With the new Indonesian regulation making letters of credit mandatory for exports coming into effect on Wednesday, market participants voiced concerns over possible delays in shipments and sought more clarity from the government on the fresh requirements, sources said Tuesday, March 31.
The new regulation requires companies to use letters of credit to export coal and other commodities starting April 1, 2015.
A major Indonesian producer said that the government had yet to clarify if the regulation would impact the contracts that were already signed at the beginning of the year.
The Indonesian Coal Mining Association started talks with the Ministry of Trade about a week ago seeking clarity, and market participants spoke of the likelihood of an exemption for sellers who had concluded trades prior to April 1, according to another Indonesian producer source.
“I believe the ICMA is taking up the case for the coal sector with relevant authorities. In my opinion, there is scope to review, fine tune further and distinguish between reputed long-standing clientele and others — possibly case-by-case exceptions,” said Bumi Resources Director and Corporate Secretary Dileep Srivastava.
Sources said that coal exporters might apply for an exemption from the Ministry of Trade and show evidence of the approval before shipping their cargoes.
“We have asked for the exemption for some of our buyers but we are yet to receive any confirmation from the government,” a third major producer said.
“[The trade ministry] would need a recommendation from the Ministry of Energy and Mineral Resources and suppliers might have to submit their ET Batubara [export license] too,” an Indonesia-based trader added.
An Indonesian government official said that discussions were going on with the coal exporters but no decision had been reached yet. He did not disclose additional details.
SOME PREFER CASH DEALS
Another Indonesian trader pointed out that many trades were done on cash payment earlier this year after sellers learned about the new regulation.
Major Indonesian coal producers have requested the government to exempt trades done prior to April 1 as it could impact transactions already closed with the banks, he said.
One of the larger coal miners said his company was already preparing to embrace the new rule after most of his customers agreed to the letter of credit requirement.
The first Indonesian trader said, however, that some buyers were resisting the new regulation as they preferred to pay through telegraphic transfers rather than letters of credit.
“We have asked for a breathing time, but have not heard anything from government as yet,” a source at a major Indonesian producer said.
Until further clarification, he said his company planned to absorb the cost associated with the letter of credit as some of the buyers are unwilling to bear the same.
“This appears to be a retrospective regulation covering the entire resource sector in Indonesia — not just coal. Though the objective may be laudable in the national context there is some potential to delay shipments and add to costs which producers can ill afford in today’s [challenging] environment,” Bumi’s Srivastava said in an e-mail.
Several producers are still negotiating with the authorities on the regulation, Standard Chartered analyst Serene Lim said.
IMPACT ON PRICES
“I think LC will add a cost [that will] probably have to be borne by the producers in this weak coal climate,” Lim said, adding, however, that the new regulation was unlikely to have any impact on prices.
An Indian trader differed and said that the implementation of this rule might have a positive impact on Indonesian coal prices.
Ships might end up waiting at Indonesian ports if suppliers are unable to furnish letters of credit, pushing up demand for those cargoes that have prior clearance to sail, he said. Any possible rise in prices might be temporary, he added.