Indonesian Coal - Domestic Market ObligationWritten by Russiav Rustam
It has been more than 1 year since December 2009 The Energy and Mineral Resources Ministry (ESDM) issued a ministerial decree which requiring producers of coal and other minerals to allocate a proportion of their annual production output to the domestic market, or they would stand facing sanctions. The decree so called Domestic Market Obligation (DMO) which will be equal to the estimate of annual demand proposed by potential domestic buyers a year earlier.
This decree implied to both producers and domestic consumers are bound to the DMO and whose failure to comply will result in sanctions. The sanctions will vary from a written reprimand to a production cut of up to 50 percent for producers, and up to 50 percent supply reduction for consumers in the following year if they failed to purchase the commodity at the agreed volume.
To make DMO could be implemented smoothly on 2010 ESDM issued a ministerial regulation No. 17/2010 of mechanism to determine reference price for mineral and coal. This regulation followed by directorate general which issues of Coal Reference Price (HBA) for coal producers, traders and buyers for negotiation from average month quarterly. The HBA is calculated based on the average price of four indices, three international and one local.
According to Directorate General of Mineral and Coal (Ditjen Minerba) of ESDM on 2011 national coal production would be 326.65 million tones and local demand would be about 78.97 million tones, including 66.28 million tones from state own power suppliers and independent power producers and 12.69 million tones for industrial sectors (cement, metallurgic, pulp, textile etc.).
As a major domestic coal consumer (±70%) PT Perusahaan Listrik Negara (PLN) the state-owned electricity utility will be increased its demands sharply as some of power plants under Phase I of 10,000 MW crash program scheduled to be ready this year and it also plans a further 10,000 MW in 2011, as Phase II of the electrification project.
Entering the 2nd years it seems that DMO still could not running smoothly since coal price increase sharply before the impact of floods and ongoing bad weather in Queensland Australia, in terms of supply disruption. Local coal producers prefer to sell their production to export market since the price is higher than domestic market and other reason is they do not produced coal that meets with PLN requirement.
It is needed to have more talk on pricing mechanism based on national interest for coal producer and PLN to make DMO can be run smoothly.