Indonesian coal association lobbies for higher exports

The Indonesian coal mining association (APBI) has asked the government to relax the country's domestic market obligation (DMO) for coal to give producers some financial breathing space during the Covid-19 pandemic.

Indonesia's DMO system requires the country's coal producers to make a percentage of their annual output — currently set at 25pc — available to the domestic market.

Producers that are unable to fulfil their DMO requirements have to pay a fine and will be subject to production cuts under a December 2019 ministerial regulation, which is designed to reduce electricity costs by increasing the supply of coal for utilities.

But the APBI has now asked for sanctions against companies that fail to meet their DMO quotas to be temporarily suspended because of weak coal demand. Coal use has fallen significantly in recent months because of travel restrictions and a nationwide lockdown, which has resulted in commercial and industrial businesses cutting operations.

Coal consumption at state-owned utility PLN, Indonesia's largest coal consumer, was 50.16mn t in January-June or 46pc of its 2020 target. PLN expects demand to remain weak because of Covid-19 and has also warned of delays bringing new coal-fired power plants on line this year.

Weaker coal demand could result in the domestic market becoming oversupplied, as strict implementation of the DMO will result in coal mining companies competing against one another just to avoid paying fines, the APBI said. This oversupply could lead to lower domestic prices, a scenario that coal suppliers are trying to avoid at a time when seaborne prices are hovering around all-time lows.

Allowing coal producers to sell more to the seaborne market could help these companies maintain a revenue stream, according to the APBI. The group said its members remain committed to supplying coal to the domestic market and those companies that have supply contracts with PLN will continue to honour them.

The APBI in July asked the energy ministry to reduce mining companies' output because of weaker demand and prices. Covid-19 is likely to cut demand for Indonesian coal by around 85mn t this year, it forecast.

The energy ministry originally set a production target of 550mn t for this year, comprising 400mn t earmarked for export and 150mn t for the domestic market. But sales are now projected to reach only 100mn-110mn t because of the economic impact of the pandemic, down from 138.4mn t last year.

The government has already rejected a request by the APBI to ease royalty payment requirements for coal mining companies because of the pandemic's impact on demand. The group has urged its members to reduce their output amid forecasts that domestic and seaborne coal demand will remain weak this year.

Several leading Indonesian coal producers are either reducing output or reviewing existing production targets. But others are keeping their output targets flat, despite a slump in demand, sparking concerns of a supply glut at a time when coal prices are already low.

Indonesia's largest coal producer Bumi Resources in June lowered its 2020 output guidance to 85mn-90mn t from a previous target of 94.5mn t. Indonesia's second-largest coal producer Adaro Energy has said it plans to reduce output by around 10pc this year because of a "difficult" market, leaving production at the lower end of its previous guidance of 54mn-58mn t.

By Antonio delos Reyes and Andrew Jones