Singapore (Platts)–8 Apr 2016 143 am EDT/543 GMT
Indonesia’s Ministry of Energy and Mineral Resources has passed a new regulation on pricing formula for coal supply to upcoming domestic mine-mouth power plants, sources said Friday.
An Indonesian government official said that upcoming mine-mouth power plants would now be procuring coal under term contracts at a price calculated based on production cost of the supplier plus a profit margin of 15%-25%.
He said the ministry has already approved this regulation and will be implemented in the next few weeks.
The new regulation is not expected to have an impact on Harga Batubara Acuan, or HBA, the thermal coal reference price used to calculate royalty payments, sources said.
A source at a major Indonesian miner said that new mine-mouth power plants entering into agreements with suppliers over a longer term ensures supply security as well as guarantees steady profit margins for suppliers.
However, the disadvantage of this regulation is that suppliers may not be able to take advantage of any possible rise in coal prices in future.
“They will still be making profit margins at the same level as per the agreement,” he said.
He said the government has to ensure that suppliers under such agreements should avoid changing strip ratios and allow contractors to move their prices only in line with oil price movement and inflation rates.
A source at another major miner voiced concerns about the calculation of production costs and the impact of any possible coal price rise on suppliers under such agreements.
He said some of the mine-mouth power plants are being planned in the Sumatra province, where there is abundance of low calorific value coal ranging from 2,700-3,400 kcal/kg GAR, which have presently lost their share in the export market.
Another major supplier source said that although this regulation was introduced last year, the flat margin of 25% imposed under the price formula at that time “is huge.”
That might be the reason why the Indonesian government has narrowed the range to 15%-25% for new mine-mouth power plants, he added.
He said there are several costs involved for a supplier to mine the coal, ranging from land acquisition to transportation to mining costs.
Although miners are expected to provide production cost details, the government also has the right to audit such submissions, he added.
Indonesia has set its eyes on an ambitious plan of adding 35,000 MW of power generating capacity by 2020, of which almost 20,000 MW are expected to be thermal-coal based.
Another Indonesia-based source noted that this 20,000 MW capacity is expected to consume an additional 90 million mt/year of coal in the next four to five years, he added.
Indonesia’s 2015 production was estimated to have fallen by about 11% from 2014 as several small- to medium-sized producers either cut production or shut mines due to weaker coal prices, sources noted.
Domestic consumption in 2015 was estimated to have reached about 90 million mt.
Several major Indonesian coal miners are planning to move into power generation as they look to diversify amid falling coal prices.
Platts FOB Kalimantan 5,900 GAR coal prices have slumped about 25% since the start of 2015, while FOB Kalimantan 3,800 GAR prices have plunged 28% over the same period, Platts data showed.