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Indonesia's coal industry reeling from global downturn
A significant fall in demand from China has seen hundreds of small coal mines shut down in Indonesia, as Helen Brown reports.

A significant fall in demand from China has seen hundreds of small coal mines shut down in Indonesia.

Indonesia correspondent Helen Brown reports.
Transcript
KEHSA WEST, PRESENTER: The latest trade figures out of China have demonstrated again the challenges the country faces to maintain its high rate of growth.

And the pain in China is spreading to another country that's been weathering the storm well - Indonesia.

It's been selling massive amounts of coal to China, but that's all changing.

Our Indonesia correspondent Helen Brown reports.

HELEN BROWN, REPORTER: Indonesia has made a lot of money selling its coal to the world. Much of it is close to the surface, making it relatively easy to dig up. It's also been fetching a high price, and thatís made it a business everyone has wanted a piece of it.

BOB KAMANDANU, INDONESIAN COAL MINING ASSOCIATION: You name it, restaurant owners or transportation owners just everybody is going with it because the business is so good.

HELEN BROWN: People with little or no experience in the industry were lured by profit margins of up to 25 a tonne. It felt like easy money. But now many of the smaller mines are shutting down, selling off what they can and getting out.

And the industry estimates that of around 400 miners that were operating last year only about half are left.

DESTRY DAMAYANTI, SENIOR ECONOMIST, MANDIRI BANK: Because this is a very tough - itís very tough condition, especially for the newcomer or for the small companies because again this is an economics of scale problem.

HELEN BROWN: There is now simply too much coal. And thatís because Indonesia's biggest customer, China, doesn't need so much anymore.

Indonesia is the world's biggest producer of coal used for energy, and around half has been going to fuel China's factories. But the protracted slowdown in the United States and ongoing debt crisis in Europe has forced Chinese manufacturers to cut back. And coal is now piling up on China's ports.

BOB KAMANDANU: Of course it's been impacting quite significantly. But I guess what I would like to also mention here it might seem only China the cause but as you know this is all about the Global Economic Crisis.

HELEN BROWN: The opportunistic may be pulling out, but Indonesia's bigger and more experienced companies are taking stock.

The second biggest miner, Adaro Coal, recently posted a lower profit and revised down production estimates. It's vowed though to stay focussed while acknowledging the difficult market conditions that exist.

GARIBALDI THOHIR, ADARO ENGERGY PRESIDENT DIRECTOR (captioned): We are pleased with our first half results amid the difficult market conditions. We are not immune to cyclical downturns; however, we will not lose focus on our core business.

HELEN BROWN: It wasn't that long ago miners could ask for more than $100 a tonne for their product.

For those not on contract, thatís now slumped to around $85 or less.

ALLAN FIDOCK, CEO, OGL RESOURCES: I don't expect it will stay that low for too long. I think it's probably close to the base if not already. But I also don't expect it will get up to the unsustainable highs that weíve seen over the last 12 to 18 months.

HELEN BROWN: Coal mining is facing tougher times not just in Indonesia but around the world. At a recent conference in Jakarta, an Australian company looking for investors was finding it a lot more difficult.

ALAN FIDOCK: You know, 18 months, two years ago, it was very buoyant, a lot of people were buying resource projects. That sentiment has certainly gone. There's a lot more conservatism and uncertainty.

HELEN BROWN: Seasoned players are keen to point out that it's a cycle theyíve seen before. Some even see it as process of natural selection that in Indonesia needs to go through.

BOB KAMANDANU: Since we believe that coal is here for long and this is the toughest of course test for all of us, then the real miners will stay because they have been trough the situation before. They have been through the situation whereby they only get on, say, $1 or $2 margin.

HELEN BROWN: Indonesia's solid growth has made it an economic darling, but analysts have been saying that its weak spot could be a falling commodity prices. And thatís proving to be true. Economic income, including from coal, is down and that is contributing to a trade deficit, a very different situation from just a few months ago.

However, the situation doesn't seem to be dampening expectations for a pick up in the not too distant future; based on the huge energy demands that Indonesia will need if it's to further develop.

DESTRY DAMAYANTI: And we expect from the domestic market itself the demand will be much, much higher in 2013 compared to now or even the previous year.

Because we expect that infrastructure development will take into effect in 2013. And most of infrastructure actually goes to power plant, to the electricity sector. And we know that the largest consumer for coal in domestic market is electricity.

HELEN BROWN: And there could be some unintended benefits. The illegal miners that scar the landscape are closing down. And the coal industry says the government's considering how to shift more of the domestic production into the local economy, which includes possibly fast tracking plans to build mineral smelters that will need coal for energy.

BOB KAMANDANU: This is the time for us to strengthen our knowledge, do things or do prepare when things start to pick up again.

HELEN BROWN: Whatever happens, there will be no quick fix.
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