top of page
  • Writer's pictureJoel Werner

No Uniform Response to Rising Commodity Prices from Asian Countries: Who Wins?

As one of the world’s major oil producers, Russia’s war in Ukraine is driving up oil prices to surpass the last decade's highs. And commodities generally are on the rise as the world contemplates the absence of Ukraine's wheat and corn crops on food security in Europe and Africa.

As a result, in Southeast Asia, net oil importers' economies will face pressure for the duration of the conflict and for some time afterward until production recovers. One exception to this could be Indonesia, thanks to its commodity-driven economy.

Indonesia has an abundance and variety of commodities that make up a vital asset to the economy and government revenues. As a result, commodities account for around 60 percent of Indonesia's exports. However, they make Indonesia more susceptible to the volatility in global commodity prices, which requires effective policy strategies for good times and bad.

Curbs on Indonesian Coal Exports Expected

Russia is China's second-largest coal supplier. If supply is disrupted or China joins the West in imposing sanctions on Moscow, Beijing might need Indonesia, the fourth biggest global coal producer, to supplement their supply.

In this case, Indonesia will benefit from both higher volumes and the price effect. However, coal miners expect curbs to be imposed on exports in April or August when mine output is lower than average due to weather conditions and religious holidays.

Indonesia is the world’s biggest coal exporter by tonnage. However, exports were banned in January of this year for the 5th time in fifteen years. The move, prompted by critically short coal stockpiles at nationally owned power plants, drove global coal prices sky-high and left other Asian coal importing economies like Japan, South Korea, China, Malaysia, and the Philippines in the lurch. Indonesian coal companies must keep 25 percent of their supply for domestic sale at a ceiling price of $70 per ton according to a 2009 “domestic market obligation” (DMO) policy.

China Ramps up Coal Production

The National Development and Reform Commission (NDRC), China’s top economic planner, has expressed its intention to increase domestic coal production capacity by about 300 million tons. (The target is equivalent to China’s typical annual imports.) And it plans to build a massive 620 million ton stockpile of coal for the government, miners, and consumers.

The production increase will be equally split, with half coming from new, upgraded operations and a half from open-pit mines, some of which have previously been shut. A record-breaking daily average output of 12.6 million tons will be targeted—higher than the levels reached last fall to counter the nation’s widespread industrial brownouts. Mines and power plants have had to contract in the medium and long-term for 100 percent generation at a price range between 570 and 770 yuan per ton.

The plans will reduce China’s reliance on coal imports, but mining activities will capsize its climate actions in the short term. China currently produces and consumes more than half of the global supply of coal and is the most significant contributor to its greenhouse gas emissions. But it has previously committed to curtailing its consumption by the latter half of the decade to peak emissions by 2030.

While China's energy production remains 60 percent coal-dependent, the NDRC also announced that further plans for desert solar and wind projects would be coming soon. In addition, the development of 17 cross-regional power systems will start this year, and provinces were instructed to speed up their peak-shaving power supply and pumped hydropower storage development.

India Also Looks to Alternative Markets

India’s economy is also set to take a hit with the cessation of Russian coal exports. Tata Steel Ltd., India’s biggest producer, has traditionally procured up to 15 percent of its coal from Russia. But now, the group has announced it is seeking alternative sources for coal supply to its European and Indian operations due to Russia’s invasion of Ukraine. Tata will look to buy more coal from North America for its European operations, and in India, Australia is the leading supplier.

The war also offers new export opportunities for Indian-produced steel. Still, Tata says it will keep Indian exports to its current 10 to 15 percent of sales and focus on getting the best possible prices. Maximizing margins will mean Europe makes a better market than Southeast Asia, potentially putting further pressure on those Asian economies that have to import their commodities.

For example, countries like Thailand, where exports and tourism drive the economy, will face hardship as energy and other input costs rise, logistics suffer, and travel remains depressed through 2022. In addition, Thailand's balance of payments deficit soared because of the loss of tourism during the pandemic, putting pressure on its exchange rate. Thus, investors should be aware that the response of Asian economies to the Russian Ukraine conflict will not be uniform.

5 views0 comments


bottom of page