Indonesia's Coal Move Might Increase Power Production Cost

Malaysia's power sector will not face a crisis if Indonesia's proposal to impose a 25 per cent export tax on coal and base metals this year comes into effect.

However, production cost will be affected, said Energy, Green Technology and Water Minister Peter Chin Fah Kui.

While Malaysia has secured long-term contracts for coal with Indonesia, there is a need to diversify the country's import sources for coal from other countries like Vietnam and Russia, to ensure supply security, Chin told reporters after delivering a talk on "The Future Of Energy in Malaysia" at an event hosted by the Malaysian International Chamber of Commerce and Industry.

Indonesia, the world's top exporter of thermal coal, is proposing an export tax increase of 25 per cent this year, jumping to 50 per cent in 2013, to boost revenue and curb output boom.

"Certainly, the tax will affect our pricing, but then we've signed long-term contract with Indonesia, so it's not as if tomorrow we're buying from the spot market.

"Besides that, most of our plants can be adopted to use gas, yet we are not saying we have to sit down there and wait until our contract expires. TNB (Tenaga Nasional Bhd) has to go outside and source," Chin added.

The tax proposal was greeted with a mix of worry and confusion by industry players such as India, Indonesia's largest coal customer.

Recent news reports stated India, which imports about 12 per cent of its coal requirements and sources 70 per cent of that from Indonesia, could face a crisis if the proposed tax is implemented.

Meanwhile, the proposed tax uncertainty has had some buyers beginning to diversify their supply source, including Malaysia.

The coal that is used in power generation in Peninsular Malaysia is imported mainly from Indonesia.

Earlier in his talk, the minister said the dependence on a particular fuel type had its implications with respect to the security of the source of supply and price of that fuel.

Meanwhile, according to a recent MIDF Research note, the country's national utility, TNB is unlikely to be affected by Indonesia's tax plans on coal as it will be applicable only to low quality coal.

TNB would be exempted since it only imports high quality coals from Indonesia, the research house said.

Currently, TNB sources 70 per cent of its coal requirements from Indonesia, 20 per cent from Australia and 10 per cent from South Africa.