LITTLETON, Colorado, May 30 (Reuters) - Developers and exporters of natural gas should be alarmed by the dour state of thermal coal exports coming out of Indonesia.

The world's largest thermal coal exporter is on course for a rare decline in annual sales after shipping out the smallest tonnage in three years during the opening five months of 2025.

To combat declining sales, regional coal traders have cut export prices to their lowest in four years, which in turn are reducing the cost of coal-fired power production across Asia.

That's bad news for natural gas bulls, who eye Asia as their main potential growth market but are already struggling to displace cheaper coal from power systems across the region.

TOP MARKETS SHRINK

Indonesian coal sales to the two largest coal consumers - China and India - dropped by 23% and 14% respectively so far this year as coal miners in those countries lifted domestic output and reduced demand for imports.

Indonesia exported just under 188 million metric tons of coal used for power generation during January to May, according to commodities trade intelligence firm Kpler.

That total was 12% or around 25 million tons less than during the same months in 2024, and was the lowest for that period since 2022.

Sales to top market China are down by 23% or by 20 million tons compared to January to May 2024, while sales to India were 14% or 6.5 million tons lower.

As China and India have historically accounted for two-thirds of all Indonesian coal exports, exporters are attempting to replace those lost volumes with sales to other markets.

However, the soft state of global consumer demand and manufacturing activity has also cooled demand for industrial power fuels in other major coal import markets, including South Korea, Japan, Taiwan and the Philippines.

Indeed, eight of the ten largest markets for Indonesian coal have registered year-over-year declines in imports so far in 2025.

CUT THROAT

To combat the declining sales, coal traders in Indonesia, Australia, Colombia, South Africa and Russia have all cut prices this month, with many key international coal benchmarks currently trading at over four-year lows.

As Asia's power system already relies on coal for over half of all electricity supplies, cheaper coal prices look set to deepen the region's reliance on the fuel for power, especially while economic and business profit growth remain subdued.

Cheaper coal prices also serve to undermine the appeal of constructing new natural gas-fired power plants in the region, especially in areas where new solar capacity can be brought online more quickly to help boost near-term power supplies.

GAS GROWTH

Natural gas plants currently produce around 10% of Asia's utility-supplied electricity, according to Ember, fed by around 912 gigawatts (GW) of regional gas-fired generation capacity, data from Global Energy Monitor (GEM) shows.

Gas market bulls have high hopes that more gas generation capacity will be built in Asia. Two-thirds of all new global gas power capacity currently under construction is taking place within the continent, GEM data shows.

An additional 61% of gas projects in so-called pre-construction - where deals have been proposed but capital and sites have yet to be secured - are also in Asia.

Most, if not all, of the gas projects currently under construction are expected to come online, especially the roughly 53 GW of new capacity in China and Taiwan where outdated coal-fired capacity is expected to be replaced by newer gas plants.

Singapore and South Korea have a further 7 GW in the construction phase, which should bode well for international gas export potential as both those countries are gas importers.

However, it is not yet clear how much more gas generation capacity will be built elsewhere in Asia, especially in countries such as Indonesia and the Philippines where there are limited government funds available for large energy investments.

Both Indonesia and the Philippines have also been hit by gas project delays in recent years which are serving to undermine commercial support for new gas projects, especially when solar capacity has been brought online more quickly.

The speed of cost reductions of solar generation and battery storage systems also cloud the outlook for gas power projects that are not yet under construction, especially in countries with strong social support for reducing fossil fuel reliance.

For exporters of natural gas and LNG, the combination of project delays and development uncertainty is already serving to postpone potential export volume growth by years and is placing pressure on near-term LNG export prices in key markets.

And with coal prices now lingering near multi-year lows, that could be enough to change the tune of many gas market bulls.

The opinions expressed here are those of the author, a columnist for Reuters.