Regulation Update: Indonesia Caps Domestic Coal Price

26 Jul 2018

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.

 

Sources:
bakermckenzie.com
reuters.com

Image Sources:
pexels.com