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Cablegate: Indonesia's Coal Output Increases in 2006

VZCZCXRO0127
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2095/01 2150614
ZNR UUUUU ZZH
R 030614Z AUG 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 5634
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0624
RUEHBY/AMEMBASSY CANBERRA 0959
RUEHBJ/AMEMBASSY BEIJING 4180

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

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