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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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Wednesday, 02 February 11
HUGE TONNAGE OVERSUPPLY LOOMING FOR DRY BULK MARKET - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
With the dry bulk market taking another dive yesterday, to just over 1,000 points (1,084), losing more than 2% on the day, it’s more than obvi ...
Monday, 31 January 11
S. SUMATRA COAL RAILWAY TO BE COMPLETED ON SCHEDULE - THE JAKARTA POST
The Jakarta Post reported that, despite land acquisition problems, state coal mining company PT Bukit Asam is upbeat that the development of a railw ...
Monday, 31 January 11
COAL MINER PTBA TO DRIVE OUTPUT WITH ACQUISITIONS - THE JAKARTA GLOBE
The Jakarta Globe reported that, State coal company Perusahaan Tambang Batubara Bukit Asam said its output would increase 34 percent to 17.6 million ...
Saturday, 29 January 11
PRESSURE ON SHIPPING MARKET MAY CONTINUE UNTIL MID FEBRUARY 2011
COALspot.com - The BDI continues to drop and saw a drop of about 5 pct this week closing at 1370 points.
In May 2010 the BDI touched 4,209 ...
Saturday, 29 January 11
ANTAM ACQUIRES SAROLANGUN COAL MINING
According to Insider Stories, Nickel and gold miner PT Aneka Tambang Tbk (Antam) of Indonesia via its subsidiary PT Indonesia Coal Resources (ICR) h ...
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- Directorate Of Revenue Intelligence - India
- Australian Coal Association
- Tata Chemicals Ltd - India
- Kideco Jaya Agung - Indonesia
- Bangladesh Power Developement Board
- Sakthi Sugars Limited - India
- Power Finance Corporation Ltd., India
- Indogreen Group - Indonesia
- Grasim Industreis Ltd - India
- Antam Resourcindo - Indonesia
- Sical Logistics Limited - India
- Global Green Power PLC Corporation, Philippines
- Xindia Steels Limited - India
- Miang Besar Coal Terminal - Indonesia
- Larsen & Toubro Limited - India
- TeaM Sual Corporation - Philippines
- Chamber of Mines of South Africa
- Ceylon Electricity Board - Sri Lanka
- The University of Queensland
- Bukit Asam (Persero) Tbk - Indonesia
- Essar Steel Hazira Ltd - India
- Malabar Cements Ltd - India
- Sarangani Energy Corporation, Philippines
- SN Aboitiz Power Inc, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Pendopo Energi Batubara - Indonesia
- Dalmia Cement Bharat India
- Baramulti Group, Indonesia
- Commonwealth Bank - Australia
- Orica Australia Pty. Ltd.
- Timah Investasi Mineral - Indoneisa
- Thiess Contractors Indonesia
- Gujarat Sidhee Cement - India
- Orica Mining Services - Indonesia
- Parliament of New Zealand
- Iligan Light & Power Inc, Philippines
- IEA Clean Coal Centre - UK
- Eastern Energy - Thailand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ind-Barath Power Infra Limited - India
- Independent Power Producers Association of India
- Meenaskhi Energy Private Limited - India
- Cigading International Bulk Terminal - Indonesia
- Goldman Sachs - Singapore
- Indo Tambangraya Megah - Indonesia
- Planning Commission, India
- Coastal Gujarat Power Limited - India
- CIMB Investment Bank - Malaysia
- Toyota Tsusho Corporation, Japan
- IHS Mccloskey Coal Group - USA
- Thai Mozambique Logistica
- Indian Energy Exchange, India
- Kalimantan Lumbung Energi - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Bhatia International Limited - India
- AsiaOL BioFuels Corp., Philippines
- India Bulls Power Limited - India
- Minerals Council of Australia
- Mercator Lines Limited - India
- Banpu Public Company Limited - Thailand
- PNOC Exploration Corporation - Philippines
- Makarim & Taira - Indonesia
- Georgia Ports Authority, United States
- Anglo American - United Kingdom
- Maharashtra Electricity Regulatory Commission - India
- Bulk Trading Sa - Switzerland
- Attock Cement Pakistan Limited
- Sojitz Corporation - Japan
- Riau Bara Harum - Indonesia
- Petron Corporation, Philippines
- London Commodity Brokers - England
- TNB Fuel Sdn Bhd - Malaysia
- International Coal Ventures Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Energy Development Corp, Philippines
- Oldendorff Carriers - Singapore
- Star Paper Mills Limited - India
- Borneo Indobara - Indonesia
- Bayan Resources Tbk. - Indonesia
- Wood Mackenzie - Singapore
- Binh Thuan Hamico - Vietnam
- Formosa Plastics Group - Taiwan
- White Energy Company Limited
- Renaissance Capital - South Africa
- Savvy Resources Ltd - HongKong
- Trasteel International SA, Italy
- Electricity Authority, New Zealand
- Ambuja Cements Ltd - India
- Ministry of Finance - Indonesia
- Gujarat Electricity Regulatory Commission - India
- ICICI Bank Limited - India
- Energy Link Ltd, New Zealand
- Global Coal Blending Company Limited - Australia
- Coalindo Energy - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Salva Resources Pvt Ltd - India
- Rio Tinto Coal - Australia
- Romanian Commodities Exchange
- Maheswari Brothers Coal Limited - India
- Kapuas Tunggal Persada - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Sinarmas Energy and Mining - Indonesia
- Edison Trading Spa - Italy
- VISA Power Limited - India
- Jindal Steel & Power Ltd - India
- McConnell Dowell - Australia
- Semirara Mining and Power Corporation, Philippines
- GAC Shipping (India) Pvt Ltd
- Bhoruka Overseas - Indonesia
- Interocean Group of Companies - India
- Indian Oil Corporation Limited
- Bank of Tokyo Mitsubishi UFJ Ltd
- Globalindo Alam Lestari - Indonesia
- Central Java Power - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Baiduri Energy - Indonesia
- Central Electricity Authority - India
- Vedanta Resources Plc - India
- Deloitte Consulting - India
- Heidelberg Cement - Germany
- Singapore Mercantile Exchange
- Asia Pacific Energy Resources Ventures Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Asmin Koalindo Tuhup - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Parry Sugars Refinery, India
- Chettinad Cement Corporation Ltd - India
- CNBM International Corporation - China
- Electricity Generating Authority of Thailand
- Aditya Birla Group - India
- Posco Energy - South Korea
- Karaikal Port Pvt Ltd - India
- Economic Council, Georgia
- Coal and Oil Company - UAE
- Mjunction Services Limited - India
- Metalloyd Limited - United Kingdom
- Vijayanagar Sugar Pvt Ltd - India
- Meralco Power Generation, Philippines
- SMC Global Power, Philippines
- GVK Power & Infra Limited - India
- PetroVietnam Power Coal Import and Supply Company
- PTC India Limited - India
- OPG Power Generation Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Holcim Trading Pte Ltd - Singapore
- Barasentosa Lestari - Indonesia
- Samtan Co., Ltd - South Korea
- Indonesian Coal Mining Association
- Standard Chartered Bank - UAE
- Aboitiz Power Corporation - Philippines
- Billiton Holdings Pty Ltd - Australia
- Siam City Cement PLC, Thailand
- Straits Asia Resources Limited - Singapore
- Sree Jayajothi Cements Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Bhushan Steel Limited - India
- Manunggal Multi Energi - Indonesia
- Global Business Power Corporation, Philippines
- Altura Mining Limited, Indonesia
- Agrawal Coal Company - India
- Africa Commodities Group - South Africa
- Kohat Cement Company Ltd. - Pakistan
- New Zealand Coal & Carbon
- Bukit Makmur.PT - Indonesia
- Latin American Coal - Colombia
- Karbindo Abesyapradhi - Indoneisa
- Port Waratah Coal Services - Australia
- The Treasury - Australian Government
- Semirara Mining Corp, Philippines
- Price Waterhouse Coopers - Russia
- Australian Commodity Traders Exchange
- Marubeni Corporation - India
- Cement Manufacturers Association - India
- Petrochimia International Co. Ltd.- Taiwan
- GMR Energy Limited - India
- Vizag Seaport Private Limited - India
- Kartika Selabumi Mining - Indonesia
- Wilmar Investment Holdings
- Intertek Mineral Services - Indonesia
- Eastern Coal Council - USA
- Siam City Cement - Thailand
- Videocon Industries ltd - India
- Lanco Infratech Ltd - India
- Kobexindo Tractors - Indoneisa
- Simpson Spence & Young - Indonesia
- Mercuria Energy - Indonesia
- Ministry of Mines - Canada
- Kaltim Prima Coal - Indonesia
- Tamil Nadu electricity Board
- Medco Energi Mining Internasional
- Indika Energy - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Mintek Dendrill Indonesia
- Kumho Petrochemical, South Korea
- GN Power Mariveles Coal Plant, Philippines
- Carbofer General Trading SA - India
- PowerSource Philippines DevCo
- The State Trading Corporation of India Ltd
- Therma Luzon, Inc, Philippines
- Rashtriya Ispat Nigam Limited - India
- Kepco SPC Power Corporation, Philippines
- MS Steel International - UAE
- Bahari Cakrawala Sebuku - Indonesia
- Ministry of Transport, Egypt
- Bharathi Cement Corporation - India
- South Luzon Thermal Energy Corporation
- LBH Netherlands Bv - Netherlands
- Krishnapatnam Port Company Ltd. - India
- Jaiprakash Power Ventures ltd
- SMG Consultants - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Madhucon Powers Ltd - India
- San Jose City I Power Corp, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sindya Power Generating Company Private Ltd
- ASAPP Information Group - India
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