Hendra Sinadia, Deputy Executive Director of the Indonesian Coal Mining Association (APBI), says the recent rally brings a breath of fresh air to the coal mining sector and causes optimism that the sector has already hit rock bottom several months ago. As such stakeholders can now expect to see gradually strengthening prices ahead.

The reason that explains why coal prices have been able to rise is reduced coal production in several key coal producing nations. Miners prefer to curb production and sell their coal reserves that have been piling up since last year. China in particular is behind the coal price rally as the world's second-largest economy announced to cut the annual statutory working days for coalmines from 330 to 276 days in order to combat the structural overcapacity. The nation will also close 1,000 mines this year to reduce production capacity by some 500 million tons over the next three years.

This year coal production in China is expected to decline 4.2 percent (y/y) from 3.68 billion tons of coal that was produced in full-year 2015. The production figure in 2015 already constituted a 3.5 percent (y/y) drop from China's coal production in 2014. Sliding coal output in China implies that the country's demand for foreign coal rises.

Similarly, the United States, another key coal producer, has seen its annual coal output sliding over the past six years.

Although it is difficult to predict the future price movement, Sinadia expects the coal price to continue rising in the remainder of 2016 on the back of coal production cuts and slightly rising coal demand from emerging markets (for power plants). Moreover, the winter is approaching and this usually results in higher demand for coal (for electricity generation).

Indonesian Government's Benchmark Thermal Coal Price (HBA):

Month    2012    2013    2014    2015
January   109.29    87.55    81.90    63.84    53.20
February   111.58    88.35    80.44    62.92    50.92
March   112.87    90.09    77.01    67.76    51.62
April   105.61    88.56    74.81    64.48    52.32
May   102.12    85.33    73.60    61.08    51.20
June    96.65    84.87    73.64    59.59    51.87
July    87.56    81.69    72.45    59.16    53.00
August    84.65    76.70    70.29    59.14    58.37
September    86.21    76.89    69.69    58.21    63.93
October    86.04    76.61    67.26    57.39
November    81.44    78.13    65.70    54.43
December    81.75    80.31    69.23    53.51

in USD/ton
Source: Ministry of Energy and Mineral Resources

But although coal prices have risen drastically in recent months, they remain far from the comfortable zone of at least USD $80 per metric ton. It is highly unlikely that the recent price rally can close this gap rapidly because coal miners will be eager to boost output now prices have rallied, hence putting downward pressure on coal prices again. Therefore, we see limited room for further growth of coal prices. Moreover, around the globe, nations are increasingly trying to cut emissions, implying that the use of dirty coal for power generation is becoming less popular. Instead, nations are more and more focusing on environmentally friendly energy sources.

Recently, the Indonesian government revised its domestic coal production data. Initially, the government stated that a total of 392 million tons of coal were produced in Indonesia in 2015. Recently it revised this figure by a whopping 59 million tons to 461 million tons. Higher-than-expected coal production last year adds to concerns about the supply glut.

Indonesian Production, Export, Consumption & Price of Coal:

  2007 2008 2009 2010 2011 2012 2013 2014 2015
(in million tons)
 217  240  254  275  353  412  474  458  461
(in million tons)
 163  191  198  210  287  345  402  382  366
(in million tons)
  61   49   56   65   66   67   72   76   87
Price (HBA)
(in USD/ton)
  n.a   n.a  70.7  91.7 118.4  95.5  82.9  72.6  60.1

Sources: Indonesian Coal Mining Association (APBI) & Ministry of Energy and Mineral Resources