The Indonesian government has scrapped plans to introduce a regulation mandating the use of Indonesia-registered vessels to ship coal and palm oil products, which had been scheduled to take effect on 1 May this year.

The trade ministry regulation stipulated that only Indonesian registered vessels could load coal and palm kernel shell (PKS) cargoes at the country's ports. The measure was meant to have been implemented from February 2018 but was delayed after industry objections about the lack of Indonesian flagged vessels.

The ministry's original intention was to bring additional income to the country by adding value to exports and help develop its shipping industry. But the regulation was opposed by coal producers and the Indonesian coal mining association (ICMA), which argued it would make Indonesian coal less competitive, while also disrupting shipments because of a lack of available vessels.

The regulation was ultimately scrapped after a series of meetings between the ICMA and trade ministry officials. It is unclear whether the decision is also related to the current coronavirus outbreak, which is fuelling expectations of a global economic slowdown that could potentially weigh on coal demand. But Japanese buyers also told Argus that the uncertainty surrounding changes to Indonesian shipping arrangements were encouraging them to look elsewhere for higher quality coal.

"The plan would have been unworkable due to the lack of Indonesian registered vessels and would have been impossible to implement," a senior ICMA official told Argus.

Buyers of Indonesian coal said the regulation would push up shipping costs, while Indonesian suppliers said it would make the country's coal less competitive in the seaborne market. Indonesian coal is mostly sold on a fob basis, which effectively means buyers are responsible for arranging shipping and the associated costs. Even if a buyer already had dedicated vessels, or vessels on long-term charters, they could have potentially also have incurred costs trying to adapt to the regulation.

The proposal had also been controversial in the international freight industry, with the European Community Shipowners Association and the International Chamber of Shipping previously arguing that the regulation would be incompatible with free trade and customary laws on international maritime transport services.

Indonesia in 2008 implemented cabotage rules — which recognise that a country may restrict the activities of foreign vessels operating in its waters — in a bid to boost revenues and empower its shipping industry. These rules also stipulated that only Indonesian registered vessels could carry domestic coal cargoes that were loaded and scheduled to discharge at Indonesian ports. But this requirement was ultimately watered down by many exemptions and the use of Indonesian agents to engage foreign vessels.

Indonesia exported a record high 456.36mn t of coal last year, supported by firm demand from China and India.

Indonesia is also the world's largest exporter of palm oil products and PKS. The country is estimated to have exported at least 2.72mn t of PKS in 2019, mostly to Japan, Thailand and South Korea, based on January-November data for the year. Official exports for 2019 already show a trend of sharply increasing PKS exports compared with previous years, although customs codes for the product do not appear to cover all the exports, industry participants said.

By Andrew Jones