INDONESIA'S ban on coal exports highlights the regulatory risks in its coal-mining sector, and could dampen its stability and credibility as the world's largest thermal coal exporter, said S&P Global Ratings on Monday (Jan 24).

The research team said the supply disruption - which comes in the middle of winter for many countries - was abrupt and untimely; it also leaves major importing countries that rely heavily on coal for power generation "scrambling to plug a sudden supply gap".

The ban, which was imposed due to low coal inventories reported at domestic power plants, also comes less than 6 months after the Indonesian government suspended coal exports in August 2021, for major miners who did not meet the domestic market obligation (DMO).

The DMO requires coal miners to sell at least 25 per cent of their coal output locally, failing which they would be subjected to export suspensions and fines.

Countries including Japan, the Philippines and South Korea have already urged Indonesia to lift the ban. Even if the ban was eased at the end of January, a slew of backlog contracts will likely further tighten supply and increase already-inflated coal prices, S&P said.

The implementation and enforceability of the DMO also highlights weaknesses in the coal procurement mechanism in Indonesia.

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The research team said miners are economically incentivised to maximise their coal-export sales and pay fines since market prices are significantly higher than the local capped coal price. Meanwhile, state power company Perusahaan Listrik Negara purchases coal with specific calorific values and from mines which are more logistically accessible.

As such, the research team expects Indonesia would need long-term solutions to restore market confidence, particularly as coal exports account for around 5 per cent of its gross domestic product and around 15 per cent of its export income.

While government cash levies could bridge the gap between market and DMO prices, they are subject to delays and contract terms, and may impose higher royalties on miners.

As for the affected companies, S&P noted that miners who have fulfilled their DMO - including Bayan Resources, Geo Energy Resources and Bumi Resources - will be given priority to resume coal exports.

It expects Bayan Resources and Geo Energy Resources will likely be able to catch up in subsequent months once the ban has been lifted completely. However, Bumi Resources may be hit more as it is pursuing a major debt restructuring and thus has little headroom for any earnings shortfalls.

READ MORE:

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