* Coal association warns of 40 pct fall in output
* Seeks delay in hike until coal prices top $100 a tonne
* Royalty hike could lead some smaller miners to cut output (Adds quotes, details)
By Fergus Jensen
JAKARTA, Sept 9 (Reuters) - Indonesia's coal trade group asked the government on Monday to postpone plans to hike royalties on output for some miners to avoid a further blow to an industry already battered by coal prices that are near the lowest in almost four years.
The Indonesian Coal Mining Association warned the world's top thermal coal exporter could see output tumble by as much as 40 percent next year if the government hikes export taxes and royalties paid by mining permit holders, known as IUP.
Indonesia ships around $2 billion worth of coal a month, one of its largest exports by value. A drop in output would exacerbate the country's current account deficit, which is already a concern for investors as Southeast Asia's largest economy fights a weakening rupiah, rising inflation and the exit of foreign capital.
The trade group said the government should hold off on its plans for a royalty hike with coal prices down by more than 15 percent so far this year at around $77 a tonne.
"Anything below $100 a tonne we would ask the government not to increase from the current royalty scheme," Pandu Sjahrir, commercial committee chairman of the Indonesian Coal Mining Association, told reporters. "But if it's above $100, then we can discuss."
Indonesia in January plans to hike royalties for IUP miners, which include PT Perusahaan Perseroan Aneka Tambang and PT Bukit Asam, to between 10 and 13 percent from 3.5 to 7 percent currently. The government postponed the royalty hike this year due to the downturn in coal prices.
The trade group warned that the royalty hike could cause more than half of Indonesia's miners to operate at a loss, leading many to halt production.
"It's cheaper to shut down production than to run a business at a loss," Sjahrir said.
The IUP licenses are normally held by smaller or newer miners so the move will not affect major miners with Coal Contract of Work licenses, such as top producer PT Bumi Resources, which already pay royalties of 13.5 percent.
The industry group supported a royalty hike of 1.5 percent only after coal prices recovered and were trading between $100-110 a tonne.
"The royalties are still being discussed because it's the easiest way for (the government) to increase income," Sjahrir said. "But it won't (increase income) ... what you will have is more illegal mining. That's the biggest issue."
If the royalties were unchanged, Indonesian coal output in 2014 would likely remain steady, he said.
The coal mining group expected benchmark Newcastle thermal coal prices to trade between $77-80 a tonne over the next year, slightly higher than Friday's weekly index price of $76.70.
Indonesia relies on exports of coal, natural gas, palm oil and textiles to offset increasing imports and improve its trade balance sheet. The fourth most populous country recorded its first annual current account deficit in 2012 at $24 billion, and most economists believe that will rise this year.
The deficit, running at an unsustainable level of more than 4 percent of GDP, is heavily skewed by domestic structural issues including fuel price subsidies and a high demand for imported capital goods that suggest it will be hard to tame. (Writing by Randy Fabi; Editing by Tom Hogue)