By Andrew Jones and Antonio delos Reyes
January 5, 2023 - Indonesia's energy ministry (ESDM) has set the country's coal production target at 694mn t for 2023, around 5pc higher than the 2022 target of 663mn t, which has been exceeded.
Indonesia produced 668.75mn t in the year to 27 December 2022, exceeding the year's target, according to the latest ESDM data. Actual output during the period is likely to have been higher as some producers do not report their production volumes promptly.
Indonesian coal production has recovered strongly after the ESDM imposed a month-long blanket ban on exports in January 2022 because of a domestic supply crunch. Production rose despite sporadic disruptions from rain throughout the year, and despite a shortage of heavy machinery. Indonesian producers have been keen to raise output wherever possible to take advantage of relatively high prices, which have been supported by weather-related supply disruptions to output in other producing countries such as Australia, and a post-pandemic recovery in demand.
Indonesian GAR 4,200 kcal/kg prices hit a historical high of $154.21/t in October 2021, having reached a historical low of $22.40/t in September 2020 when global Covid-19 lockdowns curbed demand. Prices have corrected from the intra-year highs of 2021, but the GAR 4,200 kcal/kg price averaged $85.27/t in 2022 up to 27 December, compared with around $66/t in the year-earlier period.
The higher output target for 2023 is based on the approved work plan and budgets submitted by coal producers, the ESDM said. A number of Indonesian producers tried to increase their coal production in the middle of 2022 but several factors constrained plans to significantly raise output, including the higher rainfall, the heavy equipment shortage, and the January export ban.
Higher Demand Projections
The higher output target is also expected to address an increase in domestic coal demand. Jakarta has set the 2023 domestic market obligation (DMO) quota at 25pc of coal producers' output and the national DMO target at 173.5mn t. But the ESDM has said that it expects domestic coal demand to surpass this and has projected that coal consumption by the power sector alone — which accounts for almost 80pc of domestic coal consumption — is expected to reach 161mn t. The ESDM has said that it will closely monitor domestic coal sales to ensure that local industries will not experience supply shortages.
Under Indonesia's coal DMO policy, domestic producers must make a percentage of their annual output available to the domestic market or face sanctions.
Indonesian coal producers are also expecting seaborne demand to remain strong in 2023, fuelled mainly by a shift to coal among European utilities because of tight natural gas supplies and high prices. In addition, an EU embargo on Russian coal since August as a result of the Russia-Ukraine conflict has allowed Indonesian coal suppliers to make headway into the European market.
The ESDM has declined to comment on the projected total sales volume for 2023, but previously said that Indonesia's 2022 sales to Europe are expected to reach historical highs. Total Indonesian coal shipments to Europe in January-November 2022 stood at 5.9mn t, the ESDM said in December.
The economy in China, the world's largest coal importer, will grow by 5.1pc in 2023, the Chinese Academy of Social Sciences, a public institution led by the Chinese Communist Party's central committee, forecast on 13 December. This has further supported market participants' bullish outlook for industrial demand in 2023.
India's thermal coal imports rose by 2.12mn t on the year to 12.88mn t, higher on the year for the sixth consecutive month, according to data from ship broker GAC. India is the world's second-largest coal importer.
Potential Challenges Ahead
Despite the plans to raise output and the country exceeding its 2022 production target, the Indonesian Coal Mining Association (APBI) has outlined several key challenges facing the country's producers in 2023, although it also expects coal prices to remain relatively firm because of strong global demand and tighter supplies.
High rainfall and uncertain weather patterns because of climate change could constrain Indonesian coal output, the APBI said. Weather forecasts project La Nina will remain in effect until early 2023, exacerbating rainfall during the wet season in Indonesia.
Several Indonesian producers have also cited a shortage of heavy machinery as a factor curbing plans to significantly raise output. Deliveries have increased, with heavy equipment supplier United Tractor's (UNTR) sales to the mining sector during January-September 2022 rising by 157pc from a year earlier to 2,766 units, the company said last month. But UNTR clarified that these deliveries were mainly fulfilling order backlogs from 2020 and 2021.
Global supply chains are still recovering from the impact of the Covid-19 pandemic. But a global recession and higher shipping costs will make it more expensive for companies to acquire additional heavy equipment needed to increase production, the APBI said.