Will coal crash as Indonesia ramps up production?

JAKARTA, INDONESIA – In a move designed to take advantage of strong coal prices, the Indonesian Ministry of Energy and Mineral Resources (ESDM) has increased the national coal production quota for 2021.

The coal production quota for 2021 has been increased by 75 million tonnes (13.6%), rising from the original quota of 550 million tonnes to 625 million tonnes. 

With this additional production, the supply of coal in the market will be more abundant and this excess supply may have a negative impact on prices.

Should coal investors be worried about a looming coal crash?

Executive Director of the Indonesian Coal Mining Association (APBI), Hendra Sinadia did not deny that prices would be affected by the increased quota.

“Naturally, prices will be affected by supply. The rapid rise in price in recent months was caused by extreme weather constraining our supply,” he explained.

Coal prices have been climbing recently, primarily due to the heavy rainfall and floods which hit Borneo and Sulawesi and greatly reduced supply.

“This new quota could affect prices, but nothing can be projected yet. We (coal producers) want to capitalize on the price momentum, and the government is interested in the potential revenue,” he explained.

Chairman of the Indonesian Mining and Energy Forum (IMEF), Singgih Widagdo echoed this sentiment.

He went further and said that with the 75 million tonne increase to national production quotas, the reduction in coal prices is very likely to happen.

“There is pressure on the market, but we hope it won’t make prices go down. But the potential to fall is definitely there,” he said.

According to Widagdo, if the government wants to increase production, the ideal quota should be set at 595 million – 600 million tonnes – enough to accommodate the interests of coal companies.

“Producing 595 million or 600 million tonnes, in my opinion, is more appropriate in the current global market climate where potential can be maximized,” he said.

However, he believes that the government’s initial decision to target 550 million tonnes of production this year is already ideal, especially as an effort to control production, and that quota increases are unnecessary.

There is a lot of uncertainty regarding how extremely the market and coal stocks will respond. It remains to be seen whether coal prices will plummet back to pre-pandemic levels.

In a recent Asia Markets Expert Analysis article, China Dialogue Researcher, Tom Baxter wrote about the dramatic pullback in coal demand seen across Asia in 2020.