Short-term woes of the regional coal industry-
Coal is a strategic resource for Southeast Asia, with the region accounting for almost 1 per cent of global coal reserves. Despite the fact that all countries within the region have adopted different strategies to exploit their resources, overall production performance has been impressive. The combined production of its four biggest coal producers – Indonesia, Thailand, Vietnam, and the Philippines – increased by more than 60 per cent between 2007 and 2012, significantly higher than the global growth rate of 19.3 per cent during the same period.
Southeast Asia Infrastructure gives a snapshot of the key trends of coal production and reserves, and consumption in Southeast Asia. The discussion will also address the policy and regulatory frameworks of the countries across the region…
Reserves: Indonesia leads with more than four-fifths of the resources
With coal reserves of 28.01 billion tonnes (bt), Indonesia is the most geographically attractive market in the region. The reserves are mostly concentrated in the South Sumatra (49 per cent) and East Kalimantan (34 per cent) islands. The majority (about 66 per cent) of these reserves are of medium calorific value (5,100–6,100 kilo calories [kCal] per kg), which are most suitable for power generation.
Malaysia and Thailand, with reserves of close to 1.9 bt and 1.23 bt, respectively, occupy distant second and third positions. In Malaysia, most of the reserves (69 per cent), concentrated in Sarawak, are of the sub-bituminous type (calorific value of about 4,000–5,000 kCal per kg). Thailand’s coal reserves, ranging from lignite to sub-bituminous (with calorific value lower than 4,000 kCal per kg), are largely found in the Mae Moh basin.
The remaining coal producing nations are the Philippines, Vietnam, and Laos, with respective reserves of close to 323 million tonnes (mt), 150 mt, and 100 mt. In the Philippines, coal reserves are classified as lignite and sub-bituminous. Its largest coal mine is Semirara that accounts for more than 94 per cent of the country’s coal production. As for Vietnam, the majority of its reserves (anthracite and butiminous) are located in the Red River basin in the northern part of the country.
Other countries in the region contribute an almost negligible share to the region’s overall reserves. However, Myanmar could emerge as a serious player in the future when its largely speculative coal reserves of 488.7 mt (as estimated by the Ministry of Mines) are confirmed.
Production: Indonesia and the Philippines record fastest growth
Both Indonesia and the Philippines have been the best production performers in the region. Indonesia boasts the distinction of being the biggest coal producer in the region and the fifth largest in the world, after China, the US, India, and Australia. The country is also the world’s largest exporter of thermal coal. Producing 386 mt of coal in 2012, Indonesia accounted for around 6.2 per cent of the global coal production that year. Between 2007 and 2012, the country’s coal production recorded a fairly impressive compound annual growth rate (CAGR) of over 12 per cent. As for the Philippines, its coal production in 2012 was 8.2 mt, representing a CAGR of 17 per cent over the past seven years – a remarkable achievement considering its small reserve base.
Coal production in Vietnam and Thailand, however, has shown a declining trend. After peaking at 45 mt in 2009, Vietnam’s coal production was about 42 mt in 2012. For the first eight months of 2013, Vietnam produced about 26.9 mt of coal, marking a decline of 3.4 per cent for the same period in the previous year.
Thailand’s lignite coal production has been near-stagnant over the past six years. At the end of 2012, the country’s production was 18.3 mt, constituting a sharp decline of 14.3 per cent from its 2011 figure of 21.3 mt. Coal production since 2007 (18.2 mt) has grown at a CAGR of only 0.1 per cent.
The other coal producing countries in the region are small producers. In 2011, coal production in Malaysia was about 3.1 mt followed by Myanmar (1.2 mt) and Laos (511,700 tonnes).
Overall, the region faces a number of challenges in expanding production. These include inadequate infrastructure for coal evacuation and transportation; poor rail and road connectivity for mining projects; difficulties in the development of remote coal mines; land acquisition problems; delays in government approvals; and illegal mining.
All coal producing countries in the region, barring Indonesia, Vietnam, and the Philippines, produce coal for export and the domestic markets. Indonesia’s coal production is largely exported to Asian countries. Based on the latest official estimates, the country exported 272.67 mt of coal in 2011, or nearly 77 per cent of its domestic production. However, since 2008, this share has been declining: the share of coal exports fell from 80 per cent in 2008 to 76 per cent in 2010.
Vietnam’s coal exports have significantly declined over the past few years. After peaking at 25 mt in 2009, exports have nosedived to 7.8 mt in 2013 (for January–June), as the country has been restricting exports through the imposition of coal export taxes in an endeavour to meet its domestic requirements. In fact, Vietnam has recently started importing small amounts of bituminous coal. In 2011, the country received its first coal shipment from Indonesia. It is projected that the country would become a net coal importer by 2015, with exports cut to a level of 4 mt and imports touching 5 mt.
In the case of the Philippines, it exported 3.2 mt (40 per cent of production) of coal in 2012. The country is, however, a net coal importer: it imported12 mt in 2012, representing a CAGR of around 9.04 per cent.
Continuing attractiveness for the future
Driven by growing electricity demand and the higher prices of competing fuels such as oil and gas, coal is being thrust forward as a long-term bet for the region. Currently, the share of coal in the power generation mix is the highest for the region in the Philippines, at about 34.4 per cent. In more mature markets like Thailand and Indonesia, where coal currently plays a limited role in power generation, it is expected to play a dominant role in the longer term. In Indonesia, coal accounts for less than one-fourth of the country’s primary energy supply, with oil constituting the highest share (41 per cent). By 2025, Indonesia aims to increase the share of coal in its energy mix to about 33 per cent, with the expected share of oil declining to 30 per cent.
In Thailand, coal and lignite together account for only 19 per cent of power generation; the share of natural gas is close to 67 per cent. By 2030, coal is expected to account for a share of 21 per cent, with the contribution of gas falling to 25 per cent. Between 2013 and 2017, coal-based projects with an aggregate capacity of about 2,763 MW are expected to be commissioned in Thailand. The country is also planning to set up coal-based projects in its neighbouring countries like Myanmar and Cambodia to provide 10,000 MW of power to Thailand.
As for emerging markets such as Vietnam, coal accounts for the third highest share in the generation mix at around 18 per cent, after hydro (38 per cent) and gas (32 per cent). By 2020, coal is expected to have the highest share at about 48 per cent: based on the government’s proposal, the country’s installed capacity of 5,800 MW (in 2011) should have more than quintupled.
Strong government controls
There are varying degrees of privatisation across the markets in Southeast Asia. On one end of the spectrum are the governments of Vietnam and Thailand that hold exclusive rights over coal mining, while Indonesia and the Philippines lie on the other end, with the highest degree of participation by private investors. State-owned Vietnam National Coal and Mineral Industries Group (Vinacomin) is the country’s monopoly coal producer. In Thailand, state-owned utility Electricity Generating Authority of Thailand (EGAT) owns and operates the Mae Moh mine and its lignite production accounted for more than 80 per cent of the country’s total production in 2011.
In Indonesia, the Mineral and Coal Mining Law, 2009 opened Indonesia’s coal mining industry to foreign investors by allowing mining business licences to be issued to foreign, as well as domestic investors. Even though there are a large number of small and big producers in the country, the top five companies – Kaltim Prima (owned by PT Bumi Resources Tbk), Adaro, Kideco, Arutmin, and Berau Coal – account for more than 60 per cent of the production.
Under the Philippines Coal Development Act, 1976, coal resources are owned by the government. The operator, through the contract system, reserves the right to explore, develop, produce, and market the coal. As of December 2012, 60 coal operation contracts had been awarded (29 for development and 31 for exploration to 46 companies). The Semirara Mining Corporation is the country’s only large-scale coal producer: its coal sales in 2012 were nearly 7.2 mt (almost 87 per cent of the country’s coal production in the year).
Industry reeling from coal price slump and nationalistic policies
The oversupply of coal from producers in Indonesia (and Columbia), coupled with the fall in demand by the world’s largest coal consumer, China, has resulted in a slump in thermal coal prices that have adversely affected the bottom lines of miners in the region. Indonesia’s reference price of coal averaged $95.5 per tonne in 2012 compared to $118.4 in 2011. The price decline continued through 2013 with prices falling to $76.89 per tonne as of September 2013. Low coal prices have adversely impacted profitability of the Indonesian coal miners. According to a May 2013 report by PricewaterhouseCoopers, listed coal mining companies reported a significant drop of 64 per cent in net income in 2012, on account of the price decline of 19 per cent in the year. To cope with the price drop, several small and medium coal companies have reportedly slashed production levels and announced capex cuts.
Restrictive coal export policies, driven by increasing resource nationalism, have further added to the mining industry’s problems. In Indonesia, the government introduced a domestic market obligation clause that requires coal mining companies to sell 24.72 per cent of their annual production to the domestic market. In addition, the new policy stipulates an increase in stakes by an Indonesian firm in any coal mining company to 51 per cent by the end of the tenth year of production (from the earlier requirement of 20 per cent after the fifth year of production).
These policies, in combination with the price slump, has led to the significant fall in forex earnings from coal exports (around $2 billion monthly), thus deepening the country’s budget deficit to about $9.8 billion during the second quarter of 2013. The government is now considering the removal of export restrictions. Drawing from Indonesia’s experience, Vietnam, another country whose government had briefly toyed with the idea of imposing export restrictions, moved swiftly to remove all restrictions within two months of a draft proposing such a move.
Sanguine long-term prospects
Even though the decline in prices and falling demand from China will limit the profit margins of the coal industry in the near term, the region’s long-term demand prospects are sanguine. Apart from its proximity to major coal demand centres such as China and India, the region also enjoys a significant cost (opex and capex) advantage over its competitor (Australia). Both these key factors should drive coal export demand in the future. Meanwhile, domestic coal demand would be driven by thermal coal purchases by Malaysia, Thailand, and the Philippines that have major coal-based capacity addition plans.
On the supply side, coal companies could look forward to more clarity in the policy and regulatory framework. For instance, Indonesian policymakers are currently looking at relaxing certain norms in a bid to boost coal exports, including delaying the proposed export ban. Overall, considering its vast coal reserves and strategic location, coupled with the increasing domestic and export coal consumption, Southeast Asia’s coal industry should continue to thrive going forward.
