Indonesian coal lobby urges ‘shock therapy’ cuts to production

Bob Burton, Renew Economy, 8 December 2014

The head of the Indonesian Coal Mining Association (APBI) has proposed that Indonesian coal mining companies slash coal production in 2015 by 100 million tonnes.

“Coal miners are bleeding with current prices. So, if production volume is reduced, the price will get better,” APBI chairman Bob Kamandanu told the Jakarta Globe.

With Indonesia estimated to produce approximately 410 million tonnes of coal this year, Kamandanu’s nominated target would represent the shuttering of almost one-quarter of production in a year.

With approximately 60 million tonnes of Indonesian coal production used for domestic power production and demand increasing, Kamandanu’s proposed cut would fall on the coal export industry.

While a cut of this magnitude is unlikely, the financial distress amongst Indonesia coal producers is already starting to take its toll.

In the last two weeks Bumi Resources – Indonesia’s biggest coal producer – has scrambled to have courts in Singapore and the US protect the company against potential legal actions by creditors while it undergoes a major restructure.Indonesia-coal-is-loaded-in-a-barge-for-transport-in-borneo

Bumi’s temporary legal shield was necessitated after it defaulted on making payments on a part of its US$1.37 billion of bonds. With 2013 production of 80 million tonnes, even the closure of the company’s unprofitable mines would not be sufficient to meet Kamandanu’s target.

Adani’s plan to flood the market

Kamandanu’s comments come at the time that a handful of new mine and coal export infrastructure projects particularly in Australia, the US and to a lesser extent Canada, are desperately trying to hype their potential in order to woo investors and funders.

These projects were largely conceived during the coal export market’s boom time of 2008 and are now reliant much higher coal prices to be viable.

For example, the Indian company Adani are desperately trying to stitch together a coalition of banks – led by the Commonwealth Bank of Australia – to fund its A$16.5 billion Galilee Basin coal mine and related infrastructure in Queensland.

Adani’s proposed project involves building the 60 million tonnes a year coal Carmichael mine, a 300- kilometre railway line and a major expansion of the existing Abbott Point Coal Terminal.

Adani’s project would be ambitious at the best of times, but the boom-time euphoria has long since faded. Most analysts estimate that it would require a global thermal coal price of US$100 or more to be viable. However, with the global coal price hovering around US$68, it requires a huge leap of faith in coal’s future prospects to think the project could be viable any time soon.

With Adani’s project facing financial oblivion, the Queensland Premier Campbell Newman has vowed to spend ‘hundreds of millions’ of taxpayers’ funds on infrastructure for the project. The odds are that a government which defines itself as being “in the coal business” will be under pressure from Adani to cough up even more subsidies.

If against all the financial and political odds Adani’s project were to be built it would simply succeed in flooding the global market when Chinese demand is falling and there is already massive oversupply. If it were built, Adani’s Galilee Basin mine mine would succeed in further depressing prices.

‘Shock therapy’ for the coal market

Three weeks ago, at the time that Glencore announced its extraordinary move of shutting down all 20 of its coal mines in Australia for three weeks from mid-December, Kamandanu applauded the move. “What needs to happen immediately is we need to follow the steps of Glencore,” he told Reuters. “The market has to be given shock therapy otherwise the price will remain low.”

The ‘shock therapy’ Kamandanu wants is the very opposite of what Gautam Adani, the founder and Chairman of the Adani Group, and Campbell Newman are seeking to deliver.

Last week Kamandanu said that his organisation wanted to meet with other lobby groups from coal producing countries to, as the Jakarta Globe paraphrased it, “discuss production volumes and measures that may help boost prices.”

However, the prospects of a coal cartel of the likes of OPEC are remote.

Kamandanu’s hope for a substantial boost in prices – a view which is shared throughout the coal industry – undermines the foundations of the global coal industry’s PR campaign promoting coal as a ‘solution’ to energy poverty.

While coal importing countries want ‘cheap’ coal, the global coal exporters desperately want coal to be expensive.

Countries contemplating building new coal power stations based on imported coal face the risk that if Kamandanu’s ‘shock therapy’ actually came to pass and coal prices climbed substantially, they would be far worse off. Not only would more money for fuel flow out of the country but power prices would be pushed up.

For example, if coal prices climbed to the US$100 a tonne or more needed to make Adani’s Carmichael project viable, that would be over triple the cost of domestically produced coal. Countries without domestic coal resources would find themselves hostages to volatile and increasing power prices.

The ‘shock therapy’ which would be good for coal exporters would end up causing energy poverty not solving it.

Bob Burton is a Contributing Editor of CoalSwarm and a Director of the Sunrise Project, a non-profit group promoting a shift away from fossil fuels. With Guy Pearse and David McKnight he co-authored Big Coal: Australia’s Dirtiest Habit. Bob Burton’s Twitter feed is here.