Will Indonesia’s new shipping law impact Hawaii coal imports?

by Michael Hansen, Hawaii Shippers Council, February 9, 2018

Reuters published on February 7, 2018, the news article, “Coal buyers spooked by Indonesia's new shipping rules: Assoc,” reporting that the Indonesian national government issued new regulations in October 2016 requiring coal and raw palm oil exporters to ship on Indonesian flag ships and insure the cargo with Indonesian underwriters. These regulations take effect at the end of April 2018.

The Indonesia Coal Mining Association (ICMA) announced on Thursday, February 8, 2018, that foreign buyers of Indonesian coal are putting “on hold making any new contracts,” as the new regime will make exports more expensive and there is uncertainty regarding the availability of Indonesian flag ships.

The ICMA anticipates that the export of coal will change from the existing “free on Board” (FOB) system whereby foreign buyers arrange shipping and insurance to a “cost insurance and freight” (CIF) system whereby the Indonesian exporters would have to arrange shipping and insurance.

Indonesian coal is imported by and used exclusively by AES Hawaii Inc. (AES) to fuel their coal-fired electrical power plant located at Kalaeloa, Oahu Island, Hawaii, which generates approximately 20% of the island's electrical power supply.

The coal cargoes are discharged at the State’s Kalaeloa Barbers Point Harbor (KBPH) from bulk carriers using an bulk unloading system.

Some commenters have referred to these Indonesian regulations are a form of cabotage, such as the Jones Act.

However, that is not correct, as cabotage refers to domestic shipping, and these new Indonesian regulations apply to the foreign trade and are known generically as “cargo reservation,” “flag reservation” and “commercial cargo preference.” Both cabotage and cargo reservation are forms of protectionism.

Key excerpts from Reuters:

Buyers of Indonesian coal are holding back orders of the fuel after the government issued new shipping rules for coal and crude palm oil that would restrict exports to Indonesian vessels, an industry association said on Thursday.

Jakarta issued rules in October requiring coal and palm oil exporters to use Indonesian-flagged vessels and Indonesian insurance companies, to boost the role of the archipelago’s shipping industry in its export market.

However, guidelines on implementing the rules and possible exemptions have not been released, raising concerns among shippers in Indonesia, the world’s top thermal coal exporter and palm oil producer.

The regulation will take effect at the end of April.

“There was some information, several potential buyers from abroad put on hold making any new contracts,” Hendra Sinadia, executive director of the Indonesia Coal Mining Association (ICMA), told reporters.

Describing the new rules as “dangerous”, Sinadia said they could affect export volumes and state revenues if shipping contracts had to be renegotiated to shift to so-called cost, insurance and freight (CIF) contracts from free-on-board (FOB) contracts.

Under CIF contracts, the seller is responsible for the shipping arrangements and must buy insurance to protect the cargo against losses during the voyage. Under FOB contracts, the buyer procures the vessel and is responsible for all shipping costs.

The industry is worried that time is running out to make adjustments before the rules come into effect, Sinadia said, noting that it would be difficult to do so without the guidelines.

Indonesia Palm Oil Association (GAPKI) Secretary-General Togar Sitanggang said in an interview on Jan. 24 that there were several problems with the new rules, noting there were not enough Indonesian-flagged food-grade tankers, and that Indonesian insurers may lack capacity.

“If we’re selling CPO (crude palm oil), free-on-board at Belawan port, does this mean our buyer has to use Indonesian vessel? That is ridiculous.”

The palm oil industry is awaiting guidance on when foreign vessels can be used if local vessels are unavailable, he said.

“There should be no obstacles, but if we must do this and that, it could hold up exports,” he said.