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Hedging Low-Grade Indonesian Coal

Physical Indonesian coal exposure is difficult to hedge and market participants often suffer from poor correlations and severe illiquidity. To promote effective price risk management for all active participants across the value chain, CME Group has introduced an ICI 4 indexed financially settled contract.

ICI 4 is one of five price assessments published in the Argus/Coalindo Indonesian Coal Index Report, that provide direct, independent and reliable valuations for Indonesian coal. The figures supplied are for varying coal grades 6,500 (ICI 1), 5,800 (ICI 2), 5,000 (ICI 3), 4,200 (ICI 4) and 3,400 (ICI 5) kcal/kg GAR. At 4200 kcal/kg, ICI 4 represents a lower grade coal that attracts significant physical trading in Asia (around 90 MTPA). The last 18 months have seen a rapid migration towards ICI 4 index-linked physical contracts in the Indonesian space.

With a strong presence in international coal, CME Group is committed to providing a reliable and liquid futures to manage your risk. The NYMEX ICI 4 futures contract gives hedgers and producers the opportunity to better manage their Indonesian price exposure.

Key Benefits

Trading

  • Competitive fee schedule
  • Straight Through Processing (STP) directly into customer risk systems
  • Margined efficiently in the portfolio of products

Clearing

The foundation of CME ClearPort is the strength of the CME Clearing and its market-leading risk management. The benefits of CME Clearing include:

  • Instant confirmation that a trade is cleared — no delays while credit checks are carried out
  • A fund that ensures the safety and soundness of your cleared positions
  • 24-hour monitoring by an experienced risk management team

Indonesian Coal Products

Clearing Globex Floor ClearPort Product Name Exchange Product Group Subgroup Category Subcategory Cleared As Volume Open Interest
ICI ICI ICI Coal (ICI 4) Indonesian Coal Index (Argus/Coalindo) Futures NYMEX Energy Coal Futures 5 110

Coal Prices Projected to Remain Healthy in 2018

Global coal prices are expected to remain healthy throughout 2018 owing to stable demand from China and increasing consumption in India, says the World Coal Association (WCA).

WCA chief executive Benjamin Sporton projected that demand from China would continue to be reasonably strong this year, despite the country’s plan to implement a huge gasification program for households and industries to reduce its dependence on coal.

Furthermore, he said India would also increase its coal imports amid soaring demand from its power generation sector and lower-than-expected domestic production.

“India is not in a shortage situation, but it is running very closely behind it, and that’s really what has driven coal exports into India, and a good chunk of that is coming from Indonesia,” Benjamin told The Jakarta Post recently.

The price of Asian benchmark Newcastle thermal coal had climbed to US$106.78 per ton in January after falling to as low as $74.52 per ton in May last year.

“It’s really the supply constraint that sent the price to above $100 per ton over the last year, […] and I would still expect it to be somewhere in that ballpark for most of this year,” Benjamin said.

The Indonesian government has limited the country’s coal production in 2018 at a maximum level of 485 million tons, 25 percent of which will be allocated for the domestic market.

Within the first two months of 2017, Indonesia’s coal production reached 28.07 million tons, 15.6 million tons of which were absorbed by the domestic market.

Indonesia to Regulate Domestic Coal Price to Curb Electricity Costs

The Energy and Mineral Resources Ministry says it will issue a regulation on the domestic price of coal to curb production costs as the government has decided not to increase electricity rates.

The ministry’s electricity price section head, Jisman Hutajulu, said in Jakarta on Monday that domestic coal would be sold based on domestic market obligation (DMO).

“The objective of introducing the regulation is help easing the financial burden of PLN,” Jisman said as reported by tempo.co, adding that the DMO was based on Energy and Mineral Resources Ministry Regulation No. 34/2009 on coal and mineral resources.

The regulation, among others, rules that the domestic price of the mineral and coal are based on the price reference of the commodity.

Under the regulation, the energy and mineral resources minister will decide the coal quota for domestic needs.

Jisman said Minister Ignasius Jonan would also revise a prevailing regulation to decide the domestic coal price after taking into account the opinions of stakeholders.

Jisman said PLN had proposed a price floor of US$60 and price ceiling of $70.

PLN previously said that rising coal prices had resulted in an increase of production costs, as around 57 percent of the company’s generated power came from coal-fired power plants.

Coal Futures Contract Provide Guarantee

Jakarta, Kompas – Futures contracts in coal trading transactions provides a price guarantee for industry players amid fluctuating commodity prices. Although quite profitable for sellers and buyers, futures contracts can make coal prices less competitive.

It was surfaced in Argus Coalindo Indonesia Coal Forum 2018, in Jakarta, Thursday (8/2). This gathering of coal industry players become a socialization event for futures contract concept in Indonesian Coal Index (ICI) for coal trading.

This was conveyed by PT Coalindo Energy CEO Maydin Sipayung. Coalindo Energy is the Indonesian Coal Index provider.

Maydin said, futures contracts become the agreed price of buyers and sellers of coal for a certain period. This changes the pricing system that has been set for a period of one year.

“The concept of futures contracts is applied because the selling and buying of coal is done in a long period of time. Because, the delivery time takes months. On the other hand the coal prices are very volatile, “he said.

Futures contract, Maydin continued, is a tools to determine the coal price for a certain period. Buyers and sellers get guaranteed prices.

Executive Director of the Indonesian Coal Mining Association (APBI) Hendra Sinadia assess, the implementation of futures contracts have a positive and negative impact. In general, the positive impact that buyers and sellers will experience is the guaranteed price.

“But, on the other hand, futures contracts make the selling price of coal has no competitiveness. When the coal prices are high, the producers cannot experience the benefit, “he said.

Head of Sub Directorate of Production and Marketing Operations Supervision, Directorate General of Mineral and Coal Ministry of Energy and Mineral Resources Hersonyo Wibowo said the coal production target this year is 485 million tons.

Government Maintains Energy Prices for Q1 2018

The Energy and Mineral Resources Ministry has announced that it will maintain the prices of electricity and certain fuel types in the first quarter of 2018, forcing state energy giants Pertamina and PLN to bear the burden of increasing oil and coal prices.

“The decision has been made to preserve people’s purchasing power,” Energy and Mineral Resources Minister Ignasius Jonan said during a media conference on Wednesday.

Subsequently, the prices of Premium gasoline, which has a research octane number (RON) of 88, and subsidized diesel fuel will be maintained at Rp 6,450 (49 US cents) and Rp 5,150 per liter, respectively. These rates have been in place since April 2016, even though the prices of global crude have been in an upward trend lately.

The price of global benchmark Brent crude reached $66.78 per barrel on Tuesday after falling to as low as $44.82 per barrel on June 21.

Meanwhile, the price of electricity for low capacity non-subsidized customers will remain unchanged at Rp 1,467.28 per kilowatt hour (kWh). Prices for mid-capacity and high-capacity will hover at Rp 1,114.7 and Rp 996.74 per kWh, respectively.

This is despite the 15.4 percent increase in the price of Asian benchmark Newcastle coal to $96.63 per ton between January and November.

Pertamina and PLN has pledged to undertake various efficiency measures to cope with the government’s decision to maintain current fuel and electricity prices.

Asian Coal Prices Hit Late 2016 High Amid Huge Shipping Congestion

Spot cargo prices for Australian Newcastle coal have risen nearly 15 percent from lows in late November after China loosened import restrictions to help meet a winter fuel shortage.

SINGAPORE: Asian benchmark thermal coalprices have pushed to their highest levels since 2016, fuelled by demand in China and loading delays in Indonesia that have ramped up shipping congestion outside major coal ports.

Spot cargo prices for Australian Newcastle coal have risen nearly 15 percent from lows in late November after China loosened import restrictions to help meet a winter fuel shortage.

“The reason behind relaxing the restrictions was to ensure coal supplies at utilities, as some coal-fired power plants in eastern regions have been operating with minimum coal inventories,” said Zhang Xiaojin, coal analyst at Everbright Futures.

The move by the National Energy Administration also followed an ambitious gasification programme that moved too many households and factories from coal to gas for its utilities to keep up. Traders said strong orders from India have also supported prices, which hit $105.65 per tonne on Wednesday, the highest since November 2016.

“India is buying throughout Q1, which means the shortage is not expected to end any time soon,” said a coal trader with a major trading house, who declined to be named.

HUGE CONGESTION

Bottlenecks at import terminals across China and delays at loading ports in Indonesia’s Kalimantan island, one of the world’s bigggest thermal coal mining regions have added to the tighter market.

“The trouble to load in Kalimantan is a result of huge rainfalls. This has triggered replacement orders for supplies from Newcastle (Australia), pushing up prices there,” said a second coal trader, speaking on condition of anonimity as he was not allowed to comment on trading activity.

The congestion started in late 2017, and is getting worse.

Shipping data in Thomson Reuters Eikon shows around 100 large dry-bulk ships waiting to load coal off the coast of Kalimantan, Indonesia, most of them at Samarinda and Taboneo.

Some ships have been waiting since late October, the data shows.

Even more ships are waiting to unload coal in China, where between 400 and 500 large dry-bulk carriers are waiting outside Shanghai/Ningbo and in the Gulf of Zhili, serving the ports of Tianjin, Coafeidian, Qinhuangdao and Bayuquan.

That’s up from around 300 ships waiting outside both Chinese and Australian ports to load or deliver in late 2017.

Analysts expect tight market conditions to last until the Chinese New Year, which starts in February.

“Congestion and supply-side delays have sent prices higher. We see seaborne coal price support for the winter through to the Chinese New Year, especially from China and India,” said Shirley Zhang, principal analyst for Asian coal markets at energy consultancy Wood Mackenzie.

However, in the longer term, prices should ease as China’s import curbs are potentially restored, heading to $69 a tonne by 2021 for Newcastle, Zhang said.

“In general, the Asian demand growth driver is shifting away from China towards India and Southeast Asia, including Vietnam,” she said, where strong demand growth would require investment into coal.

India Coal Demand Growth Slows Amid Power Glut

India’s coal consumption growth has slowed sharply as power plants, the biggest users of the fuel, are using less of their capacity, according to a Greenpeace report.

Coal consumption grew by an average of 2.2 percent over the two fiscal years ended March 2016 and 2017, compared with an average of over 6 percent in the 10 years before that, the report said. Lower consumption at cement and steel factories also contributed to the slowing use of the fuel, the report said.

“It’s too early to say whether this latest trend could mark a turning point in India’s energy mix, or if it’s simply a blip brought about by sluggish economic growth, but there are indications it could be the start of a longer decline,” Greenpeace, an anti-coal campaigner, said in the report.

India’s power plants are using about 60 percent of their capacity as money-losing provincial electricity retailers aren’t able to buy enough power from them. Falling tariffs of solar and wind power are also spurring a rethink on coal projects.

India has said its dependence on coal will continue for decades, but growing concern over air pollution is forcing the government and companies to use the fuel more judiciously.

China’s Coal Imports Rise as Rail Work Limits Domestic Supply

China’s coal imports in April rose to the
highest in four months as power producers were seen boosting
overseas shipments to replenish stockpiles after railway
maintenance limited domestic deliveries.
Inbound shipments by the world’s largest consumer of coal
were equivalent to about 826,000 tons a day, according to
Bloomberg calculations based on data from the General
Administration of Customs on Monday. That’s up almost 16 percent
from the previous month and the most since December.
China’s power producers have turned to overseas deliveries,
which are up 33 percent during the first four months of this
year, amid government mining restrictions that helped imports
last year expand at the fastest pace in four years. Inbound
shipments likely accelerated further last month after work on a
key rail supply line limited domestic shipments, according to
the China Coal Transport and Distribution Association.
“Inventories were quite low amid tight domestic supplies,”
Deng Shun, an analyst with GF Futures Co., said before data were
released. “Power plants should have increased purchases last
month to replenish stockpiles.”
China’s benchmark Qinhuangdao coal price was at 619 yuan a
ton, CCTD reported Monday, the lowest since March 6. Prices will
stabilize at around 550 yuan a ton this year, UOB Kay Hian
analysts said in an e-mailed note.
The Datong-Qinhuangdao railway started 25 days of
maintenance on April 6, CCTD said on its website last week. On a
monthly basis, China imported a total of 24.78 million metric
tons in April, the data Monday showed.

RI Says It’s Ready for First Nuke Power Plant

As the government completes preliminary studies and prepares human resources to build and operate the country’s first nuclear power plant, it is keeping its options open for countries to invest in the project.

The country established the Nuclear Law in 1997 as a legal basis to build a nuclear power plant, but attempts to realize it have been hampered by environmental concerns, especially following the Tohoku earthquake and tsunami that led to the Fukushima nuclear disaster in Japan.

A recent visit by the International Atomic Energy Agency (IAEA) in mid-September boosted Indonesia’s confidence after the agency concluded that the country had a high level of readiness to carry out the environmentally friendly program.

The National Nuclear Energy Agency (BATAN) said it had studied two strategic locations for the plant — in Bangka Belitung province and in Jepara, Central Java — both of which are low earthquake risk areas compared to other regions in Indonesia, also known as part of the Pacific Ring of Fire that is prone to earthquakes and tsunamis

Bangka is considered strategic to meet electricity demand for both Sumatra and Java, while Jepara is another option, should the plant be designed only to support Java.

Nuclear plants, if finally built in Jepara and Bangka, could each produce more than 1,000 megawatts (MW) of power.

“Nuclear power plants [PLTN] are a political decision. We will stick to the President’s decision [on the matter],” BATAN chief Djarot Sulistio Wisnubroto told The Jakarta Post.

BATAN has briefed President Joko “Jokowi” Widodo with regard to which country Indonesia should work with to establish its first nuclear power plant. The countries on the table are Russia, South Korea, France, China, the US and Japan.

BATAN has also carried out a capacity building program with Rusatom Overseas, a subsidiary of Russian state corporation Rosatom to assist the country in preparing the project.

A nuclear power plant takes around seven to 10 years to build and Indonesia risks missing its target to fulfill 19.6 percent of its total energy demand by 2025 with new and renewable energy, as recorded in the country’s national energy plan, if it fails to start building its first nuclear plant by 2017, at the latest.

Nuclear is one of several new energy options that will contribute to achieving the 19.6 percent target.

By 2025, the government hopes 50.3 percent of electricity generation will be fueled by coal, 29.4 percent by gas, 0.7 percent by petroleum-based fuel and the remaining 19.6 percent by new and renewable energy sources. “If we assume that the establishment of the PLTN will take around seven to 10 years, then the nuke decision has to be made soon,” Djarot said.

Funding will be a huge barrier for Indonesia to kick off its first nuclear project, as it is estimated that a nuclear power plant would cost around Rp 60 trillion (US$4.62 billion) to Rp 70 trillion for a 1,400-MW power plant.

Nuclear Energy Regulatory Agency (Bapeten) deputy for permits and inspection Khoirul Huda said the IAEA had concluded that Indonesia had the adequate regulations and infrastructure to build its first nuclear power plant.

“The response [from the IAEA] is positive. It only suggests that all relevant institutions in Indonesia increase coordination and communications with regard to the nuclear plan,” Khoirul told the Post.

Bapeten said there were several technologies considered by Indonesia to materialize its nuclear plan, including a light-water reactor (LWR), advanced heavy-water reactor (AHWR) and nuclear coolant reactor.

Bandung Institute of Technology (ITB) geologist Benyamin Sapiie said Bangka and Jepara were located in regions that had strong terrains, making them less prone to earthquakes. “According to current data on long-term stability of the regions, there is nothing that could potentially cause a big earthquake in those places. Jepara is located near a volcano, but there is no earthquake risk in the region,” Benyamin said.

Jonan, Arcandra Back in the Saddle

“[…] I am sure the two, once again, are figures with competence. Although I know both are stubborn, they like going into the field,” President Joko “Jokowi” Widodo said on Friday, regarding Ignasius Jonan and Arcandra Tahar.

The President was providing the rationale for his decision to reappoint Ignasius and Arcandra as Cabinet members, less than three months after both were removed from their positions.

In a surprise move, Jokowi announced and later inducted Jonan as energy and mineral resources minister and Arcandra as his deputy.

Jonan was sacked from his position as transportation minister in the latest Cabinet shake-up in August, a move that many deemed as punishment for his penchant for putting stumbling blocks in the way of Jokowi’s policies, including the Jakarta-Bandung high-speed railway network construction.

Arcandra was removed from his position as energy and mineral resources minister after only 19 days in office following a controversy surrounding his US citizenship.

Although Jokowi cited Jonan and Arcandra’s professionalism and skills, traits that are essential for carrying out “sweeping reform” at the graft-ridden ministry, many considered the decision ill-advised given that second fiddle Arcandra has far more extensive knowledge on the oil and gas sector than his boss.

Jonan has zero experience in oil and gas as well as the mining sector. He gained his reputation as the no-nonsense director of state-owned railway company KAI and was credited with revamping the country’s railway services, which is believed to be one of the reasons Jokowi picked him to be transportation minister.

Jokowi told reporters after the swearing-in ceremony that his decision to pair Jonan and Arcandra “was for the sake [of bringing better] management” to the Energy and Mineral Resources Ministry, hinting that collaboration between the two figures would be crucial.

In an apparent show of unity, Jonan and Arcandra traveled together in an official chauffeured vehicle from the State Palace to the Energy and Mineral Resources Ministry in Central Jakarta.

Jokowi called on the public to not politicize the reappointment of Jonan and Arcandra.

“Let’s not draw it into personal issues or politics,” Jokowi said. “Although it is not an easy task, I am sure that the two, the minister and the deputy, will be able to solve current problems at the energy ministry and bring good teamwork.”

The appointment of Arcandra was made possible after Jokowi brought back the post of deputy energy and mineral resources minister, which was scrapped when he took office in October 2014.

As deputy minister, Arcandra will have no authority to issue policies, and is expected to help Jonan in drafting his future policies.

Jonan said he would rely on Arcandra in running the ministry.

“Well, I have Arcandra here,” Jonan said when asked about his ability to run the problem-prone ministry.

Arcandra, meanwhile, shrugged off the suggestion that Jokowi had tried to find ways to accommodate him in the Cabinet, saying: “The President has his own considerations when it comes to the energy ministry.”

It was apparent that the decision to reassign Jonan and Arcandra was made in haste.

They were sworn in shortly before Jokowi took off to West Kalimantan for a working visit, and visibly absent at the ceremony was Vice President Jusuf Kalla, who was on a working visit to Makassar.

Coordinating Maritime Affairs Minister Luhut Pandjaitan, who was also the interim energy minister, did not attend the ceremony.

Multiple sources claimed that Jonan and Arcandra were notified about the inauguration only hours before the ceremony took place.

In fact, Jokowi had earlier decided to appoint Jonan as the person in charge of a holding firm for state-owned companies.

Presidential spokesman Johan Budi said Jokowi had consulted a number of key players in his administration, including Kalla and Luhut, and that their absence at the inauguration was simply due to scheduling conflicts.