Investment in the coal mining sector is predicted to remain strong in the short term because it is supported by the annual production target set by the government. Currently, the flow of investment in coal has not been disrupted by its selling price, which is currently dropping drastically.
Coal commodity prices are declining
Coal prices have gradually decreased since it reached its peak in September 2022 (US$ 460 tons) and then decreased to between US$ 200 and USD$ 167 per ton. The price again increase quite significantly to US$ 404 at the end of 2022.
According to the World Bank, it is predicted that coal prices will decline by 42% and will decrease by 23% in 2024. However, Indonesia has the opportunity to increase exports by 5% for some time with national production expected to reach 694.5 million tons by the end of 2023.
“When commodity prices decline, the issuer’s average selling price [sale projection] automatically goes down,” said Alfred Nainggolan, Head of Research at Praus Capital.
Mining investment is still high
Meanwhile, investment in the mining sector is still the main contributor to investment realization in Indonesia with IDR 329.9 trillion in Q1 2023, in which the mining sector such as minerals and coal contributes IDR 33.5 trillion.
A total of 176.8 million tons of coal were used to fulfill domestic needs while the rest was channeled for export to the Indian and Chinese markets. The temporary production target jumped 4.82% compared to last year.
Fabby Tumiwa, Executive Director of the Institute for Essential Services Reform (IESR) said, coal demand for China will be stuck in 2025, while the Government of India has cut coal use to 50% from 70%.
When the need for exports decreases, the rate of investment also decreases. “So, our coal production will still increase to a peak in a few more years. But after that it will decline. At least before 2030,” said Tumiwa.
He asserted that mining investment opportunities would be corrected. “New entrepreneurs put a stop on investment when the production targets are reduced,” added Tumiwa.
The future of the coal sector
In the future, the condition of the coal sector will be even more apprehensive with the incessant growth of EBT energy. However, the realization of EBT in the power generation sector is still limited to 14.11% in 2022 from the previous 13.65% last year.
“[Investment in] mining is still promising in terms of internal rate of return [on investment],” said Tumiwa.
In addition, Hendra Sinadia, Executive Director of the Indonesian Coal Mining Association (APBI) said he was still optimistic, with coal still having a long life even in the next decade.
Threats to coal mining
Meanwhile, there is the threat of weakening profit margins as a result of the increase in production costs from coal royalties, which are non-tax state revenues (PNBP) currently pegged at 2% to 7% per ton of coal.
In 2022, the royalty rate has increased from 4% to 13.5%, with a progressive tariff system adjusted to movement.
“We will face difficulties if the selling price continues to fall to its lowest point. This is the only thing that needs to be anticipated,” said Sinadia.
