Indonesia mulls having coal futures trading

JAKARTA: Commodities and Futures Trade Supervisory Agency (Bappebti) is considering a possibility of coal contracts being included in the country's futures market.The agency has been preparing a comprehensive review for almost a year, exploring such possibility, Bappebti Head Syahrul R. said.We invite all stakeholders of the domestic coal industry to discuss the possibility, Syahrul told Bisnis yesterday.Coal is one of Indonesias main commodities that has an important role in the national economy because it is the substitute of crude oil. Coal, which contributes 26% to the total energy needs, is currently the second largest energy source after crude oil.On the other hand, domestic coal consumption has tripled within the last 10 years. The increase was mainly attributed to the government's accelerated program in building 10,000 megawatt power plants and to the rising demands of energy from domestic industries, including cement, textile, paper, and palm oil.We also have competent players and adequate regulations that will support the coal futures trading, Syahrul said, adding that the only commodities that are currently traded on the futures market are crude palm oil (CPO) and gold,Coal is a potential product to develop. After coal, we expect that Indonesia next move to lead and nickel. But it needs further review by involving all stakeholders.Volatility in coal prices will be bigger in the future, said Bely Utarja, commodities analyst at Prasetiya Mulya Business School.Uncertain coal price movements give investors some risks, affecting them in realizing long-term contracts, in negotiating sale and purchase contract prices, while giving them difficulty in predicting revenue and costs.There is a volatility risk that needs to be overcome by hedging. Futures trading can provide solution in determining prices for delivery in the future.He reminded the main challenge for Indonesian futures trading before starting coal trading was liquidity.Bely sees that the government should give incentives to encourage market players to trade some domestic market obligation (DMO) of coal in the futures exchange to increase liquidity. The incentive may apply either to cost or tax.Moreover, there is a challenge in creating detailed specifications demanded by the market based on the coal types mostly needed in the future. Those coal types included envirocoal, jorong J-1 dan ecocoal.Physical settlement will be another challenge in the development of coal futures trading.Clearing institution or the exchange management must be able to guarantee physical settlement. It should not only rely on punishment or fines for default sellers.CredibilityHe added that the exchange and the clearing system must have higher credibility so confidence on transaction in the market and innovation from clearing also rise.Executive Director of Indonesian Coal Companies Association (APBI) Supriatna Suhala said that the creation of coal contract should not be done hastily because it needs to pass a series of information dissemination to the public and educational processes especially to the public. (T04/NOM)