, both for mining companies and the government. After being stretched for almost two years on depressed coal prices, we are seeing good prospects to expand the state coffers. The government benefits from the potential increase in non-tax state revenues (PNBP) and revenues from other taxes.
This picture taken on October 29, 2020 shows the Celukan Bawang 2 power plant in Singaraja on Indonesia's resort island of Bali. - Chinas plan to fund dozens of foreign coal plants from Zimbabwe to Indonesia is set to produce more emissions than those of major developed nations, threatening global efforts to fight climate change, environmentalists have warned.
On the other hand, the disparity between coal exports prices and the fixed coal price of $70 per ton for the electricity grid, the government must be able to maintain miners’ commitment to supplying coal for sustainable domestic electricity through the domestic market obligation (DMO).
In addition to the DMO and volatile coal prices, the government through the Energy and Mineral Resources Ministry (ESDM) must ready concrete steps to anticipate and respond immediately to a price decline.
Unlike Australia, where the coal mining industry is managed by large-scale companies, Indonesia’s mining sector is managed by a few large-scale miners based on coal contracts of work (CCoWs, or PKP2B) and special mining permits (IUPKs), as well as around a hundred companies that hold mining operation and production permits (IUP-OP), half of which are small-scale companies.
Market conditions
Until early October 2021, national coal output reached 458 million tons, or 73 percent of the total national production target of 625 million tons. It looks likely that the production and export targets will be achieved by the end of 2021.
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Coal exports are projected to approach the highest export figure of 455 million tons reached in 2019, after which it fell to 405 million tons in 2020 as a result of impacts from the pandemic.
Ironically, increasing coal production has not seen a rapid increase in domestic coal consumption. The coal DMO is limited to hover at 25 percent of total production, with this projection to remain for the next three years.
As a result, 75 percent of the national coal output is shipped to meet export demands. This appears to have motivated most coal miners to boost production.
Of the total coal demand, almost 80 percent comes from coal-fired power plants. As a result, 75 percent of the national coal output is shipped to meet export demands. This appears to have motivated most coal miners to boost production.
Almost 54 percent of Indonesian coal exports are shipped to meet the needs of coal-fired power plants in China and India. Nearly 48.2 percent of the world's coal-fired power plants operate in China with a total generating capacity of 1,050 gigawatts (GW).
Meanwhile, coal-fired power plants in Indonesia contribute 35,000 megawatts (MW) of 63.3 GW total capacity.
It can be seen that China will continue to be the largest coal export market for Indonesia. The trend has become more obvious, given China's decision to increase coal demand to 3 billion tons for 2025-2026 and will then be maintained as the maximum coal limit in that country. It is certain that China will remain a major player in the 21st century global energy map.
Steam billows out of the cooling towers at a coal-fired power station in Nanjing in east China's Jiangsu province on Monday, Sept. 27, 2021. Global shoppers face possible shortages of smartphones and other goods ahead of Christmas after power cuts to meet government energy use targets forced Chinese factories to shut down and left some households in the dark.
After China, India is the second largest importer of Indonesian coal. India's two largest coal producers, Coal India Limited (CIL) and Singareni Collieries Company Limited (SCCL), are only capable of producing 716 million tons of coal for domestic needs. With its difficulty in meeting a production target of 1 billion tons, India will remain the second largest importer of Indonesian coal.
Like the energy crisis in China shows, almost all of the 135 coal-fired power plants in India have limited reserves for three days of operation. Until mid-2021, India's steam coal imports reached 80.61 million tons, up 8.37 percent compared to the74.38 million tons reached in the same period in 2020.
India's 2021 steam coal imports are projected to approach the pre-pandemic level of 185 million tons in 2019.
Indonesia's currently exports 122 million tons of coal to India, which remains an attractive coal market for Indonesia, considering that India's coal-fired power plants have a total capacity of 209.2 GW.
The Central Electricity Authority (CEA) has confirmed that it will increase the capacity of coal-fired power plants to 267 GW for 2029-2030.
Anticipatory policy
The soaring price of coal is like a windfall that has significantly augmented the coffers of Indonesian miners and the government. However, it must be realized that behind the benefits of the high prices are potential risks that deserve to be taken seriously by the government.
Responding to the rising coal prices without an anticipatory measure could lead to social and environmental problems that will not be easy to resolve quickly.
Various policies need to be readied to minimize the risk of volatile coal prices, which could change at any time or even be corrected in a short time. Responding to the rising coal prices without an anticipatory measure could lead to social and environmental problems that will not be easy to resolve quickly.
Given the volatility of coal prices, various small-scale mines may have to stop production in the case of an abrupt decline in prices, while they have yet to carry out land reclamation.
As a result, there will be environmental damage, mass layoffs of local labor, decline in regional revenue (PAD), and even an increase in bad loans if the miner has borrowed from a bank.
To date, there are 1,307 coal mining permit (IUP) holders in Indonesia. Of that number, 144 are under the authority of the government with the majority, or 1,163 concessioners, under the authority of provincial administrations.
Restoring the authority over mining permit extensions to the central government, as mandated in Law No. 2/2020, should make it easier for the central government to consolidate.
The priority for the policy to limit domestic coal needs, especially in relation to electricity, is to ensure the coal energy supply to the state electricity company (PLN). With a fairly high price disparity between export prices and the $70 per ton of coal for the electricity grid, supervision by the Energy and Mineral Resources Ministry is needed.
The steps taken by the ministry so far to help PLN secure coal energy needs must be maintained for the sake of a reliable national electricity supply.
The ministry's firm stance to ban the export activities of suppliers that do not fulfill their DMOs is in line with the mandate of the Mining Law. The law mandates that the government determine the volume of coal production, sales, and prices to protect the national interest.
Several other steps that the ministry needs to prepare immediately are: First, considering that the quality of coal across Indonesia cannot be fully absorbed by PLN, the ministry must immediately prepare a blueprint for coal processing plants (CPPs), including blending plant facilities, so that domestic coal needs becomes extensive, from low to high quality.
Imported coal is dredged from a cargo ship at a port in Lianyungang, Jiangsu Province, China, on July 26, 2018.
Anyone can build a CPP. However, it is appropriate that the ministry prepares the blueprint, considering that the responsibility for managing natural resources lies in the hands of the government.
CPP development can help IUP-OP holders continue to operate with a blending mechanism when prices are depressed. CPP development should not merely go after market and economic benefits, but also deal with environmental damage in the case of abandoned and unreclaimed mines.
Second, the ministry still has to monitor the global growth of coal-fired power plants in the wake of an energy shift by China and India as the two largest importing countries of Indonesian coal. Controlling national coal production is key.
Considering that China's coal demand will reach critical point in 2025-2026, the government should set a national coal production target for the next five years.
At the same time, the Annual Work and Budget Plan (RKAB) for mining companies can be made for five years with annual evaluation. This is the best step for mining companies to ensure future investments. On the other hand, mining companies will be able to clearly map out their expansion plans in terms of preparing heavy equipment to support their mining operations.
Singgih Widagdo, Chairman, Indonesian Mining and Energy Forum (IMEF)
(This article was translated by Musthofid).
