Indonesia's new coal export mandate may impact contracts, halt trades

A new regulation by Indonesia's energy ministry mandating thermal coal exports to be priced at the domestic index has raised concerns over how term contracts will be honored and spot trade deals will shape up amid resistance and uncertainty from all quarters of the market, sources said.

The domestic reference price called Harga Batubara Acuan, or HBA, which was until now used to determine average coal product prices and royalty payments for exports will now be used as an export price reference, too, from March 1, according to the regulation announced by Indonesia's energy ministry. The regulation indicates that miners cannot export coal at prices lower than what the government sets the HBA at.

So far, most seaborne deals happened on various Indonesian thermal coal price indexes published by independent price reporting agencies.

The HBA comprises prices of four grades of Indonesian thermal coal and miners producing higher or lower grades normalize their values based on the closest index published by the government. "Since HBA has mostly been slightly higher to what price reporting agencies have been publishing, buyers are unlikely to accept revised terms in existing contracts which will increase their net outflows," an India-based end-user importing Indonesian coal said.

Indonesia's Ministry of Energy and Mineral Resources did not respond to queries till the time of publication.

While the risk of term contracts getting canceled stays strong, spot market trading activity is also likely to take a back seat as buyers remain unsure of price direction while sellers wait and watch as to whether the market will accept the new norm of price discovery. Till 1730 Singapore time March 3, Platts did not hear any confirmed offers, bids or trades in the market for Indonesian-origin coal, with market forces only indicating what the prices should be based on supply-demand fundamentals prevalent currently.

Higher HBA dampens sentiment

The government said the HBA will be published bi-monthly, specifically on the 1st and 15th of each month, using a formula giving weightage to average export prices submitted by the miners for sales made in the previous two months. However, market sources say since HBA will be based on a formula taking historical prices into account, it won't reflect the current market conditions, defying basic supply-demand fundamentals that determine prices.

To put things in perspective, the HBA price published by the government on March 1 for low-CV 3,400 kcal/kg GAR coal was at $34.16/mt FOB, while Platts' assessment for the same grade stands at $30.25/mt FOB. Similarly, HBA for 4,100 kcal/kg GAR coal was set at $50.70/mt but Platts assessed the slightly higher grade of coal 4,200 kcal/kg GAR at $48.40/mt FOB.

Two other buyers of Indonesian coal Platts spoke to said they're not likely to continue their contracts if the sellers upwardly revise prices, while two Jakarta-based miners said they don't want a situation where demand slumps due to high HBA prices and stockpile levels rise domestically.

India, China hold back

"Since large miners in Indonesia already sell at a premium, chances are their sale prices will automatically come close to the HBA levels and they have less risk of contracts getting canceled. It's the small and mid-sized miners who may suffer," a mid-sized Indonesian miner said.

The development is likely to create a standstill in the market as it comes at a time when thermal coal demand has been subdued with pricing remaining rangebound for over 10 months. India and China, which account for over 60% of Indonesian exports and currently sitting on sufficient domestic stockpiles, have been in a wait-and-watch mode ever since the new regulation was announced last week, leading to no bids and enquiries in the market.

"I think it'll take some time before the actual impact is understood since India and China are at comfortable levels with stocks and domestic production. The beginning of Ramadan has also led to Indonesia in a quiet business period," said the miner.

Sources say while Indonesia's move is to lift its natural resources price in the international market, if the buyers do not respond, many miners will have to trim production levels this year till the time there is stability in trading activity.