The discourse on cutting coal production has resurfaced amid the government’s efforts to safeguard state revenue and energy stability. Several experts argue that reducing coal output would not be an effective way to influence international coal prices.
Dr. Ardyanto Fitrady, a lecturer at the Department of Economics, Faculty of Economics and Business, Universitas Gadjah Mada (FEB UGM), noted that while Indonesia is among the world’s largest coal exporters, it does not possess the largest coal reserves.
Indonesia’s limited coal reserves, he said, are the main factor behind his assessment that production cuts would not have a significant impact on the global market.
“Indonesia holds only about 3 percent of global coal reserves, far below countries such as the United States, which controls around 22 percent, followed by China, India, and Australia. This means our economy is highly exploitative. We extract as much as possible now, while other countries tend to conserve their reserves,” said Dr. Arfie, as he is commonly known at FEB UGM, on Thursday (Jan. 15).
He further emphasized that Indonesia’s coal production cuts would not automatically affect the global market balance. When prices rise and international demand remains high, supply can easily be met by other producing countries.
This contrasts with commodities such as nickel, where Indonesia holds a strategic position as a major player in terms of both reserves and production.
“When nickel production is reduced, the impact is immediately felt on global prices. Coal does not share the same characteristics,” he explained.
He added that the discourse on coal production cuts would likely have only short-term effects. In the medium and long term, such a policy is unlikely to have a significant influence on the global market.
This is because when Indonesia reduces production, supply shortages are quickly filled by other coal-producing countries.
Beyond supply factors, Dr. Arfie pointed out that the quality of Indonesian coal has become a concern for many countries. Much of Indonesia’s coal production is categorized as low-calorie coal, while current global demand trends favor high-calorie coal.
Low-calorie coal tends to generate higher emissions, making it inconsistent with the commitments of many countries to reduce carbon emissions.
This condition has encouraged several countries to be more selective in choosing coal types, with some even beginning to shift toward more environmentally friendly alternative energy sources.
Dr. Arfie argued that coal is, in fact, only one of many energy sources. Beyond coal, there is natural gas, a fossil fuel with lower emissions, as well as renewable energy sources such as solar and wind power.
“Substitution does not only come from other supplier countries, but also from other types of energy. Therefore, if the goal of cutting production is to raise coal prices, the impact will be neither significant nor lasting. There may be a price increase, but it will be limited and very short-lived,” he elaborated.
Regarding the impact on state revenue, Dr. Arfie viewed the coal production cut policy as unlikely to have a significant effect. State revenue ultimately depends on the product of price and production volume, and when prices increase, but production volumes decline more sharply, total revenue could actually decrease.
“From the perspective of effectiveness in increasing state revenue, this policy needs to be reviewed,” he said.
Responding to the policy’s potential impact on the trade balance, Dr. Arfie explained that cutting coal production could instead generate negative effects. A reduction in production would directly lead to lower coal export volumes, while demand from several major export destinations is also weakening.
He cited that Indonesia’s coal exports to China have reportedly declined by around 30 percent, while exports to India have fallen by approximately 15 percent. This situation further limits coal’s contribution to the trade balance surplus.
He observed that coal companies would bear the greatest risks, as the policy could reduce sales volumes and corporate profitability.
Coal profit visibility remains relatively clear as long as reserves are available, but such a policy could undermine business certainty for companies that depend heavily on long-term planning and policy stability.
If production restrictions were applied to other mineral commodities, such as nickel, the impact would be far more pronounced.
For nickel, he said, Indonesia holds a dominant position in the global market, both in terms of reserves and production. Given its strategic role, limiting nickel production could directly affect global prices.
“This is different from coal, whose market can be more easily substituted by other countries,” he explained.
Dr. Arfie cautioned that there are significant risks that must be anticipated from coal production cut policies, particularly for mining companies. Before exploitation, the coal industry should undertake long-term planning that includes reserve estimation, investment, and projections of capital returns and profits.
“From a financial perspective, coal is actually very profitable, and its profit visibility is quite clear as long as reserves remain. I am deeply concerned that this policy could undermine that certainty,” the expert said.
He also added that Indonesia already has a Domestic Market Obligation (DMO) mechanism that allocates 25 percent of coal production to domestic needs at a maximum price of USD 70 per ton.
Under this mechanism, production cuts are not expected to significantly disrupt the national electricity supply. However, from an energy transition perspective, the DMO policy and domestic coal pricing could instead hinder the development of renewable energy.
“Coal prices for electricity in Indonesia appear very cheap compared to renewable energy. This condition makes it difficult for renewable energy to compete,” he concluded.
Reporter: FEB UGM/Kurnia Ekaptiningrum
Author: Agung Nugroho
Post-editor: Rajendra Arya
Photographs: Freepik and FEB UGM