February 13, 2019 - Indonesia's domestic market obligation requirements could impact thermal coal prices throughout 2019 should the country's government take action against companies that are missing their targets, S&P Global Ratings said Wednesday.

"DMO sales reached only 21.7% of domestic production in 2018, and a number of coal miners could not meet their DMO requirement," S&P Global Ratings said in a research note.

The DMO policy requires coal mining firms to sell at least 25% of their production into the domestic market and cap the selling price for state-owned electricity firm Perusahaan Listrik Negara, with different applicable caps depending on calorific content.

"Even though the lower-than-expected DMO allocation fulfilled national needs, the Ministry of Energy and Mineral Resources could impose sanctions on these non-compliant companies by reducing their production quota in 2019," it added.

S&P Global Ratings credit analyst Bertrand Jabouley said that Indonesia's evolving regulatory and competitive landscape, combined with negative news on the demand side, underpins a current weakness in realized prices for a number of the country's miners.

The credit ratings agency and a sister company to S&P Global Platts added that fundamentals in the Indonesian market remain strong.

"The Indonesian government has lowered its coal production target for this year to 480 million mt in an effort to stabilize the global coal price. In the longer run, the country aspires to add 35 GW of additional power, two-thirds of which could be coal-fired," it said.

"To that extent, local demand should grow beyond its current levels of about 90 million mt," it said.