* Falling coal prices hurting Indonesia's small producers
* Some will close by year-end -industry association
By Michael Taylor
JAKARTA, June 18 (Reuters) - Plunging thermal coal prices will force some small and low-margin producers in Indonesia out of business before year-end, an industry group said, cutting output capacity in the world's top exporter.
The benchmark for Asian coal prices has dropped 16 percent so far this year and has traded at its lowest level since late 2009 on fears of slowing growth in demand from China, the world's No.2 economy. It dropped to $72.38 a tonne in the week to June 13.
"It is in panic mode," said Bob Kamandanu, chairman of Indonesia's Coal Mining Association, when asked about the industry.
"Towards the end of the year, if there is no good news and if the price stays between $72-$73 ... some companies will stop and go out of business," he told Reuters on Wednesday.
But he added that Indonesian production would likely remain flat this year and next at around 420 million tonnes, as a possible 30-million tonne reduction in output as small mines closed would be offset as larger companies ramped up mining.
A Reuters survey of the top six producers in March found all aimed to boost production this year to compensate for continuing low prices. Those firms include Bumi Resources, Adaro and Berau Coal Energy.
Domestic coal demand will jump 29 percent to 90 million tonnes this year and remain unchanged in 2015, said Kamandanu, as more power plants start operating in the Southeast Asian nation.
Top overseas buyers of Indonesian thermal coal include China, India, South Korea, Japan and Taiwan, said Kamandanu, adding that prices could recover to average $80 a tonne in the second half of next year.
Indonesia is considering new regulations to limit coal production and tighten controls on exports, government officials said earlier this month, and could introduce the rules by early July.
But with campaigning underway ahead of the presidential election on July 9 and a new government to be inaugurated in October, Kamandanu urged the government to stop.
"Don't do anything - let a new government change things," said Kamandanu, who is also the chief executive at exploration firm PT Delma Mining Corporation.
"I want it to be put on hold. Let this be the responsibility of the new government."
The outgoing administration of President Susilo Bambang Yudhoyono has also been mulling a hike in royalties paid on coal sales by holders of so-called IUP mining licences, from the current 3-7 percent.
The government has proposed raising royalties to 7-12 percent when benchmark prices go above $80 a tonne, said Kamandanu, whose group is instead lobbying for a $100 threshold and escalating royalty payments from that level.
IUP licences are normally held by smaller or newer miners so any change to royalties would not affect major miners that typically hold Coal Contract of Work permits, under which they pay 13.5 percent.
Kamandanu also called for more action to crack down on illegal mining.
Editing by Joseph Radford