Indonesia's ban on coal exports likely to have 'serious repercussions' on market: observers

Singapore

TROUBLE is brewing in the coal market. After Indonesia, the world's largest exporter of the commodity and China's largest overseas supplier, announced a January ban on exports over concerns of low supplies in domestic power plants, coal prices have shot up.

The price of Indonesian 4,200 kcal/kg GAR (gross as received) coal rose 0.7 per cent after the announcement to hit US$54.56 per tonne on Jan 3, but pared some gains to US$54.32 at the close of Wednesday (Jan 5). And Australia's Newcastle coal prices, a benchmark for the Asian market, have been up 2.6 per cent since the Jan 1 announcement.

Indonesia's ban on the commodity comes even as the coal market has been grappling with instability. Prices had surged to record highs last year as a result of falling supply in China, which caused regional blackouts. Floods in key coal-producing province Shanxi worsened the issue.

Sabrin Chowdhury, senior commodities analyst at Fitch Solutions, said Indonesia's ban has the power to hit the economies of importing nations such as China, India and South Korea.

"If the (Indonesian) government were to extend the coal ban, there would be serious repercussions on the coal market. Coal prices would rally for longer, and there could be power shortages in importing nations if they are unable to secure supplies from elsewhere," she said.

She expects China to be the worst hit. The country imports most of its coal from Indonesia, having halted shipments from Australia since the end of 2020.

"China just mitigated its severe energy crunch in Q3 2021, and a shortage of coal imports would once again put its energy security in jeopardy," she said. "If Indonesia's coal export ban were to be extended, China would need to resort to Australian coal once again, making Australia a major beneficiary of Indonesia's coal export ban."

Baldev Bhinder, managing partner of law firm Blackstone & Gold, which specialises in commodities and energy, said the January export ban on Indonesian coal "couldn't come at a worse time".

In his view, there will be supply disruptions in the short term, which would lead Indonesian miners to declare "force majeure" under their contracts. (Force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract.)

However, he also warned that there is no "one size fits all" outcome for this phenomenon. "What may be a force majeure event for a miner under its supply contract may not excuse the delays and disruptions caused to charterers waiting to load or leave Indonesia, or to suppliers of power plants that may have to source for alternatives," he said.

"When the world's biggest exporter of coal imposes a ban even for a month, there will undoubtedly be an impact on the market, with price spikes in an already challenging market. And acute shortages of this nature can lead to spikes as limited options would force power producers to overstock."

Indonesian coal miners are reportedly set to hold talks with government officials on the ban, which has hit the share prices of the listed companies among them.

The share prices of Adaro Energy and Samindo Resources, miners listed on the Indonesian exchange, declined 0.6 per cent and 0.4 per cent respectively from their closing prices on Dec 30. Bumi Resources was flat; Bukit Asam is up 0.7 per cent.

In Singapore, the share price of Geo Energy Resources is down 1.5 per cent from its Dec 31 close; that for Golden Energy and Resources is up 8.6 per cent.

Rory Simington, principal analyst at Wood Mackenzie, said several large Indonesian producers have indicated they are willing to work with state-owned generator Perusahaan Listrik Negara (PLN) to resolve the issue.

"A halt in Indonesia's exports would have a major impact on thermal coal markets, but a total ban for January is unnecessary and unlikely to be implemented in our view," said Simington.

Wood Mackenzie senior analyst Manish Gupta said the domestic coal requirement for Indonesia's power sector is 9 to 10 million tonnes per month, against a monthly production of 47 to 51 million tonnes. Out of the 5.1 million tonnes required by PLN for January, 3.2 million tonnes has already been secured, he added, which means a ban on the export of coal seems unnecessary.

"The sooner the stock levels reach safe levels of up to 20-day inventory, miners can expect a resumption of exports," he said.