Indonesian mining sector investments well below target

New investments in the Indonesian mining sector are likely to fall well below target in 2020 and could reach their lowest in 10 years, with the global Covid-19 pandemic continuing to weigh on commodity demand and prices, the country’s energy ministry (ESDM) has said.

New investments in the Indonesian mining industry have totalled just under $2.2bn this year to date, amounting to around 37.7pc of an initial 2020 target of around $7.75bn. This is the first time that investments in the sector have failed to reach government-set targets since 2018. This year’s investments will be the lowest in the past decade if there are no new additions in the remainder of this year, the ESDM said.

Total investments in the mining sector so far this year are well below a revised forecast of $5.5bn for 2020 given by the ESDM in August, when the sector received a total of $2.1bn. The projected downturn in investments this year reverses a recent trend that saw total investments in the mining sector surpass government targets in 2018-2019.

The original target was based on an assumption that coal producers would continue investing in exploratory work and the upkeep of heavy machinery. But the Covid-19 pandemic has forced companies to delay plans in light of travel restrictions which affected operations, as well as weaker revenues that have impacting financial planning.

The decline in new investments is a result of weak demand for commodities and low prices, which have prompted the coal mining industry, which accounts for the bulk of Indonesia’s mining sector investments, to focus on efficiency and cost cutting measures instead of investing in infrastructure and heavy equipment.

The ESDM did not give a breakdown of the mining industry by sector, although coal accounts for a significant amount of overall investments, given that the coal industry is the largest in terms of volume and government revenues collected from the overall mining sector.

Coal prices have been hit hard by the pandemic, which has curtailed economic activity and weighed on demand. Fob prices for Indonesian GAR 4,200 kcal/kg coal, which accounts for the bulk of Indonesia’s exports, were last assessed byArgusat $28.57/t on 6 November. This is above an all-time low of $22.40/t reached in mid-September but well below a 2020 high of $36.54/t in February.

The Indonesian coal mining association (APBI) has said that increasing investments in the coal mining sector will be difficult as the industry’s willingness will depend on coal prices increasing. The APBI has forecast that the Covid-19 outbreak will reduce demand for Indonesian coal this year by around 85mn t, and has asked the ESDM and producers to reduce output to prop up prices.

While this year’s target may not be reached, the ESDM is already working on improving the mining sector’s situation in preparation for next year. The government and the APBI are working together to develop new markets for Indonesian coal and intends to focus on exporting more coal to emerging markets such as Pakistan and Bangladesh. A recovery in coal demand from next year could help to spur new investments in the mining sector, as business certainty makes the sector more attractive to private-sector investors, the ESDM said.

The ESDM previously set a coal output target of 609mn t for 2021, a projected 10pc increase from its expected production this year, although the APBIlast monthraised raised doubts about whether this is achievable given the current economic situation and weak demand outlook.