▶ To achieve the net-zero carbon emission target, Indonesia is accelerating the transformation of its energy supply structure. The share of fossil fuels is expected to decrease from 72% at the end of 2021 to 65% by 2030 and further to 22% by 2060. Among them, coal demand will see the largest decline, with coal demand in the power sector starting to decrease after 2030 and then accelerating, dropping to only 4% of total energy supply by 2060.
▶ Meanwhile, the IEA estimates that the increase in Indonesia's industrial coal demand by 2030 will mainly come from steel production, but its fuel share will decrease from 75% in 2021 to 67% by 2030 and to approximately 30% by 2060.
▶ In the long term, innovative technologies in crude steel production, such as blast furnaces equipped with CCUS, natural gas direct reduced iron electric arc furnaces equipped with CCUS, and hydrogen-based direct reduced iron, may reduce coal demand in steel production.
▶ Additionally, under the global dual-carbon background, the energy transition goals and policies of Indonesia's coal-exporting countries will also lead to a reduction in future coal demand.
Source: IEA, SMM
Note: STEPS: Stated Policies Scenario; APS: Announced Pledges Scenario; NZE: Net Zero Emissions Scenario
Indonesia's Coal Resource Distribution
Source: Ministry of Energy and Mineral Resources of Indonesia, SMM
▶ Indonesia's coal resources are relatively concentrated, mainly distributed in Kalimantan and partially in Sumatra. According to 2023 data from the Ministry of Energy and Mineral Resources of Indonesia, proven reserves show that 63% of coal reserves are located in Kalimantan, 29% in Sumatra, and the remaining small amounts in Sulawesi, Bengkulu, and other regions.
▶ However, in terms of production, 90% of coal production comes from Kalimantan, especially the eastern and southern parts, while about 10% comes from Sumatra, mainly the southern part. Most of Indonesia's coal mines are open-pit mines with favorable mining conditions, and the coal types produced are mainly bituminous coal, sub-bituminous coal, and lignite, with very little coking coal.
Indonesia's Coal Production and Export
Source: Ministry of Energy and Mineral Resources of Indonesia, SMM
▶ Over the past decade, Indonesia's coal production has maintained a growth trend, but its production is primarily export-oriented, with exports accounting for over 70% on average. Since 2019, the share of coal exports has gradually declined, mainly due to the following reasons:
✔ On one hand, the growth of its domestic economy and energy demand has led to an increase in domestic sales;
✔ On the other hand, frequent domestic coal export restriction policies in Indonesia have also resulted in reduced exports;
✔ Meanwhile, due to high domestic oil prices and increased resource taxes, Indonesia's coal production costs have risen, reducing its competitive advantage compared to countries like Russia and Australia, which has also led to a decline in export share.
Indonesia's Coal Export Destinations
Source: Statistics Indonesia, SMM
▶ In terms of country-specific coal exports, India and China have consistently been Indonesia's main coal export destinations, accounting for about 50% of Indonesia's total coal exports. They are followed by Japan and South Korea, with the share of exports to Japan and South Korea declining to 7%-8% in recent years.
▶ Benefiting from its advantageous geographical location, Indonesia's coal exports to Asian countries have significant cost-effectiveness in terms of freight and transportation cycles. The freight cost for coal from Indonesia to China is about $8-10/mt, while from Australia to China, it is $14-15/mt. Additionally, the time required for coal transportation from Indonesia to major coal ports in China and India is only about half that from Australia.
▶ According to Indonesia's coal export data from January-October 2024, the shares of exports to India and China were 28% and 22%, respectively. India, as one of the world's largest coal consumers, continues to see growing coal demand driven by increasing power demand and industrial development. Although Indonesian coal is relatively low in quality, it features low ash and low sulfur content and is competitively priced, making it highly competitive in the Chinese market, with exports to China accounting for around 20% of its total exports.
Indonesia's Coal Production DMO Mechanism and Export Policies
Indonesia's DMO Mechanism
▶ Indonesia's Domestic Market Obligation (DMO) mechanism stipulates that the central government has the authority to control the production and export of minerals, including coal, while local governments are obligated to comply with the production and export controls implemented by the central government.
▶ Currently, the DMO ratio is issued annually through MoEMR decrees. The latest decree, KepMen 267/2022, issued on November 1, 2022, stipulates that 25% of coal production plans must be sold domestically, and the selling price of coal for certain public electricity supplies is capped at $70/mt. With the prioritization of energy supply security, the DMO ratio for coal is expected to increase in the coming years.
▶ DMO Usage: For: a. Power supply for public and self-interest; b. Industrial raw materials or fuel.
▶ Therefore, under the expectation of an increased DMO ratio, Indonesia's coal export share still has room for decline.
Source: Ministry of Energy and Mineral Resources of Indonesia, SMM
Note: RKAB refers to the Work Plan and Budget for Mineral and Coal Mining Business Activities in Indonesia
Indonesia's Coal Consumption
Source: IEA, SMM
▶ Driven by the rapid development of the power industry, nickel smelting, and steel industries, Indonesia's coal consumption has grown rapidly in recent years. As of 2023, Indonesia's coal consumption reached 220 million mt.
▶ However, in terms of coal consumption by industry, before 2018, local coal consumption in Indonesia was dominated by the power industry, accounting for 79% of total coal consumption. This was mainly driven by Indonesia's energy structure and coal resource advantages during its economic development. With the growth in power demand, Indonesia's coal-fired power capacity expanded rapidly but gradually began to experience surplus.
▶ Under the global dual-carbon background, Indonesia has also started to promote energy transition. In 2023, the power sector's share of Indonesia's coal consumption decreased to 57%, while the share of coal consumption in the smelting industry, including nickel smelting and steel industry development, increased to 28%.
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