INTERVIEW: Indonesian coal may find homes in Europe amid volatile prices -- ICMA

A disrupted global market may lead to Indonesian coal finding new homes in Europe as the ongoing Russia-Ukraine conflict continues to create turmoil in trade flows and is expected keep global prices of the fossil fuel volatile over the next six-seven months, Indonesian Coal Mining Association Director Pandu Sjahrir told S&P Global Commodity Insights.

"I think the [Russia-Ukraine] war also adds a lot of uncertainty though I can give you a macro view; there is going to be uncertainty in the next 6-7 months," he said, adding that there would be further disruptions in shipments and global supplies. "With respect to the prices, there is going to be increased volatility."

Stating that sanctions on Russian coal are impacting supply to Europe, Sjahrir said Indonesian miners were looking to supply coal to European buyers, adding some miners have already explored markets like Spain, Poland and Italy.

Despite the surge in thermal coal prices globally, increasing production to meet high demand in a tightly supplied market has proven to be a problem in Indonesia, Sjahrir said.

Indonesia has set a target of 663 million mt coal production in 2022, higher than previous years, on expectations of more demand. While the production levels are comfortable to achieve, there are issues like supply chain disruption and inflationary pressure on costs that might impact prices, he said.

Equipment woes hurt output

Even though European buyers were expected to look for alternatives to Russian coal in Indonesia, it would be difficult for miners to step up production, Sjahrir said.

"There are issues related to supply chain ... it would probably take 18 months for the contractors to get new equipment, especially because of the war. It is even difficult to estimate the prices of equipment in these conditions," he said.

"A lot of these equipment come from other markets such as the US, Japan and China," he said, adding finance options for equipment meant to boost coal output are also limited amid the green finance policy initiatives.

The difficulty in raising production has been observed in the figures since 2019, with COVID-19 related restrictions playing a major role. Further, issues relating to mining equipment, unavailability of ships and barges, and difficulty in availing finance for expanding production have dampened output plans.

The realized coal production in Indonesia was at 616.16 million mt in 2019, 565.69 million mt in 2020 and 608.89 million mt in 2021, according to data by Indonesia's Ministry of Energy and Mineral Resources.

Despite the surge in the price of thermal coal globally after Russia's invasion of Ukraine, Indonesia has seen difficulty in boosting production. The Kalimantan 4,200 kcal/kg GAR price has shot up to $104.95/mt FOB on March 28 from $77.05/mt on Feb. 23, a 36% jump, according to data by S&P Global.

DMO rules need revision

Fresh sources of demand, rising domestic coal consumption and a tight global seaborne thermal coal market call for a revision of Indonesia's domestic market obligation regulations, Sjahrir said.

"The world has changed from the time the DMO was set in 2015-16. I think there must be a revision in the way we look at it," Sjahrir said.

Under DMO, coal producers need to supply 25% of their output to the domestic market -- primarily to state-owned PT Perusahaan Listrik Negara at a capped price -- which according to the miners is way below export prices, leaving little room for healthy margins.

"See the significant divergence in coal prices [between domestic and global]; that will create further issues with respect to supplying to PLN," he said.

Indonesia imposed a blanket ban on thermal coal exports in January after stockpiles at PLN's power plants slipped to critical levels due to non-compliance of DMO by a few miners. The export ban created an upheaval in the seaborne coal markets in Asia, leading to backlogs, supply tightness and consequently higher prices.

To improve compliance, the government now does a bimonthly review of DMO fulfillment instead of a yearly one. A new mechanism of monetary penalties has also been introduced, and in some cases an export ban may be reintroduced for a few miners, according to sources.

For power plant consumption, the price of procurement has been set at $70/mt for 6,322 kcal/kg GAR coal, with 8% moisture, 0.8% sulfur and 15% ash. PLN typically uses coal grades ranging from 4,200 kcal/kg GAR to 5,000 kcal/kg GAR.

The price cap for domestic supply should be a minimum of $90/mt, Sjahrir said.

According to latest projections by PLN, the state-owned power company and the independent power producers will consume 127.1 million mt thermal coal in 2022.

"These are the things to be considered apart from supply and demand numbers. Logistics is going to be an increasingly serious concern," he said.

"Because the spread between the prices of domestic coal supplied to PLN and the existing price of global coal is becoming wider, there will be potentially further disruptions happening."