Indonesian coal miners turn to domestic demand
Two of Indonesia's biggest miners are building power stations to reignite coal demand and counter a drop in global prices that has squeezed industry-wide profit margins to their slimmest in a decade and dulled the appeal of exports to top consumer China.
Privately-owned Adaro Energy, Indonesia's second biggest coal miner by revenue, and the government-run Bukit Asam are taking the lead in trying to burn some of the extra coal piling up in global markets as China's economic slowdown reduces its need for the fuel.
They are also banking on the dominant, government-owned utility's need to meet the projected 9.4 per cent annual growth in power demand over the next eight years, and the fact that a third of Indonesia's 250 million population is not linked to any grid.
"The coal business is cyclical. By moving into power, we balance our portfolio by adding a business with steady, predictable and good returns," said Adrian Lembong, a director at Adaro Power, a unit of Adaro Energy.
"We will become the primary coal supplier for more power projects in Indonesia and the region, ensuring more customers can accommodate our coal."
Indonesia is the world's largest exporter of thermal coal, used primarily for power generation, and China is its biggest customer. Exports, however, have diminished in value as benchmark prices fell by a third over the past 18 months and are now at their lowest in almost four years.
Bank Indonesia data shows the value of total coal exports fell 8 per cent year on year in the first half of 2013 at the same time that volumes rose just over 16 per cent.
That decline has made 2013 one of the worst years on record for most of the big coal miners which, on average, saw net profit margins fall 40 per cent year on year, their steepest decline since at least 2003, Thomson Reuters data shows.
Power stations may help increase miners' revenues, but they require huge infrastructure investment, analysts say.
The returns are also not guaranteed: state utility Perusahaan Listrik Negara (PLN) sets the price at which companies can sell their electricity to consumers, potentially leaving their profits hostage to politics.
PLN generated 75 per cent of Indonesia's electricity output last year, its data showed, with privately owned firms like Paiton Energy and Jawa Power accounting for the rest.
By 2017, these private plants will be joined by three Adaro coal-fired stations with a combined capacity of 2,260 megawatts and three Asam-owned plants with a capacity of 2,660 MW.