THERMAL COAL
Sub-Bituminous Coal and Lignite in Indonesia
April 2019
China’s port restriction for Australian coal has created renewed interest in Indonesian low rank coal. Chinese purchasers are turning towards thermal coal at the Indonesian spot market, particularly for sub-bituminous and lignite.

Spot prices in March 2019 for FOB Kalimantan 4200GAR and 3800GAR thermal coal averaged US$38.8/t and US$30.6/t, respectively, both up 5.9% on month.

The vast majority of export sub-bituminous and lignite-grade thermal coal is produced in Indonesia, with production from elsewhere generally consumed domestically. In most export thermal coal producing countries, including South Africa, the US and Australia, thermal coal under 4,800kcal/kg is sold predominately to domestic customers as prices on the export market are not sufficiently high enough to justify the land and sea freight costs for exporting low-calorific-value coal. A number of traditionally non-thermal coal exporting countries, such as India and China, also produce large volumes of sub-bituminous and lignite-grade thermal coal, most of which is consumed domestically.

Sub-bituminous and lignite-grade thermal coal produced in Indonesia dominates the export market. This is in part due to the country’s geographical location, which is much closer to the dominant sub-bituminous and lignite-grade thermal coal demand region compared to other potential export supply countries. Another key factor is the specifications of the sub-bituminous and lignite-grade thermal coal present throughout Indonesia. While low in calorific value, these thermal coals generally have low ash contents, typically 5%, leading to less undesirable by-products to be disposed of by power utilities after electricity generation.

As concerns turn towards climate change and environmental protection, many analysts insist that there is no foreseeable future for sub-bituminous and lignite. They forecast that the major coal consumption countries will transfer from low rank coal to high quality coal in the near future, especially Japan and South Korea. However, is this the truth?  Let’s take a look at the table below:

 

 

Indonesia exported ~350Mt of sub-bituminous and lignite in 2018, an increase of 24.3% year on year. The proportion of sub-bituminous and lignite exports in 2018 was accounted for 81.5% of total coal export volume, increased by 9.3% from 72.2% in 2017. China, the largest low rank coal importer from Indonesia imported 116Mt sub-bituminous and lignite from Indonesia, an increase of 21.5% year on year. Following China, India imported 106Mt, up 37.7% year on year. With the exception of Japan, several countries including south Korea and Thailand increased import volumes in 2017 and 2018. What's the reason for this? Price! 

 

 

Sub-bituminous thermal coal was typically sold at a discount of ~30% to the Newcastle 6,000kcal/kg spot price before 2016. However, with China cutting domestic coal production from the second half of 2016, the discount rate increased to 55% of Newcastle premium thermal coal. The same tendency is happening for both FOB Kalimantan 4,200 and 3,800 GAR. Actually, the average prices of FOB Kalimantan 5,000, 4,200 and 3,800 GAR did not change much, keeping at US$60/t, US$42/t and US$35/t in both 2017 and 2018, while the average price of Newcastle premium thermal coal increased to US$107/t, up from US$88/t in 2017 or 21.5% year on year, and peaked at US$125/t in July 2018. Sub-bituminous and lignite-grade thermal coal is heavily utilised for primary use and blending in price-conscious power utilities in countries such as India and China. Therefore, these countries prefer to import cheap low rank coal with low sulphur and low ash to blend with their domestic product, transferring the risk of import high price thermal coal from Australia.

In contrast, power utilities with more stringent requirements for coal quality, such as those in Japan, generally only use sub-bituminous and lignite-grade thermal coal in small quantities (if at all) as a blending coal to reduce ash waste.

 

 

In 2018, China and India were two dominant importers of sub-bituminous and lignite-grade thermal coal from Indonesia, with accounting for 33% and 30%, respectively. South Korea was the next largest volume importers of Indonesian sub-bituminous and lignite-grade thermal coal, accounting for 8.5% of Indonesian exports, respectively. In 2018, approximately 98% of the sub-bituminous and lignite-grade thermal coal exported from Indonesia was sold to countries in Asia. Indonesia saw an increase of ~24% in its proportion of lignite exports in 2018, as well as an overall 10% increase in thermal coal exports.

Due to China's port restrictions for Australian coal, thermal coal import from Australia dropped to 2Mt in February, down 52% year on year and 68% month on month, while total thermal coal from Indonesia was 10.4Mt, down 37% year on year and 4% month on month. China imported 9.6Mt of sub-bituminous thermal coal and lignite from Indonesia in February, keeping stable with the same period of last year. With the restrictions expected to last until the end of May 2019, AME estimates more low rank coal from Indonesia will be exported to China. However, the supply from Indonesia is also facing risk if the government takes action against companies who are missing their ‘sales to domestic purchasers’ quota of at least 25%.