Indonesian coal miners tighten belt on unfriendly prices and policies

Indonesian coal miners, especially the ones with lower output volumes, are finding it difficult to sustain themselves in the face of an enduring low-price environment and unfriendly government policies, market sources said.

The demand-starved spot thermal coal market has recorded a continuous drop in prices across all grades since the beginning of 2023, except for a few days in March-April, following a mining accident in China. Simultaneously, excessive royalty imposition has put a dent in the miners' profit margins amid high operating expenses, compelling several miners to reduce their output or even cease production on a temporary basis.

Prices of thermal coal in the Asian spot market have been under pressure over the last six months, as suppliers from across the globe flocked to the region in a quest for buyers, with stockpiles in Europe staying healthy amid negligible coal burn.

On top of that, robust domestic coal output in China and India, coupled with lower industrial consumption in the region, especially in China, have also reduced demand for seaborne coal cargoes, causing a decline in prices.

The latest market prices of thermal coal, especially for grades with low calorific value (CV), are alarmingly close to the producers' cost of production, said a trader based in Indonesia, adding that such risky margins have prevented them from cutting offer prices despite receiving lower bids from buyers.

Currently, the Indonesian miners are spending around $40/mt to produce 3,400 kg/kcal coal in the interior parts of the country, two traders based in Indonesia said, adding that the cost can rise up to $50-$55/mt for the production of 4,200 kg/kcal.

The Kalimantan 3,800 kcal/kg grade coal was priced at $40.50/mt FOB July 28, down from $66.25/mt the same day a year ago, according to data from S&P Global Commodity Insights. The price of this grade had touched the $75/mt level in November-December 2022, when global thermal coal prices surged with the Russia-Ukraine conflict disrupting trade flows and weather-related problems impacting output amid rebounding demand.

Royalty burden

Indonesian miners pay high royalties on their exports as per the new formula for calculating Harga Batubara Acuan (HBA), which is the basis for calculating the amount of royalty producers must pay to the government for each metric ton of coal sold overseas.

Since March, the monthly HBA price of coal of a particular specification has been based on the actual selling price of the cargoes in the previous two months. The levels at which the HBA of different coal grades are priced are said to be higher than the actual selling prices of many miners, resulting in disproportionately higher royalty impost.

An Indonesia-based producer who majorly mines mid-CV coal said that the current situation is particularly challenging for small producers in the South Kalimantan area, bearing a significantly high stripping ratio. The stripping ratio refers to the amount of waste material, or overburden, that needs to be removed to extract a given amount of coal. The removal of such overburden constitutes a major part of their total mining cost, the producer further said.

Shrinking margins

Another Indonesia-based trader who primarily deals with low-CV coal said many miners have tried to lower their cost of production by cutting on mining activities, which comprise 35%-40% of their total operational cost, to cope with the current situation. "However, prices have corrected more than the correction of the miners' cost of production," the trader said, adding that as a result, several miners are barely making margins in the current situation.

Restarting production after a period of output-cut warrants higher cash flow in mining operations. S&P Global recently reported that the Indonesian government's latest mandate for the country's commodity exporters to deposit about a third of their dollar-denominated income from international sales in the domestic financial system is seen to put additional cash-flow pressure on the country's coal miners currently confronting a low-price environment.