Indonesian coal faces uphill struggle to diversify exports away from China

China represents a huge market for thermal coal, and for regional suppliers there is no way to avoid the dragon. That’s especially true for Indonesia, the world's largest exporter of the commodity.

According to the Bank of Indonesia, in 2017 the mining industry contributed about 4.7% to the Indonesian economy, if the commodity is priced in US dollars.

“It is China, China, China, then number four perhaps is India, followed by Korea, Japan and Taiwan,” said a market source when asked about the demand for Indonesian thermal coal.

China is Indonesia’s top destination for total thermal coal sales (including bituminous coal, sub-bituminous coal and lignite).

Of the total 394 million mt thermal coal exported in 2018, about 31% headed to China and about 27% to India, according to S&P Global Analytics.

“We can’t always sell into China, but it’s inevitable because of the volume,” said one Indonesian producer.

Indonesian producers Platts spoke to said there is always the risk of ‘putting all the eggs in one basket’, leaving coal prices too dependent on China’s import policies.

Late last year, several Chinese ports were reportedly closed for thermal coal seaborne imports and there were often no official statements on the policies, creating frustration for market players.

According to China Customs January data, the country’s total coal import in December slumped 50% from 13.52 million mt in November and 57% on year from 15.8 million mt, showing the impact of the tightened grip.

As 2019 began, customs clearance processes became smoother, but just before the lunar New Year holidays, several sources reported longer-than-usual delays for imported coking and thermal coal of Australian origin.

While Indonesian thermal coal prices have rebounded from the beginning of this year, Australian thermal coal prices have been suppressed as a result of cautious buying.

Though Indonesian coal has not been affected, worries about import curbs are still on the minds of market players, as China tries to keep the annual import volume at the level of 2017.

In 2018, China imported a total of 281.23 million mt of all coal types, up 3.9% on year, China Customs figures showed. China imported 271 million mt of coal in 2017.

Diversification

Several sources said China is unlikely to totally close its door on coal imports as it needs the seaborne cargoes to supplement the domestic market. Nevertheless the Asian giant has embarked on a path to reduce the reliance on coal by boosting natural gas imports.

In addition, China has also implemented coal-to-gas projects and is developing renewable energy, while at the same time increasing domestic coal output.

This might not bode well for Indonesian exporters in the longer term. To deal with the risk of being too reliant on China given the uncertainty of imports, some market sources have taken proactive steps to diversify their portfolio.

For some producers, diversification is already happening, even though it means selling to some other markets at prices below the prevailing market rate.

“This is part of the market strategy of some Indonesian producers, to sell at a lower price level as they want to expand into the markets and build relations with the buyers,” said a Singapore-based trader.

“Ideally, it’s good to diversify, as Southeast Asian countries, for example Vietnam, are on a growth phase,” said an Indonesian producer.

The International Energy Agency forecasts that coal demand in Southeast Asia would grow by 5.7% through 2023, as countries including the Philippines and Vietnam are building new coal-fired power plants as their economies develop.

A Singapore-based market source told Platts that it is possible to spread the demand geographically as the total export volume to other regions could add up significantly.

“But much has to be done in terms of market development,” he said. “This would include setting appropriate credit terms, loan structures as well as allowing power plants in these countries to gain equity in the mines supplying the station,” he noted.

Cutting production

Diversification would not be a straightforward process as coal requirements at power plants in India, Vietnam or Southeast Asian countries might be different, one Singapore-based analyst noted.

“Many of the plants might not be able to use the lower CV coal. While the mid to high CV thermal coal producers are able to diversify their markets, the lower CV ones would likely stick to the Chinese market,” he said.

China is the main market for Indonesian lignite exports. Of the total 85 million mt exported in 2018, 80 million mt were exported to China, S&P Global analytics data showed.

Of the total 263.5 million mt Indonesian sub-bituminous coal exported, China imported 35 million mt.

For Indonesian thermal coal producers with over 90% of cargoes in their portfolio heading to China , it will still be business as usual for now.

“We’ll export as usual, as there’s demand from China,” said a producer of low CV coal.

Meanwhile, the Indonesian government recently set a 2019 coal production target of 480 million mt, compared with a target of 485 million mt in 2018. The government also requires coal miners to allocate about 26% of the production for the domestic market.

Rather than diversify to minimise risk exposure, the Singapore-based analyst suggested that producers should cut output, saving the supply for future use as domestic demand in Indonesia and other Asian countries is expected to rise.

“It is necessary to have a longer-term mindset and cut production significantly to meet future demand instead of increasing output and seeing prices plunge if China shuts its door again,” the analyst added.