Commodity Insights

Indonesia Coal Export Ban

Indonesia bans coal exports in January on domestic power worries

The ban, imposed due to critically low stocks at domestic power plants, has sent shockwaves through global coal markets.

The recent decision by the Indonesian government to ban coal exports has sent shockwaves through the global energy sector, and could have long-term implications. For context, Indonesian exports grew rapidly from the early 2000’s onwards, more than quadrupling in volume enroute to becoming the largest exporter globally, and supporting strong demand growth from China, India and Southeast Asia. Indonesian exports dominated seaborne growth over the period and actually helped keep the market reasonably balanced, with other large exporters unable to ramp up as quickly as Indonesia. 

Following China’s ban on the import of Australian coal in 2021, Indonesia stepped in to fill the demand from China for Thermal Coal.  This has led to market tightness as well as China becoming Indonesia’s largest customer (see chart below).

Indonesia, the world’s biggest thermal coal exporter accounting for around 45% of global supply in 2021, suspended all coal exports indefinitely on Jan. 1 after state power utility, PT Perusahaan Listrik Negara (PLN) reported dangerously low inventory levels at its domestic power stations in December 2021 (less than 3 days). Asian countries that rely on Indonesian coal to generate power are calling on the nation to drop its ban on exports of the commodity, with the Philippines the latest to contact Jakarta. Other governments, including Japan and South Korea, have also made similar requests to the Indonesian government. 

To put the export ban into context, coal miners are required to sell a certain proportion of their output on the domestic market, under the “domestic market obligation” (DMO) policy that’s been in place since 2009. In 2021, the DMO was set by the government at 25%.  Much of this is earmarked for state-owned power utility PLN, which buys the coal at a capped price that is currently set at US$70/t, less than half the international market price. Recently-high international prices (>US$150/t) have incentivised Indonesian producers to export rather than supply domestically, so many miners have fallen short of their DMO obligation, leaving domestic coal-fired power plants – which supply over half of Indonesia’s electricity – with very low stock levels.

When implemented, the DMO policy provided some security to coal producers that they’d have a guaranteed buyer in PLN, paying fixed prices, at a time when coal export prices were languishing around US$55/t. With the DMO capped at US$70/t, that meant they were making a premium off PLN. However, in strong market conditions that we have seen over the last 12 months (seaborne thermal coal prices jumped to a record high of US$270/t in October 2021), producers were incentivised to export.

This isn’t the first time Indonesia has faced an energy crunch due to coal miners preferring to export rather than sell their product domestically. Indonesia experienced severe shortages on four previous occasions in the past 15 years: in 2007, 2008, 2018, and mid-2021. It’s also not the first time the Indonesian government has intervened strongly in a key export sector, with the nickel sector (Indonesia is the world’s largest supplier) also enduring a range of export bans on unprocessed materials over the last decade. Incidentally, the nickel smelting sector will be supported by the government’s export ban as it is a large consumer of coal for power generation. 

In a recent interview (CNBC), the Coordinating Minister for Maritime Affairs of Indonesia, Luhut Pandjaitan, suggested that the Indonesian government is considering scrapping the DMO and overcoming the price gap for domestic consumers through the creation of a public service agency (BLU), although details on how this would operate are unclear. The outcome of this would be that PLN would need to purchase coal at market prices, which will put pressure on Indonesian power prices and consumers. The final outcome remains unclear, but this episode has illustrated the following:

  • Indonesian supply is crucial to the seaborne thermal coal market, particularly in developing Asia.
  • While Indonesian exports grew rapidly to 2019, they are unlikely to repeat this growth, partly because of domestic power demand growth which competes for coal off-take.
  • There remains an element of sovereign risk in the Indonesian coal sector, demonstrated by this latest government intervention.
  • The surge in Indonesian supply has helped keep coal competitive across Asia, with generation costs well below LNG – but this may not be permanent.

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