Dry bulk operators in the Pacific region are concerned about the potential impact of Indonesia’s decision to suspend coal exports from several key producers. The Indonesian government has reintroduced sanctions for producers that fail to meet their domestic market sales obligation (DMO), with 34 companies currently banned from exporting coal because of unfulfilled supply agreements with state-controlled power utility Perusahaan Listrik Negara.

The sanctions bind coal miners to quotas on domestic sales before making their products available on international markets with Jakarta reinstating their DMO to domestic coal producers having previously suspended the legislation in 2020 as companies struggled due to the pandemic. The restrictions will last until the firms fulfil their supply obligations. Rising coal prices have seen producers push their coal for export and overlook local sales, causing tight domestic supply.

Indonesia has remained the primary source of coal imports to China while the ban on Australian coal remains in place. The trade is usually carried out in supramax and panamax vessels. China imported 17m tonnes of coal from Indonesia in June, which is up by 5.8m tonnes as compared with a month before and up by 6.2m tonnes year on year. The rise in Indonesian imports to China have provided a boost to freight rates on the S10 South China trip via Indonesia to South China supramax routes which rose to $30,186 per day on August 10 as compared with just $7,567 a day on the same day a year ago when the informal Chinese ban on Australian coal was declared, according to Baltic Exchange.

In the short term, the abrupt halt of volumes from the 34 sanctioned miners is generally bad news for the dry bulk freight market, while the owners engaged in this trade in Asia could feel a negative influence from the ban because of the loss of cargo. The pain will be likely be limited as there is currently no shortage of other cargoes in the market for Supras and panamaxes to carry. “The latest decree is sure to cause some short-term pain to China, especially for the shipments which have already been fixed but the market would snare up opportunities in the long run,” the broker added.

From a shipping point of view this is certainly bad news, as China would look to neighboring country Mongolia to fill up its stock, which would result in reduced shipping demand. Meanwhile, Indonesian coal shipments faced severe domestic disruptions because of coronavirus restrictions and relative lack of competitiveness compared to Australian and Russian exports, said Banchero Costa head of research Ralph Leszczynski. Total exports from the country were only 193m tonnes of coal in the first seven months of the year, which is essentially flat as compared to the same period last year, and significantly down by 15.5% from the same period in 2019, brokerage Banchero Costa data shows.

While the global coal trade rebounded by 2.5% year on year so far this year, Mr Leszczynski argued that Indonesian exporters faced severe competition as their traditional market were undercut by Australia. “As Australian coal is now banned from China, Australian exporters have successfully targeted other Asia-Pacific markets such as India and Japan, which were the traditional markets for Indonesia.”

Although Indonesia did manage to increase shipments to China this year, by 19.9% year on year to 82.6m tonnes through January to July 2021, shipments declined sharply to India, down — 18.6% year on year to 31.9m tonnes in the first seven months, from 39.2m tonnes in same period in the previous year. Coal exports to Japan also fell by 27.6% year on year to 11.7m tonnes in the first seven months of 2021, from 16.2m tonnes in 2020. “Any new restriction on Indonesian coal exporters from the government will just pile on the already big difficulties Indonesian exporters face on the international market,” added Mr Leszczynski.