Reuters reported that Indonesia’s plans to unearth and export its vast coking coal resources could stumble over the need for large rail projects, meaning little relief for the tight global market for at least the next 5 years.
The government said that Central Kalimantan holds 1.4 billion tonnes of mostly high quality metallurgical coal reserves, but these are buried deep in the rugged mountains and forests of Indonesian Borneo. Despite the difficulties, soaring prices for the steel making raw material mean the world’s top miners including BHP Billiton are still interested. But regardless of how much is mined, a lack of funds and uncertainty over government rules could stymie the infrastructure needed to get the coal to ports and on board ships.
Low water levels in the key Barito River during the dry season from May to September can also limit coal barge trips to offshore loading facilities for up to 5 months a year.
Mr Andreas Bokkenheuser commodities analyst at UBS in Singapore said that there’s no shortage of investor interest in Indonesia’s coal rail infrastructure that much is clear. But difficulties for firms in securing capital commitment land acquisition issues and tough terrain are posing big obstacles to these projects. I wouldn’t expect anything to materialize in the near term.”
Building a rail network is crucial to unlocking the reserves of mines in Central Kalimantan, where the lack of infrastructure and high cost of trucking coal to ports are major impediments. BHP wants to develop the 774 million tonne Maruwai deposit to produce 6 million tonnes of both thermal and coking coal by 2014, with a Citigroup research report saying the major plans to triple annual output to between 15 million and 20 million tonnes.
Local firm PT Marunda Graha Mineral, in which Japanese trading house Itochu Corporation holds 23.5% stake, plans to lift production at its MGM coking coal mine by 25% to about 2 million tonnes per year. In a bid to boost coal exports, the government has kicked off a tender, seeking firms to jointly build 185 kilometer rail line to connect remote inland coal mines to a port.
But building such major projects is no easy task, especially in Indonesia, where corruption is endemic and decentralization has thrown up inconsistent regulations, particularly on laws concerning forestry protection and land acquisition. In just one year, the estimated cost for the Puruk Cahu-Bangkuang railway line has blown out to USD 2.2 billion, compared with initial estimates of USD 1.5 billion, the Jakarta Globe reported in May, with completion seen delayed by at least a year to 2013.
Despite the government having signed a decree in March to allow mining in protected forests, overlapping jurisdictions and poor coordination between agencies means firms are facing a tedious process in obtaining approvals. Land acquisition problems are also increasing costs. Raising the money is another hurdle for these multibillion mega-projects.
Mr Bokkenheuser of UBS said that with the slowdown in the economy in the past 24 months, we just haven’t seen any capital commitments come in due to difficulties in securing project funding. Access to funds for these projects will not come easy. For steel mills being hit by the double whammy of slowing demand and sharply higher costs for coking coal and iron ore, the extra supply would be welcome. Prices of coking coal are up by 75% this year to USD 225 per tonne, hitting mills in China, Japan, South Korea and Luxembourg.
Analysts are predicting that global supply of coking coal, estimated at about 230 million tonnes is likely to remain tight through to at least 2015 on the back of continuing increasing demand from China, India and Brazil. Global research firm Wood MacKenzie said that coking coal exports from Indonesia could jump more than tenfold to some 20 million tonnes per year, equivalent to some 9% of current global coking coal trade, if the proposed rail project in Central Kalimantan got off the ground.
Mr Rudi Vann analyst of Wood Mackenzie said that “The rail project is clearly the only missing piece in the puzzle. They only need to find that piece to unlock the vast resources in the province.”
(Sourced from Reuters)
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