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Cablegate: Coal Update-Blue Skies for Black Coal in Indonesia

VZCZCXRO4034
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3323/01 3391040
ZNR UUUUU ZZH
R 051040Z DEC 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7277
RHMFIUU/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 1252
RUEHBY/AMEMBASSY CANBERRA 1699
RUEHBJ/AMEMBASSY BEIJING 4554
RUEHUL/AMEMBASSY SEOUL 4323

UNCLAS SECTION 01 OF 02 JAKARTA 003323

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
SENSITIVE

E.O. 12958: N/A
TAGS: EMIN ENRG EINV PREL ID
SUBJECT: Coal Update-Blue Skies for Black Coal in Indonesia

Ref: Jakarta 2095 (Indonesia's Coal Output Increases)
1. Summary. Indonesian coal producers are enjoying boom times thanks
to high global prices driven mainly China's new net importer status.
Production is tipped to rise a modest three percent, however. With
bench mark prices up 64 percent this year and global supplies tight,
international coal buyers are scrambling to assure supply. Early
monsoon rains are the only threat to increased production, but
higher prices are likely to more than compensate for reduced
volumes. Heavy rainfall in the last three months has done little to
hurt overall output but has hindered companies from expanding in
response to record prices. Our contacts told us they foresee steady
growth in overall production, exports, and profits for the near
term. The GOI is sending mixed signals on its export and domestic
supply policies. End Summary

2. (SBU) Indonesia is on track to produce 198 million metric tons
(MT) of coal in 2007 and has produced 143.5 MT valued at $4.6
billion during the first three quarters, said Minister of Energy and
Mineral Resources Yusgiantoro Purnomo in a press conference on
November 29. Indonesia produced 192 MT in 2006, according to GOI
statistics, and became the world's largest thermal coal exporter in
late 2006/early 2007. It has estimated reserves of around 40
billion tons. Our contacts say coal production for 2008 will likely
be between 225 and 235 MT with exports likely to surpass modestly
2007's estimated total of 155 MT driven by increasingly strong
domestic demand. The GOI is seeking to build 35 new coal-fired
power plants generating 10,000 MW of electricity by 2010, which will
require state electricity firm PLN to double its coal demand to 70
MT per year.


Policy Murk: Export Tax? Quota? DMO?
------------------------------------

3. (SBU) On December 5, Director General of Coal Simon Sembiring
told reporters that the GOI will limit coal exports to 150 million
tons a year through 2025 to meet surging demand from domestic
buyers. We spoke with the Ministry's Coal Director M.S. Marpaung,
who works for Semibiring, also on December 5. He denied that the
GOI will impose export quotas. He said a domestic market obligation
for coal is already a long-standing feature of coal contracts of
work, but added that Indonesian production and reserves are
currently plentiful. He noted that current domestic demand at 49 MT
per year is far below production leaving plenty of room for exports
now and in the future. The policy is meant to reassure domestic
users and potential power investors that the GOI will provide for
their energy needs, according to Marpaung. GOI contacts tell us
they estimate coal output will rise nearly 11 percent next year as
producers increase capacity. Indonesia will consume 75 and 90 MT of
coal in 2009 and 2010, respectively, according to GOI contacts.

4. (SBU) During a meeting with a visiting department analyst on
November 27 Marpaung said the GOI is considering several measures to
support increased coal production, including halving the royalty
levied on low-quality coal. The Ministry of Energy and Mineral
Resources (MEMR) has proposed a plan to the finance ministry to
offer a 6.5 percent royalty for low-rank coal developers, according
to Marpaung. Current coal contracts of work require Indonesian
producers to pay the GOI a royalty of 13.5 percent. This royalty
would be unchanged for higher-grade coal, almost all of which is
exported. The GOI considers coal with a heat vaQlower than 5,100
kilocalories per kilo to be low-rank. Marpaung also denied the GOI
is considering a 5 percent export levy on coal, but a wide cross
section of contacts in meetings on November 27 and 28 suggest
otherwise.

5. (SBU) Marpaung's comments also betrayed a GOI bias toward
economic naQalism in the coal sector. He told us, "There will be
no more KPCs," refQng to the 35 MT per annum Kal Prima Coal
company in East Kalimantan, which is the crown jewel for the leading
coal producer PT Bumi Resources. Instead, he said the new GOI
policy will be to limit the size of coal exploration areas so that
ten companies will be producing 5 MT per year, rather than one
producing 50. When asked about efficiency concerns and the desire
to maximum GOI royalty revenues, Marpaung shrugged and said that the
cost of mining in China is three times that of Indonesia.
Nonetheless, William Deertz of PWC's Mining and Energy Consulting
practice told us that having 10 companies instead of one in a
conventional contract area will cost lots of time and money for
producers and depress the GOI royalty stream.

JAKARTA 00003323 002 OF 002

Producers in Driver's Seat
--------------------------

6. (SBU) Many of our contacts commented that strong coal demand is
also forcing world thermal coal importers to re-assess their
benchmarks. An executive with Indonesia' number two producer PT
Adaro told us that even five years ago many buyers insisted on coal
with 25 percent moisture content or less and a minimum 5,500 per
kilo caloric value or higher. Now, he said even Japanese and Korean
importers, who were historically quite stringent in their
specifications, are willing to consider coal with up to 35 percent
moisture content. Marpaung said his next goal is to get more
international buyers besides Indians accustomed to buying 40 percent
moisture coal for blending. Driving much of this frenetic activity
is the rapid growth of power demand in southern China, enormous
power infrastructure building in India, and continued strong growth
in Vietnam and Thailand, according to industry and GOI contacts.
This new growth is also competing with continued high levels of
demand from Japanese and Korean power producers. Both Bumi and
Adaro contacts told us they are convinced they have the resource
base and customer demand to raise their respective production levels
to 100 MT per year in the next decade.


Hot Sector Draws Investor Cash
------------------------------

7. (SBU) On November 30 Bumi announced a $1 billion bond offering
for 2008 to raise funds for capital expenditure, according to the
financial press. Bumi executive Peter Ball told us on November 28
that Bumi is seeking to double production capacity to 100 MT in 2011
from 50 MT in 2006 and will require an expanded financing base.
Also, in late November the Indonesian unit of Thai coal miner Banpu
PCL, PT Indo Tambangraya Megah, has taken advantage of the global
coal scramble to announce an IPO on December 17. Company executives
say the IPO target price range will value Indo Tambangraya Megah at
around $1.7 billion, making it Indonesia's third largest listed coal
miner by market value, after Bumi Resources and Bukit Asam.

8. (SBU) Adaro, the country's second-biggest coal mining firm by
volume, is contemplating a $600 million IPO in early 2008, according
to press reports. We met with Adaro executives on November 27 and
they refused to confirm or deny such a plan, saying merely that they
had several interesting options. They were similarly cagey on a
November 26 press report that China's largest coal producer Shenhua
Energy will make a $4 billion takeover bid. Adaro is controlled by
the Soeryadjaya family, former owners the Astra automotive group,
and 36 percent-owned by investors including Goldman Sachs, Citi, and
a San Franciso-based hedge fund, according to Adaro executive
Alastair Grant. With four deposits in South Kalimantan and a total
reserves of 3 billion tons of low-sulphur coal (0.2 percent or
less), Adaro is targeting output 40 MT in 2008 and 100 MT by 2017,
said Grant.


Rains Hamper Output Expansion Plans
-----------------------------------

9. (SBU) In late November a regional investment analyst predicted
that Indonesian coal production may be reduced by as much as 25
percent in 2007 because of excessive rain. Bumi, Banpu, and Straits
Asia Resources Ltd. may have lost up to 20 MT in the second quarter
and third quarter, according to the analyst's note. Our Bumi
contacts said output went down a few percent in October and November
but shrugged off any concerns on reduced volumes, saying higher
prices would more than make up for any shortfalls. Banpu and
Straits did declare force majeure in July and August due to the
rains, but Adaro contacts told us the company was still meeting its
monthly production target. All our contacts do agree that heavy
rains have hampered expansion plans to take advantage of the current
high selling prices. The West Monsoon rains in Kalimantan, which
typically begin in December and last to March, started this year in
early November.
HUME

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