For coal-exporting countries such as Indonesia and Australia the past few years have been little more than an endless stream of bad news. Coal prices have hit record lows, exports have plummeted and financially leveraged mining giants have watched their balance sheets slide precipitously from black to red.



No surprise then that for coal producers the sudden uplift in global coal prices in June and July felt like awakening from a nightmare.



But it is a false dawn. And ignoring reality, however unpalatable, will only result in longer-term economic pain.



The driver of the structural decline of seaborne thermal coal is a global energy transition away from polluting power toward renewable energy, combined with energy efficiency. Coal is being overtaken by a better technology, like your smartphone replacing a phone box.



As countries shift, inevitably, the first casualty will be expensive imported resources such as coal and gas. These seismic changes can be witnessed acutely in China and India, which are the primary importers of Indonesian coal.



Indian Energy Minister Piyush Goyal has made it repeatedly clear that India’s reliance on coal imports is not sustainable. In May 2015, the minister stated: “We are confident that in the next year or two, we will be able to stop imports of thermal coal”.



Many in the international community greeted these claims with skepticism, but it is impossible to ignore the data. India’s coal imports declined 6 percent year on year in 2015/2016 to 200 million tons (Mt). Minister Goyal forecast this month that imports will fall another 20 percent to 160 tons in 2016/2017. India is also firmly on track to develop 100 GW of solar power by 2021-2022. Billions of dollars in private corporate capital has poured into India over the last two years from major global players and as consequence of the growth, solar power is now cheaper than new imported coal-fired power generation.



The impact on imports is the predictable decline.



The story in China is similar. Aiming to cut pollution and emissions, and compounded by a decline in demand for energy due to the shift to less resource intensive development in the country, China’s coal usage peaked in 2013 and has dropped steadily ever since. In the first six months of 2016 alone, China installed a record 20GW of solar.



Which leads us to the reason coal prices have risen in June and July.



The drive for cleaner energy has had a devastating effect on the domestic Chinese coal industry, which is in the process of shedding 1.2 million mining jobs, leaving the sector in a financially parlous state that is putting systemic pressures on the Chinese banking system. In order to slow the coal crash and implement a more measured phase out, the Chinese government in April 2016 stepped in to reduce the number of days mines can produce coal from 330 to 276 in a year.



As a consequence, China has found itself in a short-term situation where the decline in coal production is outstripping the decline in demand and hence imported coal has been required to make up the shortfall. As a result, thermal coal imports in July 2016 rose 31 percent year-on-year to 9.3 million tons, the first increase in 30 months.



Coal will remain the dominant source of power in China for decades to come. But as the Chinese Government prioritizes its struggling domestic suppliers, we will quickly see this temporary imbalance rectified and the demand for seaborne thermal coal will once again drop.



The worst case scenario for Indonesia would be to now increase domestic production, which in itself would serve to once again depress prices. The best approach, as with all things, is to take a clear-eyed view of the forces at play. The days of a profitable seaborne thermal coal sector are over. But for those who take on the challenge, such as India, the investment opportunities from the global transition to renewable energy and energy efficiency are there for all to see.



Instead, the Indonesian coal mining industry is hoping for a massive increase in domestic consumption to boost its waning fortunes. If President Joko ‘‘Jokowi” Widodo’s 35 GW program is completed, the Ministry of Energy and Natural Resources estimates that thermal coal demand will grow from 82.6 million tons to 179.4 million tons by 2020. Yet the likelihood of all these coal plants attracting the necessary foreign financing and resolving the myriad land and permitting issues in the next few years is low.



In addition, the implication of this approach is that Indonesians would be saddled with worsening air and water pollution and increasing carbon emissions in order to prop up a sunset industry that is on its way out in most parts of the world. Is this really worth the sacrifice?



The sooner Indonesia too embraces this shift away from coal, the sooner it can transform its energy system and economy.

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The writer is IEEFA’s director of Energy Finance Studies, Australasia.

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