Global decarbonisation may weaken Indonesia's coal exports but boost base metals: Citi

GLOBAL decarbonisation will likely weaken Indonesia's coal exports in the medium to long term, but this could be mitigated by a pickup in exports of base metals, Citi economists said in a July 6 note.

Decarbonisation involves a shift away from fossil fuels such as coal and towards renewables, in a bid to lower greenhouse gas emissions. Metals such as nickel and copper are central in this, being needed for renewable power generation, battery storage, electric vehicles, charging stations and related grid infrastructure.

Indonesia is estimated to have the world's largest share of nickel reserves at around 12 per cent, and has the world's second-largest copper mine.

Meanwhile, although Indonesia's coal export destinations have announced plans to shift away from coal, many have ongoing coal power projects that will only begin operating in the years ahead, which could support demand for Indonesian coal in the short term.

These include India, which has coal capacity slated to come on-line through 2025, and Asean markets such as Vietnam.

"Consequently, it is possible that in the short term, basic material exports could hit a 'sweetspot', marked by a combination of positive demand growth for both coal and decarbonisation metals," said the report.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

Another major commodity export, palm oil, is likely to see slower but not reversed growth. In 2019, the European Union (EU) restricted the use of palm oil for biofuel, with Indonesia's palm oil exports to the EU stagnating since.

But Indonesian palm oil is exported to over 100 jurisdictions, and palm oil is expected to see stable to rising global demand for its use in food.

The decarbonisation trend is expected to have a limited fiscal impact on Indonesia, as the bulk of the government's natural resource revenues come not from coal, but from oil and gas.

Non-oil mining revenues averaged just 0.2 per cent of gross domestic product in the past five years, compared to 0.6 per cent for direct oil and gas revenues.

Furthermore, coal mining may continue for domestic use in the longer term, with the government thus having the potential to extract coal mining royalties.

And while revenues from oil and gas have been on the decline, this is for reasons other than decarbonisation: ageing oil fields and a lack of exploration or investment in new wells.

Indonesia's own climate policies, however, will require fiscal support. Aims such as increasing the share of renewable energy and moving to electric vehicles will likely require tax incentives or subsidies, at least at the onset.

Nonetheless, while these may pose headwinds, they may not derail fiscal consolidation, said the report. Higher spending can be accompanied by offsetting revenue policies, such as carbon taxes.

The biggest issue to tackle in Indonesia's climate efforts is deforestation, which represents the bulk of the country's greenhouse gas emissions.

Yet in the medium term, the opportunity cost of reducing deforestation could remain high, as the cleared land tends to be used for plantations - including palm oil, demand for which is expected to rise.

On other fronts, it is unclear if there is a critical mass of domestic support for the transition to renewable energy. Building this mass may require more investment in domestic capacity to produce the equipment and machinery needed for renewable energy plants.

One positive force that could drive Indonesia's climate efforts is scrutiny from global investors sensitive to ESG (environmental, social and governance) issues. The availability of external funding for coal power plants is also likely to shrink.

"Climate policies that overlap with import substitution objectives could receive broader support," noted the economists. This includes moving towards electric vehicles, which would help cut petrol imports.

Fiscal authorities will also push for climate policies that overlap with fiscal consolidation objectives, such as carbon taxes.