The government has lowered its thermal coal reference price at US$65.93 a ton in January - Photo: Privacy.

JAKARTA (TheInsiderStories) – The Indonesian government is requiring coal miners to increase their allocation of coal for the domestic market in 2020 to 155 million tons (MT), an increase of 27 percent over this year’s requirement of 128 MT, officials told media on Wednesday (12/11). The rising domestic market obligation (DMO) was in line with the projected increase in demand.

Energy and mineral resources ministry’s production director Dodik Ariyanto said 70 percent or 109 MT of the planned DMO volume next year is aimed at PT Perusahaan Listrik Negara (PLN). Then followed by the processing and refining industry as much as 11 percent or 16.52 MT and the cement industry by 10 percent or 14.54 MT.

“The domestic demand for electricity and the refining industry will increase this year. The figures getting from the reconciliation results with domestic coal users, said Ariyanto, adding that more power plants would operate this year, boosting demand for the commodity.

The ministry also projects the realization of DMO this year will reach 124.1MT, with 96.4 MT will be absorbed by PLN, and 27.7 MT will be used by the non-electricity sector. The projection is actually lower than this year’s initial plan of 128 MT. Whereas until October, the realization of the DMO volume was at the level of 95 MT.

Ariyanto admitted, the unequal between target and realization of the DMO were nothing new in Indonesian history. Last year, the government set a 121 MT DMO coal target, however, the realization reached just 115.09 MT. For him, a higher target to anticipate additional needs, stressing the DMO realization has historically continued to increase.

Association Criticizes of Coal DMO Scheme Policy

The Indonesian Coal Mining Association has criticized the government DMO scheme for coal next year, which requires a coal mining company to sell 20-25 percent of its production to the domestic market at a fixed price of US$70 per ton.

Its chairman Hendra Sinadia suggested the benchmark DMO price should be revoked and returned to the market price. The coal prices are in a downward trend. Then, not all types of coal can be absorbed by the local industry, particularly PLN.

In fact, the reference coal price for December reached $66.3 per ton or below the DMO price. The condition makes every party involved in the DMO policy will be disadvantaged. In this case, PLN must bear higher purchase costs than market prices, he said.

“The issue is that some companies may choose to pay a fine instead of meeting the DMO quota if the benefits are minimal,” he said, stressing the association basically support the DMO policy which would make coal supply for power plants always available.

Sinadia said the requirement to sell 20-25 percent of production would negatively affect coal production as coal miners tended to lower production because of the requirement.

He added that the situation had been worsened by the declining coal price in the global market. Therefore, he estimated that the next year’s coal production would further decline if the current DMO scheme was still in place.

The government previously announced the DMO sale price of coal for next year is still at $70 per ton, as is applicable this year. The DMO obligation is also imposed on all companies engaged in the coal sector.

“The minimum percentage of DMOs for companies in the next year is in the range of 20 -25 percent of total production. In 2018 and 2019, companies must provide 25 percent of their total production for DMO needs,” said Ariyanto.

In addition, the government also changed the sanction mechanism for companies that failed to fulfill DMO obligations. So far, companies that are unable to meet the DMO quota will be subject to sanctions in the form of reduced production. Conversely, companies that surpass the DMO receive a reward in the form of increased production.

However, for next year companies that experience such cases will be subject to financial penalties. The government also provides incentives for companies that can exceed the DMO target. Ariyanto claimed, such a mechanism was more just and comprehensive for all parties involved.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com