Viewpoint: Indonesian coal sellers plan amid volatility

  • Market: Coal
  • 31/12/18

Regulatory obstacles in Indonesia could hamper coal production in 2019 and uncertainty about China's import policy could also curb exports, even though a number of producers have announced tentative plans to raise output in the coming year.

A period of high prices that began in 2016 and lasted throughout much of 2018 on strong demand from main buyers China and India has prompted Indonesian producers to raise output where possible and several mining companies have announced plans to raise production even further in 2019.

China's coal consumption rose during 2018 on increased demand from its electricity, steel, construction and chemical industries. Total imports of all types of coal reached 271.19mn t in the first 11 months, already narrowly exceeding the country's import quota for full-year 2018, which had been set at parity to 2017 imports. India's overall imports have also been driven up by surging power demand amid industrial and manufacturing growth, with its imports of Indonesian coal amounting to the lion's share at 92.4mn t in the first 11 months, or just under 93.17mn t for full-year 2017, according to customs data.

Indonesia exported 356.5mn t of all types of coal in January-October, up by 35.5mn t from a year earlier, according to the latest data from government statistics agency BPS. This could theoretically put exports at an annualised rate of around 427.8mn t for 2018, although the Argus Seaborne Thermal Coal Outlook has forecast these exports at closer to 415mn t, given the weaker China seaborne demand from November. But even projected Indonesian exports of 415mn t would substantially exceed those of 2017 when Indonesia exported 389.47mn t, up from 369mn t in 2016.

The government raised the 2018 production target to 507mn t in September, although the Indonesian coal mining association (APBI-ICMA) does not expect the industry to reach this target, given the big drop in prices from November when China announced plans to tighten enforcement of its import quotas. Prices for the most actively traded fob Indonesian GAR 4,200 kcal/kg (NAR 3,800 kcal/kg) coal fell by 33pc from $47.19/t at the start of the year to $30.52/t on 21 December, according to Argus assessments, with the sharpest falls registered last month when a low of $28.73/t was recorded.

APBI-ICMA has also said it expects output to fall slightly in 2019 from 2018 to 480mn-500mn t. The likely total production for 2018 was not provided, although the government revised the production target in September from 485mn t to 507mn t, but did not announce any change to the domestic market obligation (DMO) that had been set at 121mn t.

Production plans

Some of Indonesia's biggest producers such as Bumi Resources, Bukit Asam, Geo Energy, Delta Dunia and Harum Energy are looking to raise output in 2019 amid anticipated increased demand from India as well as new emerging markets such as Vietnam, Thailand and Cambodia, even as uncertainty looms over China's import quotas for 2019. But the Indonesian government has not set an output target for 2019 yet or a DMO, which is normally set at 25pc of a producer's output. This is making it harder for many producers to plan and industry insiders say some of the companies' announcements about 2019 production hikes could prove overly ambitious.

Indonesia's largest coal mining firm, Bumi Resources, has said it aims to boost its production in 2019 to 90mn t, subject to approval from the energy and mining ministry (ESDM), from an expected 83mn t in 2018. The firm produced 62.6mn t in January-September.

State-owned producer Bukit Asam has said it is aiming to raise its production by 7-8pc in 2019 to meet strong domestic power generation demand and on expectations of increased interest from Japan, Taiwan and the Philippines in its high-calorific value (CV) coal. The firm, which produced 19.7mn t in January-September, says it is on track to achieve its 25.54mn t target for 2018.

Bukit Asam is focusing on boosting output of high-quality coal GAR 6,100 kcal/kg and 6,400 kcal/kg coal from around 900,000t in 2018 to 3mn t in 2019 to take advantage of the higher prices these grades command in the premium seaborne markets of Japan, Taiwan and the Philippines.

Geo Energy, which was earlier in 2018 targeting 11mn-12mn t of coal output, will end up producing 7.5mn t, down slightly from 7.7mn t in 2017, largely because of China's imports curbs, the company said. Chinese buyers take up 90-95pc of Geo Energy's production. Geo Energy is targeting 14mn t of coal production in 2019, as it expects to take advantage of China lifting its imports curbs post the lunar new year from February 2019.

Delta Dunia produced 4.6mn t of coal in October, taking total output for January-October to 34.9mn t from 33.9mn t during the same 10 months in 2017. The company now expects to achieve output of 5mn t/month for November and December to hit the lower end of its 45mn-50mn t production target.

Harum Energy aims to produce 5mn-5.5mn t of coal in 2019, an increase of at least 8.7pc on the company's expected 2018 output of 4.6mn t, in a bid to offset the effects of lower coal prices on company revenues. In particular, Harum aims to develop sales in emerging markets in Asia, such as Vietnam, the Philippines and Bangladesh. The largest foreign markets that Harum Energy currently supplies to are South Korea, Malaysia and China, which made up 34pc, 25pc and 19pc, respectively, of the company's orders in January-September.

Some Indonesian producers are positioning themselves more defensively and starting to consider reducing output, although few have gone on the record announcing this. Others plan to keep output stable in 2019 given lower prices and uncertainty around China's buying. Indonesian mining firm Kideco plans to keep production flat in 2019 at around 34mn t from 2018.

Indonesian coal mining company Adaro Energy has set a production target of 54mn-56mn t for 2019, it said in its work plan and budget submitted to the ESDM. Adaro will keep its 2019 production targets unchanged year on year amid uncertainty over Chinese import demand in the near term.

Sticking points

But despite plans by some firms to raise output, regulatory obstacles in Indonesia could further hamper coal production in 2019, according to APBI-ICMA. The biggest potential sticking points are uncertainty surrounding mining licences and some companies' struggle to meet their DMOs.

Legacy mining licences, known as PKP2B contracts, will begin to lapse in 2019 and the process for extending or converting these remains unclear. This might force firms to freeze output expansion plans while they await clarification. Eight first-generation PKP2B concessions are due to expire in 2019-26, starting with Harum Energy's Tanito Harum concession on 14 January.

Another factor that could limit production is the DMO requirement for producers to sell 25pc of their coal production on the domestic market. Firms that fail to meet this requirement are prohibited from increasing output and face having their output limited to four times their domestic sales volume. Some mining companies, especially the smaller ones, have struggled to sell their coal domestically because they do not produce the required specifications. Domestic power producers require coal in a 4,200-5,000 kcal/kg GAR range.

APBI-ICMA has also warned that it expects Indonesia's dominant state-owned power producer PLN to consume only 22pc of the 25pc of production set aside under the DMO in 2018

The DMO was set at around 121mn t for 2018, but the association expects PLN to take around 92mn t at most, leaving around 29mn t unallocated. Although there are a few small private power generators, mainly in the form of captive power plants, these are not likely to make a serious dent on the unallocated volumes. This is also contributing to planning difficulties for producers as they try to second-guess likely Indonesian government policy on DMO targets as well as unpredictable Chinese demand.


Sharelinkedin-sharetwitter-sharefacebook-shareemail-share

Related news posts

Argus illuminates the markets by putting a lens on the areas that matter most to you. The market news and commentary we publish reveals vital insights that enable you to make stronger, well-informed decisions. Explore a selection of news stories related to this one.

News

Fourth temporary Baltimore shipping channel to open


24/04/24
News
24/04/24

Fourth temporary Baltimore shipping channel to open

Cheyenne, 24 April (Argus) — The Port of Baltimore is preparing to open another, deeper temporary shipping channel this week so at least some of the vessels that have been stranded at the port can depart. The new 35-ft deep Fort McHenry Limited Access Channel is scheduled to be open to commercially essential vessels from 25 April until 6am ET on 29 April or 30 April "if weather adversely impacts vessel transits," according to a US Coast Guard Marine Safety Information Bulletin published on 22 April and distributed by the Maryland Port Administration on 23 April. The channel will then be closed again until 10 May. The channel also will have a 300-ft horizontal clearance and 214ft of vertical clearance. This will be the fourth and largest channel opened by the captain of the port since the 26 March collapse of the Francis Scott Key Bridge. The Unified Command has said that the new limited access channel should allow passage of about 75pc of the types of vessels that typically move through the waterway. Vessels that have greater than 60,000 long tons (60,963 metric tonnes) of displacement will likely not be able to move through the channel and those between 50,000-60,000 long tons of displacement "will be closely evaluated" for transit. There were seven vessels blocked from exiting the port as of 27 March, including three dry bulk carriers, one vehicle carrier and one tanker, according to the US Department of Transportation. Two of the bulk carriers at berth in Baltimore are Kamsarmax-sized coal vessels, data from analytics firm Kpler show. The US Army Corps of Engineers still expects to reopen the Port of Baltimore's permanent 700-foot wide, 50-foot deep channel by the end of May. The Key Bridge collapsed into the water late last month when the 116,851dwt container ship Dali lost power and crashed into a bridge support column. Salvage teams have been working to remove debris from the water and containers from the ship in order to clear the main channel. By Courtney Schlisserman Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

EU adopts sustainability due diligence rules


24/04/24
News
24/04/24

EU adopts sustainability due diligence rules

Brussels, 24 April (Argus) — The European parliament has formally approved a Corporate Sustainability Due Diligence Directive (CSDDD), which will require large EU companies to make "best efforts" for climate change mitigation. The law will mean that relevant companies will have to adopt a transition plan to make their business model compatible with the 1.5°C temperature limit set by the Paris climate agreement. It will apply to EU firms with over 1,000 employees and turnover above €450mn ($481mn). It will also apply to some companies with franchising or licensing agreements in the EU. The directive requires transposition into different EU national laws. It obliges member states to ensure relevant firms adopt and put into effect a transition plan for climate change mitigation. Transition plans must aim to "ensure, through best efforts" that business models and company strategies are compatible with transition to a sustainable economy, limiting global warming to 1.5°C and achieving climate neutrality by 2050. Where "relevant", the plans should limit "exposure of the company to coal-, oil- and gas-related activities". Despite a provisional agreement, EU states initially failed to formally approve the provisional agreement reached with parliament in December, after some member states blocked the deal. Parliament's adoption — at its last session before breaking for EU elections — paves the way for entry into force later in the year. Industry has obtained clarification, in the non-legal introduction, that the directive's requirements are an "obligation of means and not of results" with "due account" being given to progress that firms make as well as the "complexity and evolving" nature of climate transitioning. Still, firms' climate transition plans need to contain "time-bound" targets for 2030 and in five-year intervals until 2050 based on "conclusive scientific" evidence and, where appropriate, absolute reduction targets for greenhouse gas (GHG) for direct scope 1 emissions as well as scope 2 and scope 3 emissions. Scope 1 refers to emissions directly stemming from an organisation's activity, while scope 2 refers to indirect emissions from purchased energy. Scope 3 refers to end-use emissions. "It is alarming to see how member states weakened the law in the final negotiations. And the law lacks an effective mechanism to force companies to reduce their climate emissions," said Paul de Clerck, campaigner at non-governmental organisation Friends of the Earth Europe, pointing to "gaping" loopholes in the adopted text. By Dafydd ab Iago Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

Ayala’s South Luzon coal plant eligible for retirement


24/04/24
News
24/04/24

Ayala’s South Luzon coal plant eligible for retirement

Manila, 24 April (Argus) — Early decommissioning of coal-fired power plants in the Philippines has advanced with utility Ayala Energy's 246MW South Luzon Thermal Energy eligible for the US-based Rockefeller Foundation's coal to clean credit initiative (CCCI). The Rockefeller Foundation is a non-profit philanthropic group that creates and implements programmes in partnership with the private sector across different industries aimed at reversing climate change. Ayala has been working with the foundation to further shorten South Luzon's operating life from an original decommissioning date of 2040 to 2030. Doing so could result in the reduction of up to 19mn t of carbon emissions, Ayala said. An assessment by the Rocky Mountain Institute, the technical partner of the foundation for its energy-related projects, found that an early retirement date of 2030 instead of the original retirement date of 2040 could yield positive financial, social and climate outcomes. But decommissioning by this date will require carbon finance. Carbon financing will need to cover costs associated with the early retirement of the power plant's power supply contract, costs associated with 100pc clean replacement of the plant's power generation, plant decommissioning and transition support for workers affected by the plant's early closure, Ayala said. Ayala's listed arm ACEN welcomed the plant's eligibility for the CCCI programme, as its retirement is part of the company's goal to have its power generation portfolio composed solely of 100pc renewable sources by 2025. The Philippines' Department of Energy (DOE) said if successful, the pilot programme could serve as a basis for the development of other early retirement efforts as part of the country's plan to reduce carbon emissions. The DOE is seeking the early decommissioning of coal-fired power plants older than 20 years with a combined total capacity of 3.8GW by 2050, as part of the Philippines' transition to clean energy. By Antonio delos Reyes Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

US-led carbon initiative misses launch date


23/04/24
News
23/04/24

US-led carbon initiative misses launch date

Houston, 23 April (Argus) — The Energy Transition Accelerator (ETA), a global initiative to use voluntary carbon market revenue to speed the decarbonization of developing countries' power sectors, has missed its planned Earth Day launch but continues to prepare for doing business. At the Cop 28 climate conference in Dubai last year, the initiative's leaders said they hoped to formally launch the program on 22 April 2024 . That didn't happen, but the program's leaders last week announced that the US climate think tank Center for Climate and Energy Solutions will serve as the ETA's new secretariat and that former US special presidential envoy for climate John Kerry will serve as the honorary chair of an eight-member senior consultative group that will advise the ETA's design and operations. The ETA plans to spend 2024 "building" on a framework for crediting projects they released last year. ETA leaders said the initiative could ultimately generate tens of billions of dollars in finances through 2035. The ETA also said the Dominican Republic had formed a government working group to "guide its engagement" as a potential pilot country for investments and that the Philippines would formally participate as an "observer country" rather than as a direct participant immediately. The ETA is still engaging Chile and Nigeria as potential pilot countries too, the initiative told Argus . The ETA is being developed by the US State Department, the Rockefeller Foundation, and the Bezos Earth Fund and would be funded with money from the voluntary carbon market. The initiative's ultimate goal is to allow corporate and government offset buyers to help developing countries decarbonize their power sectors through large projects that accelerate the retirement of coal-fired power plants and build new renewable generation. As of now, the ETA's timeline for future changes and negotiations with countries and companies is unclear. The program's goals are ambitious, especially at a time when scrutiny of some voluntary carbon market projects from environmentalists has weighed on corporate offset demand. By Mia Westley Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Business intelligence reports

Get concise, trustworthy and unbiased analysis of the latest trends and developments in oil and energy markets. These reports are specially created for decision makers who don’t have time to track markets day-by-day, minute-by-minute.

Learn more