Policy Risk Remains as Indonesia Eases Coal Export Ban

The credit impact of Indonesia’s temporary ban on coal exports for Fitch-rated issuers is likely to be limited and the relaxing of restrictions suggests that the danger of an extended period of curbs is receding, says Fitch Ratings. Nonetheless, the potential remains for policy changes to have more substantial effects on Indonesian coal miners, and the temporary disruption of supplies may sour relations with key export markets.

The export ban was imposed for a month at the start of January amid low coal inventories at domestic power plants, which had fallen to around 1 to 2 days from a more normal level of around 20. However, the Coordinating Minister of Maritime and Investment Affairs, Luhut Pandjaitan, said on 10 January that 14 vessels loaded with coal would be eligible to ship their product overseas. We believe this signals that officials are more comfortable with coal inventory levels, and is likely to presage a gradual easing of the restrictions.

In relaxing the restrictions, we expect the authorities to focus on levels of compliance with the Domestic Market Obligation (DMO) that requires miners to supply 25% of their product locally, at capped prices. Most Fitch-rated miners complied with the DMO in 2021.

The credit impact of the ban on our portfolio of Indonesian coal miners will be limited provided the restrictions are lifted by end-January, in our view. Miners have a degree of operational flexibility, and even those that face inventory constraints limiting their capacity to store coal mined during the export ban should still be able to meet annual production targets. Some miners may face claims over export contracts that were not fulfilled in a timely fashion because of the restrictions, but they should have the option to declare force majeure in such cases.

There is a risk that overseas demand for Indonesian coal could be adversely affected if customers in export markets, such as Japan and Korea, divert their orders following the supply interruption. This is not our baseline assumption, but if exports are subject to further disruption the risk might increase. Nevertheless, the fungibility of global coal markets suggests alternative customers can be found, albeit at potentially less profitable prices.

Another danger is that the government could opt to revise the DMO. Policy changes that further prioritise domestic markets over external ones could have an adverse impact on cashflows for Indonesian miners, but the overall credit impact would depend on the nature of the adjustment and individual company responses. Our assumption for now is that the authorities will not change the DMO volume requirements, but will monitor and enforce them more strictly. This should not have a substantial effect on miners that are already compliant.

Developments in Indonesia have not led us to revise our expectation that Qinhuangdao thermal coal prices in China will average around CNY720 (equivalent to USD111) per tonne in 2022, from CNY1,022/tonne in 2021. The export ban may have provided some temporary support for prices, but imports from Indonesia are a marginal factor in prices relative to supply and demand trends in China. We believe strong domestic coal production and relatively weak demand, due to a warm winter and slowing economic growth, will put downward pressure on Chinese coal prices in the coming months.
Source: Fitch Ratings