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Biggest Coal Shipper’s Power Plan Offers Relief From Bear Market

The coal market’s best hope of breaking a four-year losing streak may be its biggest supplier’s plan to burn more at home.

Indonesia plans to expand generating capacity by 46 percent in four years with new power plants, half of them burning coal. If that happens, fuel consumption may triple to the equivalent of 76 percent of last year’s exports and boost prices more than 50 percent, the Indonesia Coal Mining Association says.

The country currently consumes less electricity than Taiwan, a nation with about a 10th of its population. Benchmark Asian coal prices fell every year since 2010 after producers from Australia to Colombia flooded the market and demand faltered in China, the biggest consumer.

“Any reduction in Indonesian exports helps the seaborne market,” said Ted O’Brien, chief executive officer of Doyle Trading Consultants, a coal industry analytical firm based in Grand Junction, Colorado. “Like other Asian countries, their own domestic needs are growing. You’re starting to see it.”

Indonesia is seeking to add 42.9 gigawatts of generation by 2019. That’s equal to about half of the U.K.’s installed capacity. Domestic coal consumption may climb as high as 290 million metric tons if that goal is met, said Pandu Sjahrir, chairman of Indonesia Coal Mining Association. The nation exported about 382 million tons in 2014.
Domestic Demand

Australia’s Newcastle coal, an Asian benchmark, surged to $136.30 a ton in January 2011 after flooding curbed output there and in Indonesia. Since then, prices have slumped to $61.24. They may rebound to $85 to $95 if all the plants are built, Sjahrir said.

The global supply glut will grow in 2015 as Chinese demand drops 29 percent, Morgan Stanley forecast this month. China’s imports are 45 million tons lower this year than in 2014, UBS Group AG said in a report June 1.

The seaborne market for the power-plant fuel is oversupplied by at least 100 million tons, analysts including Jeremy Sussman of Clarkson Platou in New York and Jonny Sultoon, research director of Global Coal Markets at Wood Mackenzie Ltd., in Annapolis, Maryland, estimate.

While China is reducing coal use to curb pollution, Indonesia wants to increase capacity to support a goal of 7 percent annual economic growth. India and other Southeast Asian nations will also burn more coal, Citigroup Inc. analysts wrote in a report last month.
Delayed Projects

Indonesia’s power plan may falter because the government faces opposition from farmers and delays in land acquisitions.

“Historically, these projects always get delayed,” Kiah Wei Giam, a coal analyst with Wood Mackenzie in Singapore, said by phone. “Domestic demand won’t get boosted so fast.”

In 2006, state utility PT Perusahaan Listrik Negara was instructed by the government to install 10 gigawatts of capacity to the grid from coal-fired power plants by 2009. Of that target, about 8.5 gigawatts have been added and some projects were canceled, Helmi Najamudin, the head of the coal unit at Listrik Negara, said June 3.

In Central Java, opposition from villagers has held up the construction of a 2 gigawatt project for four years. Flags with the words: “Reject the Coal-Fired Power Plant” fly from sticks in the fields of those unwilling to sell their land.
Power Purchases

To support Indonesia’s goal of 7 percent annual economic growth, the government says electricity consumption should expand by 8.7 percent a year between now and 2024.

Of Indonesia’s planned 42.9 gigawatts, about 7.4 gigawatts are being constructed while 7.2 gigawatts have been committed, according to government data. The rest are in the procurement or planning stages, the data shows.

Listrik Negara plans to sign power-purchase deals with producers for 10,000 megawatts worth of capacity at the end of 2015, President Director Sofyan Basyir said on Thursday.

“We will know if the program takes off if the agreements are signed,” said Sjahrir of the Indonesia Coal Mining Association. “If that happens, it will be bullish for the thermal coal market.”
Source: Bloomberg