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Miners in Indonesia, the world's top exporter of thermal coal, are looking to cash in on surging prices for the commodity, but government restrictions are casting a shadow.

Miners in Indonesia, the world's top exporter of thermal coal, are looking to cash in on surging prices for the commodity, but government restrictions are casting a shadow.

Indonesia Miners Looking To Cash In On The Surging Commodity Prices

JAKARTA — Shares of coal mining companies in Indonesia, the world’s largest thermal coal exporter, have surged on the back of record prices for the fuel in the wake of Russia’s invasion of Ukraine. But the threat of another government export ban is deterring producers from immediately increasing shipments, likely keeping prices elevated for a while.

Coal prices rocketed to a new all-time high last week, with benchmark Newcastle futures topping $400 a ton, breaking the previous record of $269 set in October. Accordingly, share prices of top Indonesian coal miners have jumped, adding to their previous gains from China-led rising energy demand amid the post-pandemic global economic recovery.

Adaro Energy Indonesia led the gains, its shares soaring 29% since Russia launched its invasion of Ukraine on Feb. 24. Indika Energy and state-owned Bukit Asam have also seen double-digit percentage gains. This comes after stellar performances last year with some miners, like Bukit Asam, reporting the highest profit in their history.

The stock price performance has moderated in recent days, as it became clear that the government’s export restrictions prevent Indonesian miners from cashing in right away, however.

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Indonesia is currently the world’s biggest exporter of thermal coal, followed by Australia and Russia. Its cargoes mainly head to Southeast Asia and the east of the continent, while Russia mostly ships to eastern Asia and Europe.

“There will be additional opportunities arising for Indonesian coal in existing markets such as Japan and South Korea as well as in the less typical European markets,” Wood Mackenzie principal analyst Rory Simington told Nikkei Asia in an email interview.

Most international sanctions on Moscow have so far excluded energy, but the U.S. and U.K. last week banned fuel imports from Russia, while financial restrictions and supply security risks have already prompted some buyers to look elsewhere. “Despite the fact that Russian thermal coal is mostly high energy, additional demand for all coal grades is apparent,” Simington said.

Indonesian miners have received enquiries from potential new buyers in Europe, according to Hendra Sinadia, executive director of the Indonesian Coal Mining Association.

“They’re exploring the possibility… to substitute the coal imported from Russia,” Sinadia told reporters in Jakarta on March 9. 

He added, however, that miners are currently focusing on meeting their so-called domestic market obligation, under which exporters must apportion 25% of their coal output for local sales.

The DMO price is fixed at $70 per ton. The wide gap with international markets encouraged many miners to dodge the requirement last year, leading to a domestic supply crunch and concerns over widespread blackouts. That led the government to impose a blanket ban on coal exports in January — although it was later relaxed.

The government is currently tightening supervision of DMO compliance, and recently issued a new regulation on fines for offenders, and a new export ban remains a threat in the background. Sinadia said the enforcement is “very strict” now, with his association urging members to fulfill their domestic quota to prevent the government taking “extreme action.”

“It’s a very interesting opportunity… this time of geopolitical [dynamics],” he said. “Unfortunately the timing came when the industry has just partly recovered from the temporary export ban.”

Sinadia added local miners are also prioritizing previous commitments to existing overseas buyers affected by the January ban, and might only be able to tap new market opportunities in the second quarter.

Indonesia’s government is targeting 663 million tons of coal output this year, up 8% from 2021. Of that amount, 25%, or around 166 million tons, is apportioned for domestic supply, with the rest for exports.

Sunindyo Suryo Herdadi, a director for minerals and coal at the energy ministry, on Wednesday said only 8% of the DMO target this year had been met as of the end of February. He urged miners to pump up production to meet domestic needs as the government also wants to “take advantage” of the high prices to boost state revenue. 

Indonesian Finance Minister Sri Mulyani Indrawati said state revenue from the minerals and coal sector — including from tax, export duties and royalties — reached 124.4 trillion rupiah ($8.7 billion) last year, which is “the highest in the past five years.” That represents around 6% of the total state revenue in 2021, which grew over 20% from 2020.

“Surely price hikes of minerals and coal… made a major contribution,” she told a webinar on Tuesday.

Coal is Indonesia’s single largest export commodity after palm oil. Higher prices for the two helped the country maintain a trade surplus last year, after years of deficit before the coronavirus pandemic.

“The recent spike in coal prices will boost the export earnings of Indonesian coal miners,” said Maisam Hasnain, a vice president and senior analyst at Moody’s Investors Service. But he added that miners’ export volumes “and ultimately earnings growth potential will be constrained” by the DMO policy and the price cap on sales to domestic electric utilities.

Bad weather is another challenge. The La Nina weather phenomenon, caused by the cooling of the Pacific Ocean, has been holding back output in Indonesia and other coal producers such as Australia.

Dileep Srivastava, director and corporate secretary at Indonesia’s largest coal producer by volume, Bumi Resources, said rains have slowed its output since December. Forecasters suggest La Nina could continue for at least several more months, preventing Bumi from increasing its supply over the short term despite a goal of raising production by 10% to at least 85 million tons this year.

Srivastava said there were other factors beyond wet weather and the Russia-Ukraine conflict that were driving prices. Increasing global energy demand has pulled up prices for competing fuels such as oil and gas, while renewables have not grown fast enough to make up for shortfalls. These factors “could all contribute to keeping coal prices elevated — and serve to benefit local producers, including Bumi”, he said.

European countries will find Colombia and South Africa “in the better position” to supply them directly, said the Indonesian Coal Mining Association’s Sinadia, since the cost of shipping hurts Indonesian miners’ competitiveness in the Atlantic market.

But prices are up all over the world — and not just for coal. Other top Indonesian exports including palm oil and nickel have also hit new heights recently as the invasion of Ukraine and sanctions on Russia roil commodity markets.

Russia is the world’s No. 3 producer of nickel after Indonesia and the Philippines. The Indonesian government’s export ban on nickel ores since January 2020 — part of its downstream push — prevents local nickel miners taking advantage of the high prices, but shares of top producers like Aneka Tambang and Vale Indonesia have soared in the past two weeks.

Moody’s Analytics noted that prices of edible vegetable oil have soared as well, as Ukraine exported over 45% of the world’s sunflower oil in 2019 and Russia 23%. But again, producers in Indonesia, which supplies half the world’s palm oil, won’t be able to take maximum advantage. The government introduced a separate DMO for the palm oil sector in January amid a cooking oil crisis.

S&P Global Ratings in a note last week put Indonesia on a list of beneficiaries from the commodities price surge, marking it out as a net energy exporter along with Malaysia and Australia. The biggest net energy importers relative to gross domestic product are India, the Philippines, South Korea, Taiwan and Thailand, S&P said.

“The fast-moving events of the Russia-Ukraine conflict,” the S&P analysts wrote, “are splitting Asia according to the energy haves and have-nots, havens and non-havens.”

Additional reporting by Shotaro Tani and Ismi Damayanti in Jakarta.


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