Indonesia's onshore forex deposit mandate may hurt coal miners' cash-flow situation

The Indonesian government's latest mandate for the country's commodity exporters to deposit about a third of their dollar-denominated income from international sales in the domestic financial system is seen to put additional cash-flow pressure on the country's coal miners currently confronting a low-price environment, multiple sources from the industry said.

From Aug. 1, Indonesian exporters will have to park 30% of the money they receive as export revenue in accounts of Indonesian financial institutions for at least three months, according to a ministerial decree shared by sources July 17. The mandate is applicable to exporters of natural resources in mining, plantation, forestry, and fishery sectors.

Market participants pointed out the government mandate can lead to higher finance costs for coal producers as many miners may need to borrow more to cover their operational expenses amid weakening cash flows, which can cause profit margins to shrink. The directive may bode well for some traders who can agree to provide cash to strapped smaller miners, and demand discounts in return, an Indonesia-based trader pointed out.

Falling prices

The development takes place at a time when many smaller miners, especially located in the interior regions of Indonesia, are contemplating undertaking production cuts as the current prices of coal with lower calorific value (CV) in the seaborne spot market are seen as unsustainable. Restarting production after a period of output-cut warrants higher cash flow in mining operations.

The Kalimantan 3,800 kcal/kg grade coal was priced at $42.50/mt FOB July 17, down from $66/mt a year ago, according to data from S&P Global Commodity Insights. The price of this grade had touched the $75/mt level in November-December 2022, when global thermal coal prices surged with the Russia-Ukraine conflict disrupting trade flows and weather-related problems impacting output amid rebounding demand.

Prices of thermal coal in the Asian spot market have been under pressure over the last six months as suppliers from across the globe flocked into the region in the quest for buyers, with stockpiles in Europe staying healthy amid negligible coal-burn. The latest mandate is "very tough for miners which need a good cash flow, especially in this current market price," an Indonesia-based coal producer said.

The impact of the latest mandatory cash deposit rule will likely vary from miner to miner, depending on the type of license they hold.

Forex flows

An official of an Indonesian coal trade association said that "the ones with strong cash flow from the savings of last two years will survive, the small ones might get affected badly." Some in the sector are optimistic that access to the parked funds should be smooth if they are to be used for mining activities. The measure is seen to stabilize Indonesia's currency exchange rates and deepen the market for domestic forex finance.

According to a July 17 presentation by Bank Indonesia—the nation's central bank— and seen by S&P Global, large proceeds from Indonesian commodity exports are placed overseas because of higher interest rates and favorable tax treatment.

Coal producers are also burdened under a higher royalty burden under the new formula for calculating Harga Batubara Acuan (HBA), which is the basis for calculating the amount of royalty producers must pay to the government for each metric ton of coal sold overseas. The levels at which the HBA of different coal grades are priced are said to be higher than the actual selling prices of many miners, resulting in disproportionately higher royalty imposition.

Indonesia had imposed an export ban for a month in January 2022 because many companies had not complied with the mandate of supplying 25% of the output in the domestic market. The country aims to produce 694 million mt coal in 2023. Indonesia produced 687 million mt coal in 2022, recording a 12% growth on the year and up from the target of 663 million mt target set for 2022.

The world's largest coal exporter sold 465 million mt to foreign countries in 2022, witnessing an increase of 7% from 2021. The largest export destination country was China, with a volume of 173 million mt, while supplies to India was 110 million mt in 2022.