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coal mining in indonesia - indonesian coal industry | indonesia investments

coal mining in indonesia - indonesian coal industry | indonesia investments

Coal - a fossil fuel - is the most important energy source for electricity generation and also forms an essential fuel for the production of steel and cement. A negative characteristic of coal, however, is that it can be labelled as the most polluting energy source due to its high proportion of carbon. Other vital energy sources, such as natural gas, are less polluting but significantly more exhaustive and more susceptible to price fluctuations on the world market. Therefore, the world's industries have increasingly shifted their focus to coal.

Indonesia is one of the world's largest producers and exporters of coal. Since 2005, when it overtook Australia, the country is the leading exporter in terms of thermal coal. A significant portion of its exported thermal coal consists of the medium-quality type (between 5100 and 6100 cal/gram) and the low-quality type (below 5100 cal/gram) for which large demand originates from China and India. According to information presented by Indonesia's Ministry of Energy and Mineral Resources, Indonesian coal reserves are estimated to last around 83 years if the current rate of production is to be continued.

Regarding global coal reserves, Indonesia currently ranks 9th, containing roughly 2.2 percent of total proven global coal reserves according to the most recent BP Statistical Review of World Energy. Around 60 percent of Indonesia's total coal reserves consists of the cheaper lower quality (sub-bituminous) coal that contains less than 6100 cal/gram.

There are numerous smaller pockets of coal reserves on the islands of Sumatra, Java, Kalimantan, Sulawesi and Papua but the three largest regions of Indonesian coal resources are:1. South Sumatra2. South Kalimantan3. East Kalimantan

Since the early 1990s, when the coal mining sector was reopened for foreign investment, Indonesia witnessed a robust increase in coal production, coal exports and domestic sales of coal. The latter, however, has always been rather insignificant as domestic consumption of coal is relatively small in Indonesia. But in recent years there has been a rapid increase in domestic coal sales because the Indonesian government is committed to its ambitious energy program (implying the construction of various power plants, mostly coal-fired because Indonesia has plenty of coal reserves). Moreover, several big Indonesian mining companies (for example coal miner Adaro Energy) have expanded into the energy sector as prolonged low commodity prices made it unattractive to remain focused on coal exports, hence becoming integrated energy companies that consume their own coal.

During the 2000s commodities boom the coal mining industry was very lucrative as coal prices were comfortably high. Hence, many Indonesian companies and wealthy families decided to acquire coal mining concessions on Sumatra or Kalimantan in the late 2000s. Coal became known as the "new gold".

Coal is the dominating force in power generation. At least 27 percent of the world's total energy output and more than 39 percent of all electricity is produced by coal-fired power plants due to coal's abundance, its relatively easy and low-cost extraction, and less expensive infrastructure requirements compared to other energy resources.

Indonesia's strategic geographical position towards the giant emerging markets of China and India. Demand for low quality coal from these two countries has skyrocketed as many new coal-fired power plants have been built to supply electricity to their immense populations.

The main export destination countries for Indonesian coal are China, India, Japan and South Korea. During the peak years coal contributed around 85 percent to total state revenue from the mining sector.

The commodities boom of the 2000s generated significant profits for companies engaged in the export of coal. The rise in commodity prices was - to a large extent - triggered by accelerated economic growth in emerging and developing economies. But this profitable situation changed with the outbreak of the global financial crisis in 2008 when commodity prices went down fast. Indonesia was affected by these external factors as exports of commodities (in particular coal and palm oil) account for around 50 percent of total Indonesian exports, thus limiting the country's GDP growth in 2009 to 4.6 percent (which still represents an impressive number, largely supported by domestic consumption). From the second half of 2009 until the beginning of 2011 a sharp rebound in global coal prices occurred. However, reduced global economic activity has lessened demand for coal, thus resulting in a downward trend of coal prices between early 2011 and mid-2016.

Apart from sluggish global economic growth (and the hard landing of China's economy), there was also another factor at play that caused low coal prices. During the lucrative 2000s commodities boom many new coal mining companies were established in Indonesia while existing coal miners raised investment to expand production capacity. This caused a severe supply glut that was exacerbated by coal miners' eagerness in the years 2010-2013 to produce and sell as much coal as possible- amid low global coal prices - in order to generate revenue and profit.

In the second half of 2016 coal prices surged to levels last seen in early 2014, hence giving some fresh air to the mining industry. This price increase was triggered by the somewhat recovering crude oil prices, rising domestic coal demand in Indonesia on the back of the completion of new coal-fired power plants, but more importantly because of China's coal mining policies. China, the world's largest producer and consumer of coal, decided to cut its domestic coal output. The key reason why China wanted to push the coal price into higher territory in the second half of 2016 is that China's non-performing loan (NPL) ratio in the domestic banking sector had risen to 2.3 percent in 2015. The main reason that explains this rising NPL ratio was that China's coal mining companies had trouble to repay debt.

Despite global awareness regarding the importance to reduce nation's dependency on fossil fuels, developments in renewable energy resources do not show an indication that the world's dependency on fossil fuels (especially coal) will be reduced significantly in the foreseeable future, thus coal is set to remain a key energy resource. Clean coal technologies in coal mining, however, are expected to gain significance in the future (partly due to commercial relevance) and Indonesia is expected to become heavily involved in that process being a major player in the coal mining sector. These clean coal technologies focus on the reduction of emissions produced by coal-fired power generation but lack sustained progress yet. Upstream activities connected to coal mining, such as the development of coalbed methane (CBM) reservoirs of which Indonesia contains great potential, has begun to receive attention recently.

Indonesian government policy will affect the nation's coal mining industry. To secure domestic supplies, the Indonesian Ministry of Energy and Mineral Resources orders coal producers to reserve a specific amount of their production for domestic consumption (domestic market obligation). Moreover, the government can adjust its export tax to discourage coal exports. The government aims for more domestic consumption of coal as it wants coal to supply around 30 percent of the country's energy mix by 2025:

coal miners owe the indonesian government hundreds of millions of dollars | news | eco-business | asia pacific

coal miners owe the indonesian government hundreds of millions of dollars | news | eco-business | asia pacific

Indonesia is now one of the worlds largest exporters of coal, an industry that contributes around four percent of the countrys gross domestic product mostly through exports to China and India. Despite its massive size, however, observers are concerned that the sectors actual contribution to the public treasury in the form of taxes and royalties is not nearly enough to balance out the social and environmental impacts of coal extraction.

According to data from the Ministry of Energy and Mineral Resources, hundreds of millions of dollars in royalties and taxes owed to the government remain unpaid. The government often lacks key information it needs to collect the revenues owed to it, even down to the addresses of mining companies offices.

Indonesias decentralisation era, beginning in the early 2000s, saw a shift in control over extractive industries from central to regional governments. The most significant law for the mining sector was the 2009 Mining Law, which gave district and municipal governments the authority to issue permits for mid-sized mines.

Mining is now a major contributor to Indonesias economy. In 2014, revenue from the mining sector reached IDR 37.37 trillion ($2.8 billion), contributing around 10 per cent of total state revenue, according to data from the extractive sector oversight body Extractive Industry Transparency Initiative (EITI).

However, poor management and control of the mining permitting process particularly for small to medium-sized mining concessions has led to an excess of mining permits being issued by district governments, without adequate oversight or enforcement of related laws.

According to a network of regional and nationally-based NGOs called Anti-Mining Mafia Coalition, 6.3 million hectares of mining concessions have been allocated illegally within forests zoned for protection.

Evidence of excessive and poorly regulated mining permitting emerged in the findings from a recent investigation by the National Human Rights Commission and NGO groups into the mining sector in East Kalimantan, where the majority of Indonesias coal is sourced.

The investigation revealed that almost 70 per cent of the province has been allocated for mining concessions. The same study found that 632 coal mining pits have been left abandoned across East Kalimantan. These pits often fill with water, and have been the cause of 27 deaths by drowning to date, including 21 children.

The revenues that are able to be collected from the coal sector in no way outweigh the expenses needed to address the extensive social and environmental damages brought by poorly managed mining operations, Merah Johansyah, the national coordination of JATAM, Indonesias Mining Advocacy Network, told Mongabay.

To obtain a clean and clear certificate, mining companies must prove they have no outstanding royalty and other tax debts; that rehabilitation funds have been collected and saved in a government bank account; that exploration and environmental commitments have been fulfilled; and that concession areas do not overlap with protected forest areas or with other companies concessions, including for palm oil and timber plantations.

In early 2014, following initial civil society reports of significant corruption, illegalities and environmental and social damage in the mining sector, the Corruption Eradication Commission (KPK), together with the Ministry of Energy and Mineral Resources and the Ministry of Environment and Forestry, began investigations into mining operations in 12 provinces with the largest number of mining permits.

Going forward the government needs to blacklist individuals or companies that dont comply with laws. It is important to make data on mining permits available to the public and law enforcement agencies.

The initiative, called Korsup Minerba, aimed to assess the legality of mining permits, ensure companies were registered to pay tax, land rent and other royalties, and determine whether permits adhered to all relevant permitting and environmental laws.

The Korsup Minerba investigations began in February 2014, when there were a total of 10,992 locally-issued licenses across Indonesia. Within a year, investigations revealed that 40 per cent of these licenses were non-clean and clear.

The total number of permits active in Indonesia had reduced to 8,524 mineral and coal mining permits. However, 2,522 mining permits active in Indonesia are not clean and clear. After three years of implementation, Johansyah is concerned that the Korsup Minerba is yet to result in any significant improvements in mining governance.

Clean and clear certification may not reflect whether companies operations adhere to environmental and human health protection laws. There are many instances of mining companies that violate laws but that hold clean and clear certification, Johansyah reported: A child drowned in an abandoned mining pit in Kutai Kartenegara owned by a clean and clear mining company, PT Multi Harapan Utama.

Although this is a reduction from the total of IDR 6.65 trillion owed in December 2016, collecting the remaining arrears is proving to be difficult. Collecting royalties has not been as easy as we initially thought. There are many obstacles, an energy ministry official told Tempo in February.

Divisions in authority and a disconnect between central and regional government has made collecting revenues challenging. Although district, and now provincial governments are empowered to issue permits for mining, responsibility for collecting royalties, land rent and taxes lies largely with the central government.

As Hendra Sinadia, the deputy director of the Coal Production Association has observed, this has resulted in major gaps in data on mining operations between different levels of government. I am certain the government does not have accurate data about coal mining production. Ever since the authority for mining has been with the regional government, the total number of mining permits has been hard to trace, Sinadia told CNN Indonesia in January.

A lack of accurate data on mining permits, combined with a lack of resources, makes it difficult for the collection of state revenues from mining companies, explained Agung Budiono, communication and outreach manager at mining sector oversight NGO Publish What You Pay Indonesia.

The Directorate General of Mineral and Coal Mining already has detailed data that includes the names of the thousands of companies that are in arrears. However, one of the biggest challenges has been that after tracing the names of the companies in arrears, it emerges that their existence is unknown. The addresses used when applying for a permit were not provided correctly, Budiono told Mongabay.

It is not known whether the addresses were fake or companies have moved since registering for mining permits. The Director General of Mineral and Coal Mining sent letters to mining permit holders in an effort to recover non-tax state revenues owed to the government. However, many of the letters came back return to sender, indicating the addresses are incorrect, said Budiono.

The Anti-Mining Mafia Coalition are pushing for more transparency in the issuance of mining permits. Making public all mining permits in Indonesia, including their full names and addresses, as well as their progress towards meeting clean and clear certification, would help to ensure better civil society oversight, said Ali Adam Lubis, a representative of the Anti-Mafia Coalition in a media statement.

Going forward the government needs to blacklist individuals or companies that dont comply with laws. It is important to make data on mining permits available to the public and law enforcement agencies, Budiono told Mongabay. Partnerships between government agencies like the Directorate of Mineral and Coal Mining and the Directorate of Common Law Administration, could also help government to identify debt-owing mining permit holders, said Budiono.

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