More stick to penalize non DMO sales.

Background.

In December 2021 a two-day coal conference in Bali, the state power company (PLN) mentioned the ongoing low coal inventories held at PLN power plants. Also, a number of coal companies and associations repeated requests to review and update the Domestic Market Obligations (DMO) to supply cheap coal to PLN, and to improve the logistics supporting the supply of coal to PLN.

A fair sale may be considered in terms of a willing seller and a willing buyer. The DMO regulations oblige all producers to sell coal, what-ever their coal quality and how remote they may be to a local buyer. ?The coal price is fixed by the government at a price presently heavily discounted to the export price. However, PLN is not obliged to buy every producer’s coal. The buyers have applied market forces when considering who to buy coal from, including coal quality parameters, cost of delivery and payment terms etc.

At the beginning of 2022 the Indonesian Ministry of Trade abruptly terminated coal exports in a crisis’s reaction to low coal inventories at a number of PLN power plants. The press emphasized the unwillingness for some coal producers to sell at well below market to PLN, and some industry commentators mentioned more quietly the slow terms of payment by PLN (often 110 days). The government acted to address some of the PLN coal purchasing issues with changes in management and scrapping a state coal purchase company.

Decree 13.k/HK.021/MEM.B/2022

On the 19th January a ministerial decree was circulated being “Guidelines for implementing administrative sanctions, prohibitions of coal sales abroad, and the imposition of fines and compensation funds to fulfill the need for domestic coal”. This is the latest in a series of revised regulations that provide penalties for non-compliance of the DMO coal supply system. The penalties are that coal miners may not be able to export coal, and that payment obligations are applied. These financial penalties are applied to miners and transport & sale business. These fines relate to 1. The lower sales price relative to the Indonesian standard price (HBA), 2. The shortfall in supplying 25% of production to the DMO, and 3. A compensation fund for coals that cannot find a 25% domestic market component (typically out-of-specification coals). The regulation sets out formula and terms related to the payment of fines, and provides numerous appendices for ease of compliance.

Discussion.

The coal producers are supportive of the governments efforts to maintain the affordability of electricity for the people’s welfare, with ongoing discussions on how to improve implementation of this objective. The trend is for the coal miners to carry a significant burden for the provision of cheap power to the people. It would seem these sanctions of non-compliance are all stick, and no reprieve for matters beyond the producer’s control. ?A common cause of non-delivery is bad weather holding up the transport segment, or management of PLN stock purchases, or PLN’s extended slow payment scheme that does not provide cash flow for ongoing production etc. Perhaps some form of “producers-no-fault” clause could be considered to protect (and show empathy) to the miner, who also is an Indonesian person in need of consideration by the Government.