New ball game: As prices drop sector players are seeing increased competition

Cementing its position as the world’s largest exporter of thermal coal, Indonesia increased its output of coal in 2011. Even as domestic production and export of minerals has entered a downturn, coal output increased 28.43% over the 2010 mark of 275.16m tonnes to reach 353.38m tonnes, according to data from the Indonesian Ministry of Energy and Mineral Resource’s (MEMR). However, The Jakarta Globe reported that ministry data from December 2012 showed a decrease in 2012 production at 304m tonnes.

SURVIVAL OF THE FITTEST: After years of high demand driving up prices for coal the effects of the global economic downturn are now being seen on demand, leading to a deceleration of the global mining boom and a decrease in coal exports in 2012. As a result of global demand not achieving its predicted rate, the market is becoming oversupplied, sending commodity prices plummeting. After the government-set coal price reference swelled from $70.70 per tonne in 2009 to $91.74 in 2010 and over $120 in 2011, prices retreated to under $90 per tonne by the summer of 2012 before stabilising to a monthly average of $99.62 per tonne by September (15.87% off the 2011 average).

With coal value now experiencing a dramatic downturn, many of the opportunistic investors who recently flocked to the sector may end up vanishing as fast as they appeared. Even larger outfits have faced obstacles. British coal miner Churchill Mining has alleged that the regional government of East Kalimantan unlawfully took over its operations in Borneo. The company filed a claim on May 22, 2012 with the International Centre for Settlement of Investment Disputes following a series of unsuccessful attempts to take up the issue in Indonesian courts. Churchill is not the only troubling sign for foreign investors. The Guardian reported in October 2012 that Nat Rothschild had resigned as the non-executive director of the Bumi mining group over a proposal from the Bakrie family to take over the group’s mines, which he though was contrary to minority investors’ interests. Rothschild said, “The Bumi plc story is a small but high-profile impediment to ensuring growth, especially when resource nationalism is repeatedly used to abuse minority shareholder rights.”

LOCAL OBLIGATIONS: In addition to disputes with foreign investors over ownership rights, the government has sought to limit exports and set aside three-quarters of its annual coal production to meet domestic demand. However, The Jakarta Globe reported in early January that the requirement had to be reduced in the face of low national consumption, and further restrictions on exports have been shelved for the time being.

Despite the doom and gloom pervading the coal sector through 2012, there is still optimism for the sector going forward. The resulting cutback in worldwide global production should ease the oversupply problem to an extent. Overall production will likely not increase significantly in the future as companies are highly leveraged and need to tighten their belts as profit margins shrink. The government will also have to work towards easing concerns over ownership rights in the face of a number of disputes with international investors.