Indonesian rains shake up thermal coal market

Heavy rains in Indonesia have left some buyers of imported thermal coal with a tricky dilemma — wait on the sidelines for a possible price dip or bite the bullet.

Heavy rainfall in the past few days in parts of Indonesia's main Kalimantan coal-producing region has caused flooding at several mines, creating the potential for supply tightness and further price gains. The downpour could well be a precursor to the upcoming monsoon season in the southeast Asian nation that could keep availability tight.

A number of coal producers are seeking changes to loading schedules for shipments, while others have declared force majeure on shipments. A rough estimate suggests the current situation will disrupt 4mn-5mn t/month, mainly from South Kalimantan, an Indonesia-based trader said. The country, which is the biggest thermal coal exporter in the world, shipped 36.7mn t of coal in June, according to customs data.

A state of emergency has been declared in South Kalimantan's Tanah Bumbu regency until 17 September because of heavy rains and flooding. The rains have also disrupted coal logistics in other parts of Kalimantan. The diversion of cargoes to the domestic Indonesian market after authorities enforced producers' supply obligations is adding to the squeeze.

Signs of firming prices have dashed the hopes of some buyers — particularly those from India — that had been hoping for prices to ease a bit as China moves into the shoulder season for coal consumption. Indian interest in recent weeks has also been curtailed by high coal prices and freight rates.

Argus last assessed prices of Indonesian GAR 4,200 kcal/kg (NAR 3,800 kcal/kg) coal at $75.22/t fob Kalimantan on 3 September, the highest since assessments began in 2008. In comparison, the prices of this coal were hovering at all-time lows about a year ago.

"End-users in India cannot wait and have to bite the bullet," a Singapore-based trader said, noting that some may even pass on the increase in costs.

The need from some Indian buyers comes at a time when coal stocks at dozens of power stations are running low, prompting authorities to focus on arranging domestic coal supplies to the utilities and potentially reducing availability for industries such as cement mills. Several Indian buyers are still actively looking to secure as much domestic coal as possible for blending with smaller parcels of imported coal procured from stock-and-sale operators at ports, an official involved with coal sourcing at an Indian firm said.

"So instead of buying a bigger fob shipment, some end-users are going for smaller parcels of imported cargoes for blending with local coal," the official said. There could be a handful of companies that have not ventured into the seaborne market for months and could be forced to reduce operations if local supplies are also constrained, he said. Most state-controlled utilities have been absent from the seaborne market for more than a year after federal authorities asked them to cut down on imports.

In China, enquiries from some consumers and utilities have started for seaborne coal. And as the move to restock for winter gains pace, "availability and fuel security will take precedence over prices", the Singapore-based trader said, adding that the market "looks firmly supported". Domestic availability in China is still tight, despite efforts by authorities to ensure steady local supplies and tame prices.

Interest in seaborne cargoes is also expected to pick up from other markets — including Bangladesh, Vietnam, Thailand and Philippines — at about this time of year.

The support to current market fundamentals also stems from China's ban on Australian coal imports, which has distorted thermal coal trade flows and created unprecedented price imbalances in the market. And the latest supply tightness, particularly for the popular low-calorific-value (low-CV) GAR 4,200 kcal/kg, is propelling interest in ultra-low-CV and some off-spec mid-CV cargoes, according to another Indonesian trader.

But mining firms expect the supply pressure to ease as soon as the rains subside. Restoring production as soon as possible is vital because coal producers have to bear certain fixed costs related to mining operations, production and supplies, even if output gets disrupted.

"We want to produce and sell at these price levels," an Indonesian coal producer said. "But the weather is too hard to predict."

By Saurabh Chaturvedi