Higher long-term deals with China keep Indonesia's thermal coal export steady despite weak spot demand

Indonesia's thermal coal exports remained steady in the first five months of the year despite weak spot demand due to high stocks and slower growth of coal-based power generation, thanks to higher volumes of long-term contracts with China.

Additionally, rising coal demand from Indonesia's nickel smelter industry has provided a silver lining in an otherwise lackluster market where prices have been mostly under pressure.

Indonesia's thermal coal exports totaled 47.4 million mt in May, the highest since October, S&P Global Commodities At Sea data showed. Cumulative thermal coal exports over January-May reached 220.70 million mt, up 9.74% year on year. Coal exports to China alone during this period were 90 million mt, accounting for around 40% of total exports.

Indonesia exported 502.9 million mt of thermal coal in 2023 , with around 43% of that going to China, according to the same data.

Platts, part of S&P Global Commodity Insights, assessed FOB Kalimantan 4,200 kcal/kg GAR coal at an average of $56.55/mt over January-May, down 23.37% year on year. Platts assessed the grade at $53.95/mt FOB on June 20.

"The rise in imports could primarily be attributed to buyers' long-term imports that have become quite strategically systematic lately," a producer based in Indonesia said. Chinese buyers have booked most of their required volumes under term contracts, with tenures averaging between one and one-and-a-half years. They are likely to fulfill only about 10% of demand from the spot market, the producer added.

This situation has given buyers more leverage to negotiate on their own terms, keeping fixed-price trades limited, the source further explained.

However, this has also led to a reluctance among producers to lower offers despite receiving significantly low bids due to subdued demand. "Producers are in no rush to liquidate cargoes as they have very few left for spot market," said a Singapore-based trader.

"For 2024 delivery, Chinese buyers started sealing term contracts at the end of 2023," another Indonesia-based producer said. Currently, buyers prefer making term deals on index-linked prices to reduce the chances of defaulting in an otherwise volatile spot market, the producer said.

A third Indonesia-based producer said only 15% of their production was set aside for the spot market.

Chinese ports faced record congestion in the first few weeks of June, with a waiting time of up to 11 days to offload the stock due to the arrival of higher number of cargoes booked via long-term contracts, multiple sources said.

Demand from nickel smelters on the rise

The recent upsurge in demand from the country's nickel smelters also played a pivotal role in producers' total sales. "Unlike the power sector, miners can supply to smelters without a ceiling price, which has helped them maintain a healthy margin," said a trader based in Indonesia.

While last year the total supply to these smelters was around 60 million-70 million mt, this year supply could rise to 90 million-100 million mt, multiple sources said. "We are further expecting at least 10 million-15 million mt higher supply for the upcoming year," an Indonesia-based miner added.

Indonesia is projected to produce 43.9% of the world's nickel by 2027, according to Market Intelligence data.

As the Asian thermal coal market saw a significant fall in demand for seaborne cargoes, multiple traders chose to liquidate cargoes at significant discounts the to index. Having sold higher cargoes for term contracts, many Indonesian miners were heard to be choosing to cater to nickel smelters.

"We have sealed a higher number of deals with the smelters, which has helped us nearly achieve our sales target for June," another Indonesia-based trader said.

Nickel smelting is a power-intensive industry, as processing nickel requires fueling boilers at high temperatures. This has also led to an increasing number of captive power plants in the country. According to a report by CAS, 16 more nickel smelting units are likely to start construction in 2024.

Indonesia has been facing unexpected rainfall since May in major coal-producing provinces like Kalimantan and Sumatra, affecting production at small and mid-sized mines. Several miners have complained about lagging behind in their total coal output targets. Additionally, higher prices of heavy mining equipment amid falling global thermal coal prices have also restricted them from scaling up productions.