G7 nations have made a US$10bn offer to help Indonesia to accelerate it coal phase out, with the US and Japan taking the lead in the negotiations. The new partnership is expected to be unveiled during the upcoming COP27 UN climate conference in Egypt. The cash offers are a combination of public and private finance as well as technical assistance, which aims for Indonesia to peak emissions in the power sector by 2030 and reach net zero by 2050-2055.
The
accelerated decarbonisation of Indonesia’s power mix will directly affect long-term
coal production in the world’s largest thermal coal exporter. Indonesia ranks
as the biggest thermal coal exporter in the world, accounting for 41% of the
seaborne supply in 2022.
Coal mining in Indonesia is dominated by private
sector, with mining areas allocated via a government contract mechanism. The
country produced 609Mt of thermal coal in 2021, of which 317Mt were exported
and 217Mt were consumed domestically including non-power sectors apart from the
DMO realization.
The
government intends to raise coal output to 663Mt in 2022, up by 9% from the
actual volume in 2021, amid the potential for more exports to meet the temporary
European demand. Indonesia's coal production totalled 361Mt by the end of July, achieving
54% of its 2022 target. This compares to only 286Mt over the same period of
2021. As of 2020, Indonesia’s
coal resources were estimated at 143bnt and reserves at 39bnt.
Indonesia
has committed to reduce its carbon emissions by 41% by 2030 and become carbon
neutral by 2060. The country ranks in the global top ten of carbon-emitting
countries with over 568Mt of CO2e in 2021. Energy transition is a latent risk
for the development of thermal coal projects as major investors have withdrawn
funding in fossil fuel projects to support decarbonisation efforts.
Pumping
Up Production, Dropping Exports
AME
forecasts that Indonesia’s thermal coal exports will drop by 6% on the year to
406Mt in 2022. This has been partially driven by the export ban in January,
severe rainfall curbing production and issues with equipment. Indonesia has set
its October coal benchmark price at a record high of US$331/t as demand from
Europe rises.

However,
the Indonesian government keeps prioritising domestic supply obligations,
announcing this time a partial ban on coal exports in August. In 2022, the
country will require 127Mt of coal from local producers to meet domestic energy
needs, up by 13% from 2021.
Over
the long term, AME forecast that Indonesia’s seaborne thermal coal supply
will peak by 2030 at 403Mt to decline at a CAGR of 0.3% to 389Mt by 2040. Unlike
other industries, skyrocketing prices are not supporting further investment in
the thermal coal business. Thermal coal is the segment of the mining sector
that is most vulnerable to long-term climate risk, as coal-powered energy
generation accounted for over 40% of the overall growth in global carbon
emissions in 2021.
A
tighter lending policy on mining companies, more effective climate policies and
stronger 2030 carbon reduction targets from the third largest thermal coal producer
in the world would force companies to reduce their output to comply with new
policies. Similarly, a faster fall in prices would also discourage companies
from producing at full capacity. A shift in South and Southeast Asia’s current
carbon-intensive pathways to renewable energy will drastically drive coal
demand/supply down.
Indonesian
Coal Lords
Record
thermal coal prices has translated into extraordinary cash generation for
Indonesian miners over the last months. Indonesia is home to four of the top
ten global export thermal coal suppliers in 2022, with a combined share of
12.4%. PT Adaro Energy Tbk (3.3%), PT Bayan Resources (3.2%), PT BUMI Resources
(3.1%) and PT Berau Coal (2.7%) are expected to ship over 123Mt of thermal coal
to the export market this year.
PT
Adaro Tbk is the largest coal exporter in Indonesia, forecast to export 33Mt of
thermal coal in 2022, up by 6% from the low level in 2021. Adaro
Energy’s coal sales volume totalled 27.5Mt in the first half of 2022, up by 7%
on the year, with India and China accounting for 15% and 10% of Adaro’s sales
volume, respectively. The company delivered 23% of its product to the domestic
market.
Increased sales and high prices contributed to a 127% annual surge in
revenue to US$3.5bn in the first half of the year, with the average selling
price increasing by 117% from a year earlier. In the first half of 2022, the
company’s net profit increased by 611% on the year to US$1.35bn. Adaro’s revenue is fully driven by
coal sales, with a forecast of US$7.2bn in 2022. This represents a rise of 56%
on the year, after almost doubling its revenue in 2021 compared to 2020.
AME
estimates coal revenue will drop at a CAGR of -15.5% to US$3.1bn by 2027. In
2021, Adaro Energy started to develop the Carbon Abatement Project for Net Zero
Emissions roadmap. Despite the company’s aims to progress towards becoming a
green business, actual plans set coal to remain the ‘DNA’ of the company. In
fact, Adaro Energy is yet to commit to carbon neutrality and establish actual
carbon emissions reduction targets.
PT
BUMI Resources Tbk is the second largest coal producer in Indonesia. AME forecasts
that BUMI will export 31Mt of thermal coal in 2022, up by 7% from 2021.
However, severe rainfall in key mining areas in Indonesia and issues with equipment
procurement have prompted a cut in production, which saw BUMI’s production fall by 14% on the
year to 34.5Mt in the first half of 2022.
The company has lowered its coal output
target in the range of 70Mt to 78Mt for 2022 (100% basis). This represents a
drop of 8Mt and 5Mt in the lower and upper limits, respectively. The Indonesian
miner had already lowered its target for coal production to 78-83Mt in 2022,
from an initial range of 83-89Mt. BUMI produced 78.8Mt in 2021.

PT
BUMI Resources’ flagship coal mine Kaltim Prima Coal (KPC) is the largest
export thermal coal mine globally. BUMI holds 51% interest in the mine, which produces
low-ash and low-sulphur thermal coal. KPC’s coal production totalled 56.4Mt in
2021 and is forecast to reach between 52Mt and 54Mt in 2022. AME forecasts that
KPC exports will increase to 48.8Mt by 2027.
Coal represents 98% of the BUMI’s total revenue, with oil accounting for
the remaining 2%. In
2022, AME forecasts that BUMI’s total revenue will reach US$5.7bn, climbing by
49% on the year amid historical coal prices. The company is expected to slowly
start diversifying its revenue from 2025, with the inclusion of Zinc, Lead and
Silver. AME estimates coal revenue will drop at a CAGR of -13.5% to US$2.8bn by
2027.
BUMI Resources' emission reduction program focuses on lowering CO2e
by decreasing energy consumption in transport and CO2 absorption through
revegetation. Energy consumption is mainly reduced by minimising engine
uprate and fuel burn rate for fuel savings in coal and overburden transport and
replacing trucks with overland conveyors for coal transport. The company
is yet to announce its carbon emissions reduction targets and has not
officially committed to achieve carbon neutrality.
Indonesian
companies’ sole focus on coal will represent a high risk as their revenue is
principally sourced from coal sales. AME is closely reviewing the effect of
global announcements putting a halt on all financial services to companies that
derive 100% of its revenue from thermal coal.