Indonesian Energy Ministry: No Immediate Plan to Adjust Thermal Coal HBA in Indonesia

Indonesian Energy Ministry:
No Immediate Plan to Adjust Thermal Coal HBA in Indonesia

Author: Pritish Raj
Editor: James Leech

(Coal | Metal)
Date: September 29, 2023 | 15:10 UTC

A senior official from the Indonesian Ministry of Energy informed S&P Global Platts that despite some mining companies questioning the accuracy and criticizing the high mining royalty, the Indonesian government does not intend to change its benchmark coal reference price calculation method in the short term.

The benchmark, also known as Harga Batubara Acuan (HBA), determines the prices of Indonesian coal products and serves as the basis for calculating the amount of royalty that producers must pay for each ton of coal sold overseas. In February of this year, the government amended the method for calculating the country’s benchmark coal prices.

An official from the Indonesian Ministry of Energy and Mineral Resources expressed during a Coaltrans conference earlier this week, “Based on our understanding of the coal market and interactions with major miners, the new HBA is closer to the actual prices of products sold overseas, and we have also made some adjustments that we believe are appropriate.” The official, who declined to be named, stated, “We cannot change it every time just because some participants think there is a problem.”

While the HBA prices before February took inputs from price reporting agencies including S&P Global Platts, Argus Media, and globalCOAL, the new HBA system considers prices of four coal grades originating from Indonesia and is based on the actual selling prices of shipments for the preceding two months, with a weightage of 70:30 for the first and second months respectively.

Starting from March, the government announced reference prices for grades including 6,322 kcal/kg GAR, 5,200 kcal/kg GAR, and 4,200 kcal/kg GAR. However, in August, the government made minor adjustments to some grades and published reference prices for 6,322 kcal/kg, 5,300 kcal/kg GAR, 4,100 kcal/kg GAR, and 3,400 kcal/kg GAR.

The prices in the Asian thermal coal* market have been on the rise, driven by strong demand from India and China amid stocking up for festivals and winter requirements, breaking the subdued demand of the past three months. On September 28th, S&P Global Platts estimated the price of FOB Kalimantan Island 4,200 kcal/kg GAR at $57 per ton, an increase from $50 per ton at the beginning of the month.

[*Thermal coal is a type of coal used for power generation and industrial production. It has high calorific value and is primarily used as a fuel to generate energy.]

The metallurgical coal* HBA gives priority to domestic demand.

Another official stated, “We do not want the overlap of thermal coal and metallurgical coal to cause confusion; for some, the current HBA may seem to be a reference for metallurgical coal. In order to make it more transparent and easier to distinguish, we will propose a separate HBA standard for metallurgical coal, which will be published monthly.”

【*Metallurgical coal is a special type of coal that is typically used in the high-temperature processes of iron and steel production in the metallurgical industry. This coal generally has a high fixed carbon content and low ash and volatile matter content, making it suitable for reactions in iron and steel production at high temperatures as well as other metal smelting processes. Metallurgical coal is widely used in the metallurgical industry and is considered an important raw material for metallurgy.】

At the same time, an official from the Ministry of Energy stated that as the demand for coal increases in both the domestic power and non-power sectors, the world’s largest coal exporter will seek to prioritize domestic demand, even at the cost of losing revenue from coal exports, which currently forms a pillar of the government’s finances.

Another official from the Ministry of Energy stated, “With economic growth, the demand from industries such as nickel, aluminum, and cement is expected to grow exponentially, further increasing the demand for coal. We are confident that if there is a need to strengthen domestic market supply regulations, we will do so, but everyone must contribute to economic growth.” As of the time of drafting, no response has been received to the emails sent to the ministry.

Indonesia has a Domestic Market Obligation (DMO) that requires mining companies to supply 25% of their annual production to the domestic market, failing which they may face hefty fines and potential revocation of mining permits. Official data shows that the production of thermal coal has almost reached 600 million tons so far this year, with exports reaching around 300 million tons. The coal production for 2022 is projected to reach 687 million tons, representing a 12% year-over-year increase and surpassing the target of 663 million tons set for 2022. In 2023, the target for coal production is set at 694 million tons.

On the other hand, in response to ongoing accusations from coal mining companies regarding unfriendly government policies, excessive tax burdens, mining license fees, and cash flow issues, an official from the Ministry of Energy stated that when formulating regulations pertaining to mining companies, transparency and accountability in the coal industry were taken into consideration due to the industry’s susceptibility to improper conduct.

Coal producers have continuously complained about the high burden of mining license fees and stringent DMO regulations. To exacerbate matters, the government has now mandated that roughly one-third of the dollar-denominated revenues from international sales of the country’s commodities be deposited into domestic banks. Many small-scale mining firms believe that this requirement will weaken cash flow and narrow profit margins.

Source: S&P GLOBAL Commodity Insights