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Indonesia's Adaro scores 20-year coal-supply deal in Thailand

Miner is hungry for long-term contracts as eco-concerns cloud the fuel's future

Adaro Energy owns one of Indonesia's largest single-site coal mines.

JAKARTA -- Indonesian coal major Adaro Energy's push for long-term stability received a big boost from its recent agreement to supply to the Electricity Generating Authority of Thailand for about 20 years as well as sell a stake in its main mining subsidiary to the state-owned entity.

Adaro Energy's quest to secure stable customers, including power plants it plans to build and manage, comes at a time when growing environmental concerns are making coal-fired power generation less popular.

The EGAT will acquire an 11.53% stake in Adaro Indonesia through its subsidiary, which will purchase all new shares to be issued by the Adaro unit for an estimated $325 million. Adaro Energy will continue to hold the remaining shares in Adaro Indonesia.

An Adaro Energy official said the deal will help the company capture long-term demand for coal and give it the financial cushion needed to cope with rougher times in the coal market.

Cheap and abundant

As environmental regulations have grown more stringent, so too have rules on coal-based power generation. But in emerging Asia, where power demand is surging, coal remains a popular source of energy because of its low cost and wide availability.

Adaro Energy CEO Garibaldi Thohir does not see coal's primacy in the region ending anytime soon.

To ensure that remains the case, Adaro Energy is scouting for long-term supply deals with power plants at home and abroad. It helps that the company owns one of Indonesia's largest single-site coal mines, in southern Kalimantan.

Thohir said his company is keen to find customers elsewhere in Southeast Asia, including Vietnam. But domestic demand is also a key target.

Adaro Energy has high hopes for coal-fueled power plants it is building at home. One high-profile project is a long-term supply deal for a large plant it is constructing in central Java in cooperation with Japanese players Electric Power Development (also known as J-Power) and trading house Itochu. The new facility will have a generation capacity of 2 million kilowatts and is slated to be completed around 2020.

Mining stocks have been trending higher on the Indonesia Stock Exchange since the start of the year, backed by the apparent end of the protracted slump in coal prices. The bourse's mining stock index jumped some 70% between early 2016 and the end of November.

Losing appeal

Tempering optimism in the coal industry over the recovery, however, is growing opposition to the construction of coal-based power plants, a major source of greenhouse gases.

The World Bank and other international lenders, for example, generally do not extend loans to projects to build coal-fired plants. Meanwhile, there are heavy restrictions on the construction of such facilities in the U.S. and Europe.

Britain, for example, declared it will shutter all existing coal-burning plants by 2025, while U.S. President Barack Obama wants to see an effective ban on the construction of such plants. And while President-elect Donald Trump may not follow through on Obama's wishes, there is no denying that coal-fired power generation is on the wane in the U.S.

These factors may eventually force Southeast Asian nations to rethink their heavy reliance on coal for energy. For now, however, demand across the region is only likely to grow. A survey by the Asian Development Bank predicts that coal use there will continue to expand at an annual rate of 4.8% through 2035, faster than any other region in the world.

Along with that growth will no doubt come stronger pressure from the international community to step up the fight against global warming.

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