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Viewpoint: Stronger prices lift Indonesian coal exports

27 Dec 2017 10:48 GMT
Viewpoint: Stronger prices lift Indonesian coal exports

Singapore, 27 December (Argus) — Indonesian coal exports are likely to rise in 2017, driven by strong Asia-Pacific demand, and could increase further in 2018 as mining firms look to boost production. But much will depend on possible Chinese policy changes that could shape demand in the coming year.

Indonesia exported 321mn t of all types of coal in January-October, up by 18.03mn t from a year earlier, according to the latest data from government statistics agency BPS. That puts exports at an annualised rate of around 385mn t for 2017. Indonesia exported 368.89mn t in 2016 as a whole, up slightly from 366.97mn t a year earlier.

The rise in Indonesian exports so far this year has come despite intermittent disruptions as a result of heavy rains. Overseas shipments increased in tandem with higher prices, which have recovered since mid-2016 thanks to higher demand following several years of declines. Imports by main buyer China have also picked up on strong industrial demand.

Prolonged monsoon curbs growth

Exports could have been even higher in 2017 if not for weather disruptions. The rally in coal prices in 2016 encouraged several Indonesian producers to announce significantly higher output targets for 2017, only for the plans to be hampered by heavy rain.

Indonesia's largest producer Bumi Resources said at the start of 2017 it was aiming to raise output by 5-7pc to around 90.8mn-92.6mn t. State-controlled producer Bukit Asam said in February that it was planning to increase its production by 25pc to 24.7mn t in a bid to take advantage of higher seaborne coal prices.

But a prolonged monsoon season in Indonesia's main Kalimantan producing region, which also brought higher-than-average rainfall, resulted in a number of producers undershooting their targets. Bumi and Bukit Asam both produced less than half of their planned full-year output in January-June. And Bumi said in early December that it would miss its goal for this year because of the rains and revised its target down to 87mn t, only slightly higher than its 2016 output of 86.5mn t.

Producers are more optimistic they will be able to raise output in 2018. Bumi plans to increase production by around 10pc to 94mn-95mn t, weather permitting, while Bukit Asam is aiming to boost its output by 20pc to 26.3mn t on expectations of increased demand.

Chinese policy to shape demand

Weather conditions will again play a major role in determining whether or not Indonesian mining firms' production targets will be achieved in 2018, although a big role will also be played by Chinese government policy — both factors that are difficult to predict.

Beijing unexpectedly banned coal imports to some terminals at 12 ports in the south of the country from the start of July. It then stepped up the restrictions, halting imports through the Xinsha terminal at Guangzhou port in southern Guangdong province from early September until the end of the year. The ban was subsequently expanded further to cover Zhuhai port in Guangdong and Fangchenggang port in neighboring Guangxi.

The import restrictions curtailed Chinese deliveries in October and November. But despite this, monthly imports have been mostly higher on a year-on-year basis in 2017.

The government has now started to ease the import restrictions in an attempt to address coal and gas shortages and to cool domestic coal prices through the remainder of the high demand winter heating season. The curbs had earlier only been expected to be removed early in 2018.

The easing of the restrictions is raising the prospect that Chinese import demand in 2018 could be relatively steady compared with the previous two years, something that would be good news for Indonesian producers.

But some market participants expect Beijing to impose new restrictions on the volume and quality of imported coal next year. China could adopt a quota system for power plants that use imported coal, while forbidding the intake of low-quality coal, although nothing has been confirmed and it is unclear if these measures would be workable for utilities. But any such policy could dampen Chinese demand for imported low-heat coal, of which Indonesia is a major producer, just as the country's mining firms are aiming to raise output.