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Indonesia's decision to move capital to East Kalimantan could disrupt coal mining: sources

Singapore — Market sources expect some disruption to mining activity and stricter environmental standards after the Indonesian government picked the coal-producing region of East Kalimantan to host the country's new capital.

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President Joko Widodo said Monday the new capital would be in East Kalimantan province, which is home to several major thermal coal producers' mines, including Adaro and Indika.

The capital will be between the districts of North Penajam Paser and Kutai Kartanegar, near Samarinda City and the port city of Balikpapan. Both cities are strategic for coal and oil shipments, with Samarinda hosting Indonesia's main coal terminal while Balikpapan is the country's oil hub.

There is no detailed information on the development, but there is talks that mining could be affected, sources said.

"Some are worried that mining activities at the Paser area will be disrupted, and that some of the work contracts will not be extended," said an Indonesian producer.

"Right now we can't do much as we don't have much information," he said, adding that having government services in the province could help clean up the coal industry.

CLEANING UP

"For example, they might clean up illegal mining, and might have better work processes when it comes to collecting mining data, which is good for the industry as a whole," the producer said.

Other sources said that although they expect more environmental regulations, they do not foresee a major policy shift when it comes to the coal mining industry in East Kalimantan.

"I think the government will still need income from coal," a Singapore-based analyst said, adding that there could also be more environmental supervision in the province.

"Mining standard may [be] stricter there, but I don't think it's a big issue," he added.

Another Indonesian producer said other commodities, including steel, nickel and aluminum, would be required to build the new city.

"Domestic coal consumption will be boosted as energy demand will be ramped up, so this will help the coal industry in Indonesia remain attractive," he said.

According to Indonesian officials, construction of the new capital is expected to begin in 2021, and will be completed by 2024.

The relocation is said to help spread economic activity across the country and counter rising sea levels in Jakarta.

-- Hui Min Lee, hui.min.lee@spglobal.com

-- Edited by Jonathan Dart, jonathan.dart@spglobal.com