Testing Indonesia's Coal Boom
By Xin Jiang
September 21, 2012
On a recent trip to Indonesia, small talk with my taxi driver led to an interesting proposal: an offer to buy a coal mining license. I wasnâ€™t in the market for one but it just goes to show how much Indonesiaâ€™s coal mining industry has grown in recent years. The countryâ€™s rapid and significant development in this area has been due partly to privatization efforts, but more so to a sharp uptick in demand from countries like China. Nearly 80% of the output from Indonesian mining firms is exported, with China as the largest individual importer.Â
China boasts the worldâ€™s third-largest coal reserves (after the U.S. and Russia) and its coal quality (as measured by heat content) is not necessarily any worse than that of Indonesian coal. So why would China seek to import so much coal from Indonesia? One key factor is that a large portion of Chinaâ€™s reserves are located in remote areas such as Xinjiang Province or Inner Mongolia, and logistics tend to be difficult to send resources from these reaches to Chinaâ€™s more developed eastern areas where demand is strong. Most Indonesian mines, on the other hand, are situated near shipping ports, and coal can therefore be transported rather easily and cost-effectively to Chinaâ€™s coasts.
Chinaâ€™s reliance on coal has actually declined from its levels in the 1950s when the resource was virtually the countryâ€™s sole source of energy. Last year coal supplied about 70% of China's energy consumption as the country has made efforts to diversify its energy supplies with sources such as crude oil, natural gas and hydroelectric. Moreover, when I visited Xinjiang three months ago to tour a large open-pit thermal coal mine, I noticed the construction of power plants and the development of many electricity-consuming heavy industries. As China continues to develop its inland roads and railways, logistics should eventually pose fewer problems for production and delivery. But with alternative sources of energy on the rise, Chinaâ€™s dependency on coal imports may decline even before its transportation bottlenecks are resolved.As I considered the offer to buy an Indonesian mining license, it seemed clear to me that Indonesiaâ€™s coal producers should continue to diversify their customer base, and perhaps invest in other areas including power production in order to maintain more robust and viable businesses.
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