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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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- Bhatia International Limited - India
- Global Green Power PLC Corporation, Philippines
- Australian Coal Association
- Kohat Cement Company Ltd. - Pakistan
- Parry Sugars Refinery, India
- Bukit Baiduri Energy - Indonesia
- Ministry of Transport, Egypt
- Gujarat Electricity Regulatory Commission - India
- Samtan Co., Ltd - South Korea
- Heidelberg Cement - Germany
- Eastern Energy - Thailand
- Price Waterhouse Coopers - Russia
- Semirara Mining and Power Corporation, Philippines
- Anglo American - United Kingdom
- Savvy Resources Ltd - HongKong
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Straits Asia Resources Limited - Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Wilmar Investment Holdings
- McConnell Dowell - Australia
- Barasentosa Lestari - Indonesia
- Mercator Lines Limited - India
- Vedanta Resources Plc - India
- Indogreen Group - Indonesia
- GAC Shipping (India) Pvt Ltd
- Jindal Steel & Power Ltd - India
- European Bulk Services B.V. - Netherlands
- Economic Council, Georgia
- Krishnapatnam Port Company Ltd. - India
- Manunggal Multi Energi - Indonesia
- Binh Thuan Hamico - Vietnam
- Eastern Coal Council - USA
- Baramulti Group, Indonesia
- Renaissance Capital - South Africa
- GVK Power & Infra Limited - India
- Latin American Coal - Colombia
- Sindya Power Generating Company Private Ltd
- Karaikal Port Pvt Ltd - India
- Bhoruka Overseas - Indonesia
- Holcim Trading Pte Ltd - Singapore
- TeaM Sual Corporation - Philippines
- Electricity Authority, New Zealand
- Indo Tambangraya Megah - Indonesia
- Salva Resources Pvt Ltd - India
- Interocean Group of Companies - India
- The Treasury - Australian Government
- Ind-Barath Power Infra Limited - India
- Indika Energy - Indonesia
- Altura Mining Limited, Indonesia
- Kartika Selabumi Mining - Indonesia
- Africa Commodities Group - South Africa
- Antam Resourcindo - Indonesia
- Merrill Lynch Commodities Europe
- India Bulls Power Limited - India
- MS Steel International - UAE
- Sojitz Corporation - Japan
- New Zealand Coal & Carbon
- Goldman Sachs - Singapore
- SMC Global Power, Philippines
- Port Waratah Coal Services - Australia
- Petrochimia International Co. Ltd.- Taiwan
- PTC India Limited - India
- The State Trading Corporation of India Ltd
- Minerals Council of Australia
- Central Java Power - Indonesia
- Tata Chemicals Ltd - India
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- Therma Luzon, Inc, Philippines
- Carbofer General Trading SA - India
- South Luzon Thermal Energy Corporation
- VISA Power Limited - India
- Australian Commodity Traders Exchange
- Kobexindo Tractors - Indoneisa
- Vijayanagar Sugar Pvt Ltd - India
- IEA Clean Coal Centre - UK
- Ceylon Electricity Board - Sri Lanka
- Orica Mining Services - Indonesia
- Kaltim Prima Coal - Indonesia
- Malabar Cements Ltd - India
- Ministry of Mines - Canada
- Billiton Holdings Pty Ltd - Australia
- Global Coal Blending Company Limited - Australia
- Madhucon Powers Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Georgia Ports Authority, United States
- Rio Tinto Coal - Australia
- Coastal Gujarat Power Limited - India
- Wood Mackenzie - Singapore
- Gujarat Mineral Development Corp Ltd - India
- Petron Corporation, Philippines
- Xindia Steels Limited - India
- Bulk Trading Sa - Switzerland
- PNOC Exploration Corporation - Philippines
- Ambuja Cements Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Global Business Power Corporation, Philippines
- Sinarmas Energy and Mining - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Marubeni Corporation - India
- Bukit Asam (Persero) Tbk - Indonesia
- Formosa Plastics Group - Taiwan
- Star Paper Mills Limited - India
- Aditya Birla Group - India
- ICICI Bank Limited - India
- Thai Mozambique Logistica
- PowerSource Philippines DevCo
- Essar Steel Hazira Ltd - India
- Dalmia Cement Bharat India
- Toyota Tsusho Corporation, Japan
- Sakthi Sugars Limited - India
- Banpu Public Company Limited - Thailand
- Maharashtra Electricity Regulatory Commission - India
- Lanco Infratech Ltd - India
- Riau Bara Harum - Indonesia
- Meralco Power Generation, Philippines
- Offshore Bulk Terminal Pte Ltd, Singapore
- Chamber of Mines of South Africa
- Jaiprakash Power Ventures ltd
- Tamil Nadu electricity Board
- International Coal Ventures Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- London Commodity Brokers - England
- Directorate Of Revenue Intelligence - India
- Bukit Makmur.PT - Indonesia
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- Agrawal Coal Company - India
- Mintek Dendrill Indonesia
- White Energy Company Limited
- AsiaOL BioFuels Corp., Philippines
- Leighton Contractors Pty Ltd - Australia
- GMR Energy Limited - India
- Grasim Industreis Ltd - India
- Kumho Petrochemical, South Korea
- Power Finance Corporation Ltd., India
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- Kepco SPC Power Corporation, Philippines
- Independent Power Producers Association of India
- Globalindo Alam Lestari - Indonesia
- Mjunction Services Limited - India
- Electricity Generating Authority of Thailand
- Timah Investasi Mineral - Indoneisa
- Pipit Mutiara Jaya. PT, Indonesia
- The University of Queensland
- Bank of Tokyo Mitsubishi UFJ Ltd
- Cement Manufacturers Association - India
- Siam City Cement - Thailand
- TNB Fuel Sdn Bhd - Malaysia
- Edison Trading Spa - Italy
- Planning Commission, India
- Central Electricity Authority - India
- Indian Energy Exchange, India
- Coal and Oil Company - UAE
- Aboitiz Power Corporation - Philippines
- Orica Australia Pty. Ltd.
- Kalimantan Lumbung Energi - Indonesia
- Meenaskhi Energy Private Limited - India
- Sical Logistics Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Makarim & Taira - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Energy Development Corp, Philippines
- Deloitte Consulting - India
- SN Aboitiz Power Inc, Philippines
- Iligan Light & Power Inc, Philippines
- Jorong Barutama Greston.PT - Indonesia
- CNBM International Corporation - China
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- SMG Consultants - Indonesia
- Maheswari Brothers Coal Limited - India
- Parliament of New Zealand
- Romanian Commodities Exchange
- Bayan Resources Tbk. - Indonesia
- Semirara Mining Corp, Philippines
- Borneo Indobara - Indonesia
- Standard Chartered Bank - UAE
- Chettinad Cement Corporation Ltd - India
- Kideco Jaya Agung - Indonesia
- Metalloyd Limited - United Kingdom
- Vizag Seaport Private Limited - India
- Uttam Galva Steels Limited - India
- LBH Netherlands Bv - Netherlands
- Medco Energi Mining Internasional
- Sarangani Energy Corporation, Philippines
- Siam City Cement PLC, Thailand
- Indonesian Coal Mining Association
- Sree Jayajothi Cements Limited - India
- OPG Power Generation Pvt Ltd - India
- Mercuria Energy - Indonesia
- Indian Oil Corporation Limited
- Bahari Cakrawala Sebuku - Indonesia
- Thiess Contractors Indonesia
- Bangladesh Power Developement Board
- Pendopo Energi Batubara - Indonesia
- Larsen & Toubro Limited - India
- CIMB Investment Bank - Malaysia
- Trasteel International SA, Italy
- Singapore Mercantile Exchange
- Bharathi Cement Corporation - India
- Videocon Industries ltd - India
- Attock Cement Pakistan Limited
- Oldendorff Carriers - Singapore
- Coalindo Energy - Indonesia
- ASAPP Information Group - India
- Posco Energy - South Korea
- Karbindo Abesyapradhi - Indoneisa
- San Jose City I Power Corp, Philippines
- Energy Link Ltd, New Zealand
- Commonwealth Bank - Australia
- Alfred C Toepfer International GmbH - Germany
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PetroVietnam Power Coal Import and Supply Company
- Bhushan Steel Limited - India
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