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Digging Deeper: The Quest for Indonesian Coal

Cheaper costs, less red tape and a reliable supply have sent Indian businesses looking for coal from down under. The destination is Indonesia, and it won’t be long before India actually becomes their biggest customer, writes Siddharth Srivastava.

Congress Party general secretary Rahul Gandhi
(Above): Indonesia's coal ports have forced a rethink on 'traditional' handling options. Seen above is PT Puteri Borneo with a floating Gottwald port.

Indian power producers continue to be big buyers of coal overseas due to a combination of insufficient domestic output and large capacity additions to meet growing electricity needs.

India imports bulk of its coal from South Africa and Indonesia. Indian firms have also been investing in Australian coalmines over the last couple of years.

In 2010, Indian companies surpassed firms from China, Korea and Japan as the biggest Asian buyers of overseas coal assets. Last year, Indian firms signed deals valued U.S. $2.4 billion out of global total of U.S. $16 billion.

Given the scenario, Indonesian Coal Mining Association recently said that India will overtake Japan to become the leading buyer of Indonesian coal this year, importing 60 million tonnes (mt) that is predicted to rise to 90 mt by 2013. The country will also stay ahead of China for coal supplies from Indonesia.

“In the past, Japan has traditionally been the leader of importing Indonesian coal, but now India is surpassing it. In terms of tonnage, India is moving towards 50-60 million tonnes... very strong,” Bob Kamandanu, chairman of the association said adding that “India has been able to access such large amounts of Indonesian coal through long-lasting relationships with existing Indonesian producers.”

“A lot of Indian investors are also acquiring coal assets,” he said. Electricity demand in India, Asia’s third-largest economy and one of the fastest growing, is projected to rise to 1,400 billion Kilowatt per hour (kwh) by 2017. Presently, India’s consumption of power per capita is a low 612 kWh as compared to the global average of 14,240 kwh.

Indonesia Calling

Unlike India whose coal output is hampered and slowed by myriad factors such as lack of environment clearances, inadequate transport infrastructure, price controls and state monopoly over the sector, predictions about coal supplies from Indonesia are good.

Indonesia will lead global growth in thermal coal exports in the next decade with producers Bumi Resources and Adaro Energy becoming two of the top three coal exporting companies worldwide by 2015, energy consultancy Wood Mackenzie said last week.

According to projections, by 2020, Indonesia’s annual production will be over 500 mt, more than 50 % increase from 2010 output levels. Indonesia’s coal export growth will be driven primarily by China and India due to rising power demand.

Congress Party general secretary Rahul Gandhi
(Above): Executive Director of Indonesian Coal Mining Association, Supriatna Suhala at the opening ceremony of the Coal Indonesia 2008 show.

In order to build sufficient backward linkages Indian majors with big domestic power plans have also been investing in Indonesia to ensure uninterrupted coal supplies and escape import price volatilities.

Last year, Anil Ambani promoted Reliance ADAG group acquired two coal companies in Indonesia that own three coal mines in the country. ADAG is investing over US$5 billion in various sectors in Indonesia.

State-run Coal India Limited (CIL), the world’s largest producer of coal, has set aside U.S. $1.3 billion this year to fund acquisitions in Australia, America and Indonesia.

According to recent reports, CIL may submit a final bid in the next few weeks to buy a stake in Indonesia’s PT Golden Energy Mines, a wholly owned unit of Jakarta-based Dian Swastatika Sentosa with estimated coal resource of 1.2 billion tons.

Tata and Essar continue to be big investors abroad.

In a recent assessment of Asia coal equity markets Standard Chartered has said: “Chinese deals in recent years have largely been by government-owned companies. On the other hand, more recently Indian bidders have come from the private sector, often from groups that are developing power assets.”

Other big ticket Indian overseas acquisitions by Adani in Australia and Indonesia with estimated collective reserves of nearly 158 mt. India’s biggest coal importer has bought coal assets from Australia’s Linc Energy and purchased Queensland’s Abbot Point Coal Terminal. Adani imported 29 mt coal in the 2010 fiscal to primarily feed its power plants.

Meanwhile, Indian power group Lanco Infratech has bought assets from Australia’s Griffin Coal and is also bidding for Premier Coal from Wesfarmers in the same country. GVK, the Indian power and infrastructure group is negotiating with Hancock Prospecting to buy two Queensland coal mines.

Need For Coal

India’s rising need for overseas coal is linked to an overall picture of domestic coal shortages in India and a consequent rush to tie up assets abroad. More than 50 % of India’s power-generation capacity of nearly 175,000 MW is thermal coal based.

The country aims to add 163,000 MW of capacity in the two five-year plan period 2007-2017, with a major addition of coal based plants.

In this context, India’s federal Planning Commission (PC) that keeps a close pulse on the progress of the Indian economy recently said that the country’s coal shortage is likely to soar to 200 mt by 2017 as against 142 mt by 2012.

“The fossil-fuel demand for the year 2016-17 is projected at 1,000 mt against production of 800 mt,” the PC said, adding that the demand supply gap for 2011-12 has been estimated at 142 mt with domestic supply 554 mt against need of 696 mt, mostly to fire India’s power plants.

Indian coal availability is expected to rise by little over 4 % over the next few years, while power sector power capacity growth is likely in the range 10.5 %, the PC said.

Given such a scenario, Indian power producers have no choice but to look abroad for coal, which will be another foreign exchange drain on the country that already imports a bulk of its oil and gas needs.

Siddharth Srivastava is India correspondent for Siliconeer. He lives in New Delhi.


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