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Monday, 05 September 11
INDONESIAN COAL BENCHMARK PRICE - ANALYSIS
 Analyst : Sunil K Kumbhat
COALspot.com - As a part of the Government’s efforts to stop transfer pricing abuses which have resulted in the loss of production royalties in recent years Govt of Indonesia issued Regulation No.17 of 2010 entitled "Procedures to Determine the Benchmark Price for Mineral and Coal Sales" .
Apart from setting out the procedures to determine the benchmark price for the sale of coal and minerals, Regulation imposes other obligations on mineral and coal producers (that is, the holders of Production Operation IUPs and IUPKs) when making sales.This move has been seen as important as the benchmark Coal price is expected to provide optimum price and help goverment in calculating potential State Revenue. The new regulations will allow the Indonesian government to get the right amount of royalty , and the taxable revenues from the sector will also move up to the correct levels. It will also stop the practice of transfer pricing. The government has put in a strong framework.
The following are some key points highlights the provisions of regulation and the likely impact it will have on mine owners, including on their sales activities, royalty calculations and administrative obligations:
Obligation to follow benchmark price
Regulation provides that mineral and coal producers are obliged to sell minerals and coal based on a regulated benchmark price, whether for domestic or export sales.
The benchmark pricing obligation applies to all minerals and coal sales to third parties, including to any affiliate of the mineral and coal producer (which includes any party that has direct ownership in the holder of a Production Operation IUP or a Production Operation IUPK as well as any party that may indirectly influence the decision-making of such holders).
Determination of benchmark price
Regulation provides that the benchmark price for minerals and coal will be determined by the Director General of Minerals and Coal (DGMC) . The benchmark price for non-metallic minerals and rocks will be determined by either the Governor or the Regent/Mayor, as appropriate.
Different methods will be used to determine the benchmark price for different commodities. For metallic minerals, the DGMC will determine the benchmark price for each metallic mineral monthly using a formula that refers to international market prices. For coal, the DGMC will determine separate benchmark prices for metallurgical coal, thermal coal and low rank coal monthly.No formal definition of low rank coal exists , however in the past ;MEMR has referred to low rank coal as any coal with gross calorific value( ADB Basis) of less than 5100 kca/kg. The benchmark price for metallurgical and thermal coal will use a formula that refers to the average coal prices based on local and international market indices.As a system government will determine Coal Price Reference (Harga Batubara Acuan or HPA) by averaging the calorie value of coal in four coal price indexes, namely :
1.Newcastle Coal Index,
2.Global Coal Index,
3.Platts and
4.Indonesia Coal Index (ICI).
The first two indexes represented international price, while the last two indexes represent local coal prices. Each coal category has a weight of 25 percent. The coal category will divided based on coal quality, which is set at 6,322 kcal/kg (arb), moisture content at 8 percent (arb), sulfur content of 0.8 percent (arb), and ash content at 15 percent (arb).
After determining the Coal Price Reference (HBA), the benchmark coal price (HPB) is then determined. There will be 8 benchmark prices category, representing the quality of the coal, starting from 4,200 up to 7,000 kcal/kg.
For that price of coal other than 8 classes of HPB, prices are determined by interpolation approaches or determining HPB based on a certain formula.
Sales of minerals and coal
The benchmark price is set on the basis of the price paid for Coal at the point of Sale by way of FOB Vessel. Sales of metals, ore, concentrate or other intermediary products can be made :
1.Free on Board (FOB) mother vessel or
2.FOB barge basis.
3.Sales can also be made to end users domestically or in the form of Cost Insurance Freight (CIF) or
4.Cost and Freight (C&F).
In calculating the sales price for FOB mother vessel sales for royalty payment purposes, holders of Production Operation IUPs for metallic minerals must refer to the benchmark price. For sales that are not made FOB mother vessel basis (including FOB barge sales), the benchmark price may be adjusted by adding or subtracting an amount based on certain recognised costs approved by the DGMC.
While the principle of deducting certain costs from the benchmark price for the purpose of royalty calculations would appear to be reasonable, Regulation leaves open the possibility that there may be costs that could adjust the benchmark price by being added to, rather than being subtracted from, the benchmark price. The circumstances under which costs would be added to the benchmark price are not yet regulated.
Adjustments can include costs incurred for barging, survey, trans-shipment, treatment as well as refinery and/or metal payable and/or insurance costs. For coal, sales are contemplated in the form of FOB mother vessel, FOB barge, within an island to an end user or on a CIF or CF basis. In calculating the sales price, holders of Production Operation IUPs for coal to be sold FOB mother vessel must refer to the benchmark price. Again, for non-FOB mother vessel sales (including FOB barge sales), certain costs may be added or subtracted as approved by the DGMC.
Under the new sales price regime for coal, the production royalty for FOB mother vessel sales will effectively also be imposed on barge transportation and trans-shipment costs (as well as survey and insurance costs), which are not able to be subtracted from the selling price.
Accordingly, all royalties for FOB mother vessel sales are now assessed on the full delivered cost FOB mother vessel without adjustment for costs. Regulation provides that further details on the procedures to determine the amount of “adjustment costs” will be set out by the DGMC in a separate DGMC regulation.
Benchmark Price for calculation of royalties
For royalty calculations, regulation provides that for minerals and coal sales made FOB mother vessel basis, the Government will take the higher of the contractually-agreed price or the benchmark price. On the other hand, for non-FOB mother vessel sales such as mineral or coal sales by way of FOB barge, the production royalties will be calculated using:
• (a) the contracted sales price, if the contracted sales price is higher than the benchmark price, after adding or subtracting the adjustment amount (adjusted benchmark price); or
• (b) the adjusted benchmark price, if the sales price is the same as or lower than the adjusted benchmark price.
Post sales Reporting
Coal producers are required to submit post-sales reports on the sales of their mineral and coal commodities every month, together with supporting information including invoices and bills of lading,quality reports and barging Costs as well as export declarations and surveyor reports for exported commodities. This new reporting obligations will add significant administrative burdens to mining companies.
Sale of coal for certain purposes
Coal of certain types (including fine coal, reject coal and coal with certain impurities) for domestic use may be sold below the coal benchmark price, upon approval of the Govt (DGMC) which will issue separate regulations regarding what types of coal will fall within this exception.
Similarly, coal to be used for certain purposes in the domestic market may be sold below the coal benchmark price, upon approval of the Govt.
The Govt will issue further regulations on the purposes that will be exempted. Regulation indicates that coal used for individual needs or for the development of underdeveloped or poorly developed regions will be exempted from the benchmark pricing requirements.
Impact on existing coal and/or mineral sales contracts
All existing supply contracts ( Both Spot and term Contracts) with Indonesian mining firms will have to be brought in line with this new benchmark regulations by 22nd September 2011. Spot sale contracts must be adjusted by no later than six months after the effective date of Regulation No. 17 (that is, by 22 March 2011).
Term sales contracts must be adjusted by no later than 12 months after the effective date of Regulation No. 17 (that is, by 22 September 2011).
Sanctions
Regulation provides that the Government can impose a range of administrative penalties on mineral and coal producers who fail to comply with the provisions of Regulation.
Penalties range from written warnings, temporary suspension of sales, and ultimately, cancellation of the licences’. Due to the severity of such sanctions, mining companies will need to pay particular notice to the requirement of this new regulation.
Indian Impact
For India, the situation will be aggravated by stagnation in domestic production even as demand has increased. With up to 100,000 MW of capacity addition likely in the 12 th plan period starting next year, more coal-based projects may need to scout overseas for fuel.
Three to five years back, domestic coal production was able to keep pace with the demand from power producers. However in 2010, domestic production has remained at a flat level, while there has been a sudden increase in demand from Indian power companies.
With a substantial part of its imported coal requirement already coming from Indonesia, India’s appetite is expected to grow further. India's coal imports from Indonesia are rising every year. In 2010, it overtook Japan to become the second largest importer of Indonesian coal after China. It is expected that India may become the biggest importer of Indonesian coal in 2012.
The regulation is likely to increase the price of coal mainly for all Indian Power Projects using imported coal from Indonesia. The impact on the tariff of such projects may vary, depending upon the quality of imported coal and fuel mix. All existing supply agreements with Indonesian mining firms will have to be brought in line with this new benchmark by 22nd September 2011. The implementation of this new regulation will adversely impact all existing and future Coal based power plants importing Coal from Indonesia.The new regulations will allow the Indonesian government to get the right amount of royalty , and the taxable revenues from the sector will also move up to the correct levels. It will also stop the practice of transfer pricing. The government has put in a strong framework.
Given the long-term demand fundamentals, current high coal price scenario may continue to squeeze margins (of Indian power producers). This may well be the end of the road for cheap Indonesian coal.
Conclusion
Whilst the intention behind the minimum pricing regulation is to stop transfer pricing abuses which according to Govt, have plagued the Indonesian mining industry( particularly the Coal mining Industry) over recent years, the question is whether this intention has been implemented in a way which is inconsistent with genuine , arms -length commercial practices which exist in the market. (updated on 5 Sept 2011)
Analyst By : Sunil K Kumbhat
The views and opinions / conclusion expressed on this analysis is purely the writers’ own
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Thursday, 09 June 11
INDIKA AIMS TO PRODUCE 31 MILLION TONS OF COAL IN 2011 - THE JAKARTA POST
The Jakarta Post, a leading English news paper in Indonesia reported that, PT Indika Energy Tbk, an integrated energy company, is targeting to incre ...
Wednesday, 08 June 11
BAYAN TO DISTRIBUTE RP. 80 ( APPROX. US$ 0.00939850) PER SHARE DIVIDEND
Coal miner PT Bayan Resources Tbk (BYAN), that is controlled by business Dato' Low Tuck Kwong, will distribute Rp80 a share dividend or Rp266.7 bil ...
Wednesday, 08 June 11
CBM PRODUCTION FROM AUSTRALIA, CHINA, INDIA, AND INDONESIA IS EXPECTED TO WITNESS A SIGNIFICANT INCREASE BY 2015
Press Release - According to Global Data (December 2010), CBM production in Australia, China, India, and Indonesia is expected to witness a signific ...
Sunday, 05 June 11
COAL IMPORTS BY CHINA IS LIKELY TO INCREASE - VISTAAR SINGAPORE
COALspot.com - The freight market softened this week except for the BDI and Cape index was up, but even in these sectors the momentum was compared t ...
Friday, 03 June 11
DRY BULK MARKETS RESURGENCE APPEARS TO BE LOSING SOME STEAM - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market’s seems to be losing some steam, despite reports of growing Chinese demand for commodities, especially coal, on the back o ...
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- Indonesian Coal Mining Association
- Australian Coal Association
- Sindya Power Generating Company Private Ltd
- Antam Resourcindo - Indonesia
- Globalindo Alam Lestari - Indonesia
- Bharathi Cement Corporation - India
- Chamber of Mines of South Africa
- Deloitte Consulting - India
- Orica Australia Pty. Ltd.
- Ministry of Transport, Egypt
- Pendopo Energi Batubara - Indonesia
- Kaltim Prima Coal - Indonesia
- Madhucon Powers Ltd - India
- Gujarat Electricity Regulatory Commission - India
- VISA Power Limited - India
- New Zealand Coal & Carbon
- Global Business Power Corporation, Philippines
- Aditya Birla Group - India
- Malabar Cements Ltd - India
- Minerals Council of Australia
- GN Power Mariveles Coal Plant, Philippines
- GVK Power & Infra Limited - India
- Global Coal Blending Company Limited - Australia
- Romanian Commodities Exchange
- Power Finance Corporation Ltd., India
- Asmin Koalindo Tuhup - Indonesia
- Marubeni Corporation - India
- Electricity Generating Authority of Thailand
- Medco Energi Mining Internasional
- Mintek Dendrill Indonesia
- PNOC Exploration Corporation - Philippines
- Leighton Contractors Pty Ltd - Australia
- Meenaskhi Energy Private Limited - India
- Port Waratah Coal Services - Australia
- AsiaOL BioFuels Corp., Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Thai Mozambique Logistica
- Kobexindo Tractors - Indoneisa
- Attock Cement Pakistan Limited
- Anglo American - United Kingdom
- Planning Commission, India
- Timah Investasi Mineral - Indoneisa
- Grasim Industreis Ltd - India
- Renaissance Capital - South Africa
- Heidelberg Cement - Germany
- Ambuja Cements Ltd - India
- South Luzon Thermal Energy Corporation
- Wood Mackenzie - Singapore
- Independent Power Producers Association of India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Energy Development Corp, Philippines
- Rashtriya Ispat Nigam Limited - India
- Indogreen Group - Indonesia
- Star Paper Mills Limited - India
- Interocean Group of Companies - India
- Ceylon Electricity Board - Sri Lanka
- Parliament of New Zealand
- Vijayanagar Sugar Pvt Ltd - India
- Riau Bara Harum - Indonesia
- McConnell Dowell - Australia
- Coastal Gujarat Power Limited - India
- Aboitiz Power Corporation - Philippines
- Directorate Of Revenue Intelligence - India
- ICICI Bank Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Samtan Co., Ltd - South Korea
- Ind-Barath Power Infra Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Singapore Mercantile Exchange
- TNB Fuel Sdn Bhd - Malaysia
- Oldendorff Carriers - Singapore
- Mercuria Energy - Indonesia
- The State Trading Corporation of India Ltd
- White Energy Company Limited
- IEA Clean Coal Centre - UK
- Meralco Power Generation, Philippines
- Price Waterhouse Coopers - Russia
- PowerSource Philippines DevCo
- Maharashtra Electricity Regulatory Commission - India
- The Treasury - Australian Government
- Tata Chemicals Ltd - India
- Georgia Ports Authority, United States
- Trasteel International SA, Italy
- Kalimantan Lumbung Energi - Indonesia
- San Jose City I Power Corp, Philippines
- PTC India Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- GAC Shipping (India) Pvt Ltd
- CIMB Investment Bank - Malaysia
- Dalmia Cement Bharat India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Formosa Plastics Group - Taiwan
- Vizag Seaport Private Limited - India
- Standard Chartered Bank - UAE
- Sarangani Energy Corporation, Philippines
- Sakthi Sugars Limited - India
- Gujarat Sidhee Cement - India
- Essar Steel Hazira Ltd - India
- Ministry of Finance - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Bulk Trading Sa - Switzerland
- Jorong Barutama Greston.PT - Indonesia
- Simpson Spence & Young - Indonesia
- SMG Consultants - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Metalloyd Limited - United Kingdom
- Central Java Power - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Krishnapatnam Port Company Ltd. - India
- Coalindo Energy - Indonesia
- Maheswari Brothers Coal Limited - India
- Makarim & Taira - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Barasentosa Lestari - Indonesia
- CNBM International Corporation - China
- Bhatia International Limited - India
- Bhushan Steel Limited - India
- Africa Commodities Group - South Africa
- Carbofer General Trading SA - India
- Petrochimia International Co. Ltd.- Taiwan
- Merrill Lynch Commodities Europe
- Australian Commodity Traders Exchange
- Borneo Indobara - Indonesia
- Agrawal Coal Company - India
- Manunggal Multi Energi - Indonesia
- Videocon Industries ltd - India
- Energy Link Ltd, New Zealand
- Mjunction Services Limited - India
- Lanco Infratech Ltd - India
- Salva Resources Pvt Ltd - India
- Kideco Jaya Agung - Indonesia
- OPG Power Generation Pvt Ltd - India
- Coal and Oil Company - UAE
- The University of Queensland
- Therma Luzon, Inc, Philippines
- Electricity Authority, New Zealand
- Commonwealth Bank - Australia
- Vedanta Resources Plc - India
- Bhoruka Overseas - Indonesia
- Semirara Mining Corp, Philippines
- LBH Netherlands Bv - Netherlands
- Jindal Steel & Power Ltd - India
- Ministry of Mines - Canada
- Iligan Light & Power Inc, Philippines
- Indian Energy Exchange, India
- Kohat Cement Company Ltd. - Pakistan
- Chettinad Cement Corporation Ltd - India
- Kepco SPC Power Corporation, Philippines
- Larsen & Toubro Limited - India
- Eastern Coal Council - USA
- Siam City Cement PLC, Thailand
- Cement Manufacturers Association - India
- Kartika Selabumi Mining - Indonesia
- Tamil Nadu electricity Board
- Sree Jayajothi Cements Limited - India
- Indika Energy - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- India Bulls Power Limited - India
- Orica Mining Services - Indonesia
- Mercator Lines Limited - India
- Posco Energy - South Korea
- Karaikal Port Pvt Ltd - India
- Parry Sugars Refinery, India
- European Bulk Services B.V. - Netherlands
- London Commodity Brokers - England
- Miang Besar Coal Terminal - Indonesia
- MS Steel International - UAE
- Bukit Asam (Persero) Tbk - Indonesia
- Jaiprakash Power Ventures ltd
- Indian Oil Corporation Limited
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- ASAPP Information Group - India
- Rio Tinto Coal - Australia
- Siam City Cement - Thailand
- Bukit Makmur.PT - Indonesia
- Economic Council, Georgia
- Edison Trading Spa - Italy
- Savvy Resources Ltd - HongKong
- Kumho Petrochemical, South Korea
- Thiess Contractors Indonesia
- Xindia Steels Limited - India
- Alfred C Toepfer International GmbH - Germany
- Uttam Galva Steels Limited - India
- Straits Asia Resources Limited - Singapore
- Indo Tambangraya Megah - Indonesia
- Central Electricity Authority - India
- Toyota Tsusho Corporation, Japan
- SMC Global Power, Philippines
- Baramulti Group, Indonesia
- Cigading International Bulk Terminal - Indonesia
- Banpu Public Company Limited - Thailand
- International Coal Ventures Pvt Ltd - India
- SN Aboitiz Power Inc, Philippines
- Altura Mining Limited, Indonesia
- GMR Energy Limited - India
- Petron Corporation, Philippines
- Latin American Coal - Colombia
- Wilmar Investment Holdings
- Bayan Resources Tbk. - Indonesia
- Bukit Baiduri Energy - Indonesia
- Goldman Sachs - Singapore
- Kapuas Tunggal Persada - Indonesia
- TeaM Sual Corporation - Philippines
- Eastern Energy - Thailand
- IHS Mccloskey Coal Group - USA
- Sojitz Corporation - Japan
- PetroVietnam Power Coal Import and Supply Company
- Sical Logistics Limited - India
- Binh Thuan Hamico - Vietnam
- Global Green Power PLC Corporation, Philippines
- Bangladesh Power Developement Board
- Intertek Mineral Services - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Mineral Development Corp Ltd - India
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