Coal Prices Projected to Remain Healthy in 2018

26 Jul 2018

Global coal prices are expected to remain healthy throughout 2018 owing to stable demand from China and increasing consumption in India, says the World Coal Association (WCA).

WCA chief executive Benjamin Sporton projected that demand from China would continue to be reasonably strong this year, despite the country’s plan to implement a huge gasification program for households and industries to reduce its dependence on coal.

Furthermore, he said India would also increase its coal imports amid soaring demand from its power generation sector and lower-than-expected domestic production.

“India is not in a shortage situation, but it is running very closely behind it, and that’s really what has driven coal exports into India, and a good chunk of that is coming from Indonesia,” Benjamin told The Jakarta Post recently.

The price of Asian benchmark Newcastle thermal coal had climbed to US$106.78 per ton in January after falling to as low as $74.52 per ton in May last year.

“It’s really the supply constraint that sent the price to above $100 per ton over the last year, […] and I would still expect it to be somewhere in that ballpark for most of this year,” Benjamin said.

The Indonesian government has limited the country’s coal production in 2018 at a maximum level of 485 million tons, 25 percent of which will be allocated for the domestic market.

Within the first two months of 2017, Indonesia’s coal production reached 28.07 million tons, 15.6 million tons of which were absorbed by the domestic market.

International Outlook
Coal prices grew by 4-5 percent in August 2017 continuing a 3-5 percent growth in January 2018. SInce January 2016, when the price of coal reached a 10-year low, coal prices have rebounded by about 100 percent.

This situation is attributable to several factors. First, it is the consequence of an implemented policy in China which aimed at reducing harmful emissions. China is the largest coal consumer and coal producer at the same time. The reduction in own-grown production led to the increase in coal imports. Second, not only China reduced its coal mining. Indian coal industry also had hard times. The strike of miners led to the crisis in the industry. The Market was not ready for that and, as a result, coal prices immediately began to soar.
Leading international agencies made the following prediction of future coal price change:

    • The World Bank in its October commodity forecast report estimated that the price for coal will fall in 2018 to USD 70/mt against USD 85/2017. After that, the price will fall in 2017 to USD 55/mt. And since 2018 it will grow slowly.
    • The IMF’s July report revealed a different forecast. The IMF’s experts predict a decline in 2018 to UDR 78.8/mt and a slight drop in 2019 to USD 74/mt.

View more energy statistics and visualization related to energy, including the estimated break even cost of oil production by country, natural gas price dynamics and insights from the BP Energy outlook 2035.



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Regulation Update: Indonesia Caps Domestic Coal Price

Indonesia has introduced a new decree designed to cap coal prices for public interest electricity supply. MEMR Decree No. 1395/K/30/MEM/2018, which was issued on 9 March 2018, does three things:

    1. It limits coal prices for public interest electricity supply at USD 70 per tonne for FOB coal. This price is applicable for relatively high quality 6322 kcal/kg GAR coal with a maximum moisture content of 8%, a total sulphur content of 0.8, and ash at 15%.
      In other words, the coal sales price for public interest electricity supply is capped at USD 70. The price cap will apply for the remainder of 2018 and 2019 for total sales of 100 million metric tonnes of coal per year. Decree 1395 did attempt to make this price cap retrospective, but this was quickly revoked by Decree 1410K/30/MEM 2018, issued a few days later.
    2. Notwithstanding Directorate General of Mineral and Coal (DGMC) Decree No. 953.K/32/DJB/2015 on Production Cost to Determine Base Price of Coal, royalties will be determined based on the actual sales price, rather than the reference price (unless the reference price is less than USD 70 per tonne, in which case that will be the price used to determine royalty).
    3. As a sop to coal producers, companies satisfying the DMO requirement at these capped prices may have their permitted production volumes increased by 10%. The Decree applies to both coal IUP holders, and holders of CCOWs, even though the latter permit sales at market price, regardless of any DMO requirements.

Key Issues

Indonesia’s domestic market obligation requires coal producers to sell up to 25% of their coal domestically. If they fail to do so, then they may be prevented from exporting coal. So far, there has not been sufficient demand within Indonesia for this to be an issue. However, as Indonesia continues to rely on domestic coal in the future, this may pose more of a problem for its biggest suppliers and coal exporters.
The reference to sales of coal for the first 100 million tonnes applies to total sales of coal used for power generation; these are currently running at approximately 97-100 million tonnes per year. Given Indonesia’s increasing reliance on coal power generation, what happens if this figure is reached? Will coal producers be allowed to sell coal to PLN/IPPs at a higher price? We presume that the cap of 100 million tonnes will be increased at that point.


How Will This Impact Coal Companies?

There is no transition provision in Decree 1395. Accordingly, the capped price of USD70 is effective straight away. It is not clear whether PLN or IPPs will seek to apply the regulation to existing contracts, although we imagine they will. Coal companies with existing supply contracts with PLN should review the regulation to determine what price they will get for their sales. They should also review their service agreements with service providers, to understand to what degree they face not only a price freeze, but a cost squeeze. Accordingly, they should review the terms of their service contracts, and in particular the force majeure provisions, to see how robustly these might be used by the coal companies.

This being said, the overall impacts of the new regulation are likely to be muted, at first. According to Fitch Ratings, most of Indonesia’s big coal producers’ sales are export driven. The impact is likely to be greater over the next few years, as Indonesian domestic coal usage increases. While PLN is not the only domestic consumer in Indonesia, removing the price pressure generated by PLN demand will, presumably, result in a general softening of prices across the domestic market.



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BUMA Awarded Contract Worth Over Rp 7 Trillion

13 Mar 2018

PT Bukit Makmur Mandiri Utama (Buma) The subsidiary of PT Delta Dunia Makmur Tbk (DOID) has just signed a new mining service contract with an estimated contract value of over Rp 7 trillion.

The mining service contract was signed with PT Tanah Bumbu Resources, a subsidiary of Geo Energy Resources Limited. “The value of this contract is estimated to reach more than Rp 7 trillion or equivalent to more than US $ 500 million,” wrote the management of DOID in an official statement on Thursday (8/3/17).

The mine is adjacent to another Geo Energy concession area, PT Sungai Danau Jaya. Buma has also signed a contract with the mine that has been operating since 2015. Geo Energy is an integrated coal mining business group and listed on the Singapore Stock Exchange.

The location of the adjacent Tanah Bumbu and Sungai Lake mines is expected to optimize operational efficiency in both mine sites. The operation of Tanah Bumbu will commence in March. While production is expected to begin to be seen in the second quarter of 2018.

This contract is expected to strengthen the relationship between BUMA and Geo Energy which is a fast growing coal mining company with good growth potential in the future. This contract is also in line with BUMA’s strategy to always focus on long-term sustainability and profitable growth.

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