Stabilizing coal prices through production cuts, DMO expansion

Global coal oversupply and falling prices have prompted the Indonesian government to cut domestic coal production this year in an effort to stabilize the market. The move has raised concern among coal producers, who warn that smaller operational scales could reduce employment and non-tax state revenue (PNBP). At the same time, to secure coal supply for state-owned electricity company PT PLN, the government plans to increase the domestic market obligation (DMO). This dual pressure on producers raises an important question: will the production cut outlined in the 2026 annual work plan (RKAB) for the mining sector help restore prices, or will it create further challenges?

The Energy and Mineral Resources (ESDM) Ministry announced in January that Indonesia’s coal production target for 2026 has been reduced to 600 million tonnes (Mt), down from the 750-790 Mt realized in 2025, in response to weakening commodity prices. According to ESDM data, total coal production in 2025 consisted of 254 Mt for domestic consumption and mostly, 514 Mt, for exports. The remaining 22 Mt are stockpiled.

The Coal 2025 annual market report published in December 2025 by the International Energy Agency forecast global coal production to plateau from 9.1 billion tonnes in 2024 to 9.11 billion tonnes in 2025. Global coal trade is projected to decline by 5 percent year-on-year (yoy), reversing the positive growth from a record 1.54 billion tonnes in 2024 to nearly 1.47 billion tonnes in 2025. Indonesia’s coal export volume, dominated by thermal coal, is expected to fall by about 9 percent yoy from 555 Mt in 2024 to 505 Mt in 2025. As a result, Indonesia’s share of global coal trade would decline from 35.95 percent in 2024 to 34.4 percent in 2025, according to the IEA.

Thermal coal used for power generation is classified by calorific value into low CV below 4,200 kilocalories per kilogram, mid CV between 4,200 and 5,700 kcal/kg, and high CV above 5,700 kcal/kg. During January to August 2025, average prices stood at US$45 per tonne for low CV coal, $71 per tonne for mid CV coal, and $104 per tonne for high CV coal. High CV prices fluctuated between $92 and $122 per tonne during the period. Meanwhile, metallurgical coal used mainly for steel production averaged $186 per tonne.

The ESDM Ministry stated that companies holding first generation coal contracts of work (PKP2B) and state-owned enterprises with mining business permits (IUP) will not be subject to the 2026 production quota reduction. In exchange, these companies are required to fulfill their DMO commitments in the first half of 2026 to ensure sufficient supply for PLN, as many companies have not yet finalized their 2026 RKAB submissions.

Seven first generation PKP2B holders have converted their contracts into special mining business permits (IUPK), namely Adaro Indonesia, Arutmin Indonesia, Berau Coal, Kaltim Prima Coal, Kendilo Coal Indonesia, Kideco Jaya Agung, Multi Harapan Utama and Tanito Harum. Only Indominco Mandiri remains under a first generation PKP2B contract until October 4, 2028.

The ministry expects coal supply from first generation PKP2B companies and state-owned enterprises to reach 75 Mt in the first half of 2026. However, the government does not plan to increase DMO prices, which have remained at $70 per tonne for the electricity sector and $90 per tonne for the cement and fertilizer sectors since 2018.

The ESDM Ministry has also floated the possibility of raising the DMO requirement from 25 percent, as stipulated in Ministerial Decree No. 267.K/2022, to 30 percent. The ministry argues that the increase may be necessary to meet PLN’s thermal coal requirement of 240 Mt. With production capped at 600 Mt, a 25 percent DMO would fall short. Previously, Commission XII of the House of Representatives urged the ministry to raise the DMO to 30 percent for 2026.

The Indonesian Coal Mining Association (APBI-ICMA) reported that companies not exempted from the 2026 RKAB could reduce production by 40 to 70 percent. Some analysts estimate that the production cut could shave 0.09 percentage points off Indonesia’s 2026 gross domestic product growth. Non-tax revenue from the minerals and coal sector could decline by 19 percent year on year, equivalent to Rp 26.6 trillion. The reduction also risks job losses for approximately 16,000 workers in the coal sector and up to 610,000 workers across the broader economy.

The government should consider implementing a more moderate production cut to limit adverse impacts on the coal sector. It should also either maintain the DMO at 25 percent or increase DMO prices to better reflect market conditions. Given that the primary objective of the DMO is to secure supply for PLN, preferential pricing for the cement and fertilizer industries should be gradually reduced and eventually phased out. At the same time, the production adjustment presents an opportunity to accelerate Indonesia’s energy transition, which the government should strategically leverage.