Indonesia, the world's largest thermal coal exporter, is set for a second straight year of falling overseas shipments in 2026 after a 2025 decline, as the government plans deep production cuts to support prices.

The move threatens to tighten shipments to major importers like China and India, yet their ample domestic supply and the transition to renewable energy are set to cushion the impact.

Bahlil Lahadalia, minister of Energy and Mineral Resources, said on January 8 that coal exports fell by 7.9% year on year to 514 million tonnes in 2025, marking the first decline since 2020, when COVID-19 disrupted supply and demand. Total production stood at around 790 million tonnes, with 254 million tonnes or 32% allocated to the domestic market and 65.1% for exports, he said.

The minister also announced a drastic reduction of coal output to around 600 million tonnes in 2026, a roughly 24% cut from the 2025 level, although the number has yet to be finalized. The explicit goal is to address global oversupply and stabilize prices, but it will inevitably constrict export volumes.

Projected 2026 export contraction

With domestic demand for power plants and nickel smelters projected to remain resilient, and the government prioritizing full DMO fulfilment before allowing exports, the math points to a sharp export contraction.

Sxcoal's calculation, based on the 600-million-tonne production target and a conservative DMO share of 30-35%, indicates that exportable volumes in 2026 would likely fall within a range of 390-420 million tonnes. That represents a further decline of 94-124 million tonnes or 18-24% from the already reduced 2025 export level.

The IEA predicted that coal demand in Indonesia will rise mainly because of expanding electricity demand driven by economic and population growth and the increasing use of coal in industries like nickel and aluminium.

If domestic needs intensify, there is a likelihood that the DMO share could be raised, pushing exports lower to 400 million tonnes of threshold.

China, its largest export destination accounting for about 45-50% of Indonesian shipments, could feel the direct ripple effects. A sharp reduction in seaborne coal supply could likely push up import costs and make imported cargoes less appealing due to a narrowed edge compared with domestic alternatives.

In the mid-to-long term, it may push some major Chinese buyers to seek supplies domestically or alternative sources, like Russia, Australia and even Mongolia. However, seaborne thermal coal prices are prone to fluctuating in a wider range during the early process of demand redirection.

In the long term, China's robust and advanced production capacity could effectively provide a cushion. China's coal production is projected to see a modest growth of 1% or so to 4.82 billion tonnes in 2025. Efficient capacity, competent to be adaptive to external changes, and continued fast expansion of renewable energy and development of renewable technologies could help bridge the shift.

Initial market reaction among Chinese participants remained cautious. Some said that the production cut is more of a sentimental boost for now, and the actual impact still largely depends on implementation and global demand. Some traders said that they are more concerned about near-term issues like Indonesian export duties and South Sumatra logistics.

Indonesia's Finance Minister Purbaya Yudhi Sadewa confirmed on January 5 that the coal export duties have already been effective from January 1 and will be retroactive, although regulations that form the legal basis for their imposition have not yet been issued. He revealed earlier on December 31 that the tariff will be tiered, likely ranging 5-11%, up from the earlier reported 1-5%.

Meanwhile, the South Sumatra government officially started a ban on coal transportation on public roads starting on January 1, even though some miners, especially small-sized ones, still heavily relied on these roads with limited access to dedicated roads.

Similar effects are likely to be felt in India, where robust domestic production has pushed the market into a structural surplus, potentially curbing the country's appetite for seaborne cargoes. India's cabinet late last year permitted the export of coal as the country's power plants have a surplus.