Indonesia's H2 thermal coal exports may slide on unfavourable policies, weak demand

Thermal coal exports from Indonesia, the world's largest exporter of the commodity, is likely to decline in the second half (July-December) of this calendar year (H2CY23).

Data maintained with CoalMint reveals that Indonesia's thermal coal and lignite exports in H1 (January-June) have risen an estimated 22% to around 249 million tonnes (mnt) from 205 mnt recorded in H1CY22.

Total volumes exported in CY22 rose 9% y-o-y to 458 mnt against the backdrop of a global energy crisis set off by the Russia-Ukraine war.

Factors that can impact export volumes in H2

Both demand and supply issues can impact exports in H2, CoalMint understands. On the demand side, two key importers, China and India, may see a weakened appetite in the remaining part of the year while certain Indonesian policy developments can restrict supplies.

Demand-side challenges

Chinese sits on huge inventory:?China, the leading importer of Indonesian thermal coal, may see a drop in demand in the remaining part of the year, essentially because it is already sitting on a huge inventory. Data maintained with CoalMint reveals that Chinese buyers had imported a humongous 110 million tonnes (mnt) from Indonesia in the first half (January-June) of 2023, which is an almost 81% increase over 61 mnt seen in H1CY22. It may be mentioned that China's total thermal coal imports in H1CY23 from Indonesia are merely 61 mnt less than CY22's total volume of 171 mnt.

Secondly, China already has a pronounced focus on increasing domestic production since the shortage experienced in the latter part of 2021. Expanding coal mining and production has been a key component of China's energy policy. Working towards this end, late last year, China had extended long-term thermal coal supply contracts for 2023 for all coal mines and had asked its power utilities to source from these contracts. The country relies on thermal coal to generate 60% of its electricity.

India's domestic production rises:?Demand from India too may weaken, on the basis of two reasons. One, India's domestic coal production increased a considerable 15% in financial year 2022-23 (FY23), with Coal India's share rising 13% y-o-y to 703 mnt. Moreover, India has settled for a production target of more than 1 billion tonne in FY24, which would be another 13% y-o-y increase.

Two, Indian buyers are sourcing discounted coal from European resellers.

Data reveals that India's coal imports from Indonesia are already down 17% in H1 at 50 mnt against 60 mnt seen in H1CY22. This is a strong indication that volumes in H2 may not move north.

Europe lessens dependency on coal:?With a decline in gas prices, Europe is once again lowering its dependency on coal for power generation. A Eurofer source reveals electricity inflation in the EU had slowed to 13.2% in April from the peak of 52.6% in July 2022. This has led to considerable stockpiles of thermal coal at European ports, a fact that is driving many traders to de-stock by re-selling portions they had earlier procured from various supply sources--mainly Indonesia and South Africa--to buyers in India, and Asia in general. Obviously, this coal is coming at discounted prices much to the buyers' delight.

Supply-side woes

Policies may curb supply:?The Indonesian government mandated that exporters of natural resources keep 30% of their foreign exchange earnings in domestic banks for three months, as part of the government's efforts to shore up dollar supply. This move has not gone down well with the country's miners who feel keeping a portion of their forex earning in local banks can affect their liquidity and impact operations and expansions.

That apart, miners have also been told to declare their intended export volumes 60 days in advance against the previous 20 days.

Both policies can restrict/curtail exports, feel miners.

Way ahead

Indonesia coal output in January-June 2023 touched 360.6 mnt, covering 52% of the country's overall 2023 target of 694.5 mnt.

However, with coal prices nosediving, after skyrocketing last year, and prices of the low CV variety nearing production costs, some miners are mulling a reduction in output, which may further reduce exports. Under current regulations, producers who have fulfilled their DMOs, can increase their output by up to 10% from their original target, subject to the energy ministry (ESDM) approval.

Meanwhile, the government is targeting a July-September launch of the much-delayed coal agency, which aims to address coal producers' concerns regarding revenue losses incurred on domestic sales because of a coal price cap.

3rd India Coal Outlook Conference

What could be the broader implications of recent policy tweaks by the Indonesian government on coal exports from that country in H2CY23? Experts will share their insights on Indonesia's coal export outlook and much more at SteelMint Events' 3rd India Coal Outlook Conference to be held at JW Marriot, Kolkata, from 24-26 August, 2023. Register now.