Indonesian coal producers consider output cuts

Reduced economic activity because of the pandemic could result in a global oversupply of coal of around 30mn t this year, with Indonesian exports possibly falling by around 15mn t compared with 2019 as a result of weaker demand, according to a senior market analyst.

India, the second-largest buyer of Indonesian coal after China, last week imposed a nationwide lockdown that is aimed at containing the coronavirus outbreak in the country. The lockdown has caused disruptions and declarations of force majeure by a number of Indian ports, including Gangavaram, one of the country's largest for imported coal.

Chinese state-owned utility Guodian yesterday cancelled a number of mostly low-calorific value Indonesian coal cargoes that it had already booked for delivery over April-June through recent tenders. Market participants estimated as many as 40 shipments, or around 3mn t of coal for arrival from April-June, may be affected.

The move was driven by a decision by Guodian's parent company, China Energy Investment that is also the country's largest coal producers, to prioritise the use of its own domestic production because of a build-up of stocks at its mines.

Indonesia's energy ministry said it has not received any reports of coal mining companies completely shutting their operations because of the coronavirus in Indonesia. Producer Bayan Resources said earlier this week that it is halting production at two of its mining subsidiaries until 30 April as a precautionary measure, although it has enough inventories to continue supplying its customers for up to three months.

Indonesia's energy ministry said this week that coal production remains on track to reach its 550mn t target for 2020, with output during January-March at 137.31mn t, or around 25pc of the target.

The ministry said that while there has been a reduction in coal demand over the past two months, coal production has been unaffected as most coal mining companies sell their coal under offtake contracts. But the ministry did not rule out the possibility of a drop in the country's exports in the near future because of the economic slowdown resulting from lockdowns that are being enforced in other countries. 
The ministry has issued a circular outlining several steps that coal producers can take to offset the effects of the outbreak on company operations, which include business risk assessments and stricter monitoring of company workers.

Indonesian exports face contraction

Indonesia exported 456.36mn t of all types of coal last year. This was 6.4pc higher than in 2018 and was a likely all-time high, with the increase driven by firm demand from China and India, as well as growing demand from southeast Asia. Thermal coal accounted for 428.83mn t of last year's exports, up by 35.2mn t from 2018.

But Indonesian exports could contract by around 15mn t this year amid a slowdown in demand in the Asia-Pacific region, said Hong Kong-based trading firm Noble Resources' head of research Rodrigo Echeverri.

"Despite supply disruptions due to reduced shipments out of South Africa and Colombia, we are going to see demand destruction and we are now forecasting a global oversupply of around 30mn t this year. It will take a period of weak prices and reduced output for the market to rebalance," Echeverri said.

Despite the weaker demand outlook, Indonesian mining companies may not look to cut output immediately, especially given the recent slump in crude prices that has reduced their coal production costs significantly. But this could potentially add to a potential supply glut further ahead, if demand falls sharply in the coming months.

Mining companies may also be unwilling to rescind or seek to reduce their annual production quotas amid the possibility that they might not receive the same quota next year. Given recent steep falls in crude and gas prices the Indonesian government is unlikely to want to lose additional royalties from the coal sector, if producers cut their output significantly.

The Indonesian government indicated last year that it could allow many large-scale coal producers to increase output to help the country meet its state revenue target. Jakarta had begun to take a more lenient approach to production ceilings, as coal mining royalties have become an important component of the central government's budget.

Asia-Pacific's emerging economies are facing a sharp slowdown in growth this year and regional GDP could even contract, the World Bank said yesterday. Indonesia faces a slowdown in GDP growth to 2.8pc under the World Bank's baseline scenario and a contraction of 3.5pc in the lower case scenario compared with growth of 5pc last year.

By Andrew Jones and Antonio delos Reyes