Wood Mackenzie recently presented a paper to clients titled “Upgrading Indonesian coal margins”, saying that, while coal upgrading technology has yet to be proven, the race is on as there is great commercial potential. Indonesia is in a particularly good position to benefit as low rank coal projects will achieve higher operating margins and increased market opportunities through an upgraded product. This means Indonesia will be competitive with bituminous coal producing countries, as well as increasing its commercial attractiveness for investors.
According to Southeast Asian coal supply lead analyst, Rudi Vann, Indonesia is in a position to benefit because it has large quantities of low rank coal that has a limited consumer base and cannot enter the traditional Asian thermal markets in large volumes. Heavy discounting on coal prices are required to capture the market share, eroding returns for investors. Upgraded coal will bring substantially higher operating margins, as this price discounting will be eliminated, despite having higher capital and operating costs. “
Using Wood Mackenzie’s Global Economic Model (GEM), the Tekno Orbit Persada project was used as an example to analyse the implications of implementing upgrading technology. It is located in the Wahau coal field, which contains several billion tonnes of low rank resources. Total capital costs will double and operating expenditure over the life of the mine will increase by 24%. This is offset because the total increase in gross revenue is significantly more than the increase in operating costs thanks to the removal of heavy price discounting.
According to Vann, there will be an overall higher net cash flow over the life of the project. Increased margins will result in a net present value (NPV) of US$ 2.9 billion for the upgraded project, three and a half times that of the base case of US $816 million. Even though more capital is required, the payback period for investors actually decreases due to the increased value of the coal. Breakeven price also improves, allowing for greater resilience to price shocks and better absorption of volatility in capital or operating expenditures.
Analysis performed using Wood Mackenzie’s new Cost & Margin Tool place Australian thermal exports with much higher operating margins than Indonesian low rank exports. However, in the upgraded scenario Indonesian low rank exports can expect margins to be comparable to Australian producers. With large resources in place, Indonesia can sustain large-scale production, potentially opening up yet-to-be exploited areas of Kalimantan and Sumatra.
Indonesia’s upside scenario still faces several challenges to becoming a reality. Firstly, the technology for upgrading low rank coal to a bituminous product has yet to be proven in large commercial quantities. Secondly, implementation of the technology and access to upgrading facilities in the industry has yet to be determined. Lastly, there lies an uncertainty as to acceptance of the product and a complete transition to the upgraded coal product is unlikely.
Vann summarises: “Coal upgrading technology has come a long way and can have considerable impact on returns of low rank coal projects in Indonesia. If proven, we expect a significant change in export thermal supply and trade flows. Investor reaction will also likely change to now consider Indonesian projects using this technology as economically attractive options.”
Read the article online at: https://www.worldcoal.com/coal/28102010/coal_upgrading_would_benefit_indonesian_coal_industry/