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Is coal industry going to hit a brick wall?

The Director General of Mineral and Coal of Indonesia revised down Indonesian coal benchmark price once again to US$ 59.59 per MT for 6322 GAR coal for June 2015 delivery. The June price reference for Indonesian coal declined 1.49% or $ 2.44 per MT month over month and lost 6.65% year to date.

According to the date from Director General Shows that, the government has fixed US$ 14.73 per MT for the coal with calorific value 2,995 kcal/kg on GAR with total moisture 50.10% on as received basis in June 2015. The royalty and taxes will be calculated based on this declared HPB. In the meantime, the government also fixed US$ 46.23 per MT as HPB for 5000 GAR coal for June 2015.

Indonesian thermal coal reference price or called HBA recorded the lowest level in 78 months or since launching of HBA by the government of Indonesia in January 2009.

Indonesian coal benchmark price for June 2015 was calculated based on calorific value of 6,322 kcal/kg (GAR), stated to be using a formula based on the May 2015 index average of ICI-1 (Indonesia Coal Index) 25%, Platts-5900 25%, NEX (Newcastle Export Index) 25%, and GC (globalCoal Index) 25% and its was calculated considering coal with GCV (GAR) 6,322 kcal/kg, Total Moisture (arb) 8.00%, Total Sulphur 0.8% (arb), Ash Content 15 % (arb) and  delivery free on Board (FOB) Vessel basis and apply to spot contract, delivery between 1 – 30 June 2015.

The highest benchmark price was declared by The Ministry of Energy & Mineral Resources of Indonesia in February 2011. Compared today's price The February 2011 price was higher by US$ 67.46 per MT. Energy and Mineral Resources Minister of Indonesia has said the world’s coal market is heading towards a new balance, which will make Indonesia’s national coal industry more efficient, during the 21st Coaltrans Asia conference in Nusa Dua, Bali, on Monday. According to media reports, the minister also noted that, the declines in coal prices during the last several years have pushed markets to normalization because what previously occurred were abnormal profits.

The government of Indonesia was publishing a monthly coal price reference (HBA & HPB) since January 2009 to be used by coal producers for all spot and term contracts. However, the official implementation of HBA was commenced since September 2011. According to government regulation, the coal benchmark price must be used by the holders of production operation IUPs, special production operation IUP's, and CCoWs as a reference in determining the coal selling price for a particular period.

The declared HBA in June 2015 was 19.08 per cent or $ 14.05 lower compared to the same period in 2014.

February 2011 declared HBA was the highest since the launching of HBA by the government of Indonesia (US$ 127.05 / MT for 6322 GAR coal) and the lowest was declared this month (US$ 59.59/ MT).

This month declared price is only valid for the spot price (loading on or before 30 June 2015), while as for term price (up to 12 months supply), the average reference price (HPB) of the previous three months will be used to determine the selling price. (50% of the latest available month HPB (this month) 30% one month prior HPB and 20% of two-month prior HPB).

The government also declared price marker for eight brands of Indonesia's coal, which are most commonly traded in the market. Those eight brands act as the benchmark and used to calculate other 66 coal types with a quality similar to the coal price markers.

For sales in the barge, the reference price is reduced by barging and trans-shipment costs from the barge to the vessel. The government has recently issued a regulation (644.K/30/DJB/2013 dated 21 March 2013) to regulate or determine coal prices on FOB barge. The government also fixed the freight for barging, surveyor, insurance and etc., to determine FOB barge price. Transshipment cost US$ 4.00/MT + Surveyor cost US$ 0.25/MT + Insurance 0.80% per shipment + Barging cost (for 270 footer - (US$ 0.0221 X barging distance) + US$ 3.7406, for 270 - 330 footer - (US$ 0.0184 X barging distance) + US$ 3.1172 and > 330 footer - (US$ 0.0154 X barging distance) + US$ 2.6002.

The coal price reference is being established to fulfil the requirement of mining law 04/2009 and ministerial decree No.17/2010. In addition to that, it aims to increase government revenue from royalties from coal producers.

The today's coal industry situation where coal industry gone from somewhat of a seller’s market to more of a buyer’s market in terms of excess supplies, and, as a result, the market is now experiencing a lot of volatility in coal price.  The excess of coal supplies and weak demand are still to be blamed for delay of  price recovery or falling of prices. Today’s price levels are not supporting any new investments or new explorations in coal mines.

It would be nice to see coal prices settle at a point where both the producer and consumer can sustain. Will it happen any time soon?

source: http://www.coalspot.com