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Coal Markets May Just Have Been Thrown A Lifeline

Coal Markets May Just Have Been Thrown A Lifeline

There have been rumors the last few months. And last week we got confirmation of a major shift underway in one of the world's biggest bulk commodities.

That's thermal coal. Where it looks as if the world's largest supplier -- Indonesia -- is on the verge of a collapse in output. Related: Warren Buffett Betting Big On Wind Energy In Nebraska

Reuters quoted Pandu Sjahrir, the chairman of the Indonesian Coal Mining Association, as confirming that the country's coal producers are now cutting back output in a major way. With Sjahrir saying that overall Indonesian production could drop to between 350 million and 400 million tons for 2015.

That confirms previous announcements from Indonesia's government that a major production cut is in the works this year. And suggests that the scale of the drop could be one of the largest the coal market has ever seen from this critical exporting nation.

Last year, total Indonesian coal production came in at 458 million tons. Meaning that a fall to the lower end of the range quoted by the Coal Mining Association would imply a 24% reduction in output. Related: Four Key Catalysts To Watch In The Oil Sector

Such a drop looks all but assured, according to chairman Sjahrar, who noted that companies have stopped trying to expand production in order to keep cash flow high -- with producers now almost completely focused on making sure they have "enough cash on hand".

At the same time, Sjahrar said the Coal Mining Association is carefully watching another key trend -- plans to increase coal burning within Indonesia. Specifically, government designs that call for the construction of up to 17 gigawatts of new coal-fired power generation capacity over the next four years.

He noted that such a plan could increase domestic coal demand to as high as 250 million tons per year. A more than 175% increase from current demand of just 90 million tons. Related: Is Solar Energy Ready To Compete With Oil And Other Fossil Fuels?

That combination of falling production and rising local demand could see a reduction in coal exports much larger than anyone in the global market is predicting. Watch for production figures over the coming quarters to confirm the start of this possibly game-changing trend.

Here's to throwing in the towel,

By Dave Forest

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