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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, 19 December 19
COAL POWER GENERATION CONTINUES TO DECLINE IN GERMANY: DESTATIS, XINHUA REPORTED
The volume of electricity generated in coal-fired power plants in Germany decreased “markedly” by 37 percent to 34 billion kilowatt-hou ...
Thursday, 19 December 19
BANGLADESH'S NBR CUTS VAT ON COAL IMPORT FOR POWER PLANTS - THE DAILY STAR
The National Board of Revenue (NBR) reduced value added tax on the import of coal for power plants to 5 percent from present 15 percent for five ye ...
Wednesday, 18 December 19
AVERAGE PRICES OF COAL IN 2018 WERE MORE THAN 60% HIGHER THAN IN 2016 - IEA
Coal use grew again in 2018.
Global coal demand increased by 1.1%, continuing the rebound that began in 2017 after three years of decline ...
Wednesday, 18 December 19
ASIA IS SET TO SUPPORT GLOBAL COAL DEMAND FOR THE NEXT FIVE YEARS - IEA
Press Release: Global coal demand is expected to decline in 2019 but remain broadly stable over the next five years, supported by robust growth in ...
Wednesday, 18 December 19
SHIPPING MARKET INSIGHT - INTERMODAL
As we all know very well by now, the reduction in the maximum allowable sulphur content of marine fuels in 2020 is likely to have a massive impact ...
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- Globalindo Alam Lestari - Indonesia
- Indian Energy Exchange, India
- Africa Commodities Group - South Africa
- London Commodity Brokers - England
- Rashtriya Ispat Nigam Limited - India
- Oldendorff Carriers - Singapore
- Power Finance Corporation Ltd., India
- SN Aboitiz Power Inc, Philippines
- Dalmia Cement Bharat India
- Simpson Spence & Young - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Meenaskhi Energy Private Limited - India
- Heidelberg Cement - Germany
- Global Coal Blending Company Limited - Australia
- Bukit Asam (Persero) Tbk - Indonesia
- Lanco Infratech Ltd - India
- Banpu Public Company Limited - Thailand
- Toyota Tsusho Corporation, Japan
- Chettinad Cement Corporation Ltd - India
- Tata Chemicals Ltd - India
- Manunggal Multi Energi - Indonesia
- Borneo Indobara - Indonesia
- Mercuria Energy - Indonesia
- Leighton Contractors Pty Ltd - Australia
- GMR Energy Limited - India
- Cigading International Bulk Terminal - Indonesia
- Uttam Galva Steels Limited - India
- Makarim & Taira - Indonesia
- Price Waterhouse Coopers - Russia
- Ceylon Electricity Board - Sri Lanka
- Metalloyd Limited - United Kingdom
- Australian Coal Association
- Gujarat Mineral Development Corp Ltd - India
- IHS Mccloskey Coal Group - USA
- Kumho Petrochemical, South Korea
- LBH Netherlands Bv - Netherlands
- Independent Power Producers Association of India
- Coal and Oil Company - UAE
- Mjunction Services Limited - India
- PNOC Exploration Corporation - Philippines
- MS Steel International - UAE
- South Luzon Thermal Energy Corporation
- Intertek Mineral Services - Indonesia
- Australian Commodity Traders Exchange
- SMC Global Power, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Eastern Coal Council - USA
- Sree Jayajothi Cements Limited - India
- Semirara Mining and Power Corporation, Philippines
- Larsen & Toubro Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Antam Resourcindo - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Videocon Industries ltd - India
- Bhoruka Overseas - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Barasentosa Lestari - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Carbofer General Trading SA - India
- Directorate Of Revenue Intelligence - India
- Indika Energy - Indonesia
- CIMB Investment Bank - Malaysia
- Commonwealth Bank - Australia
- Chamber of Mines of South Africa
- Riau Bara Harum - Indonesia
- Bukit Baiduri Energy - Indonesia
- The State Trading Corporation of India Ltd
- Coalindo Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Binh Thuan Hamico - Vietnam
- Anglo American - United Kingdom
- Bahari Cakrawala Sebuku - Indonesia
- Indian Oil Corporation Limited
- Minerals Council of Australia
- GVK Power & Infra Limited - India
- Global Green Power PLC Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Bukit Makmur.PT - Indonesia
- Ministry of Mines - Canada
- CNBM International Corporation - China
- McConnell Dowell - Australia
- ICICI Bank Limited - India
- Orica Mining Services - Indonesia
- Grasim Industreis Ltd - India
- Central Electricity Authority - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- International Coal Ventures Pvt Ltd - India
- Posco Energy - South Korea
- Altura Mining Limited, Indonesia
- Sarangani Energy Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Bulk Trading Sa - Switzerland
- Kepco SPC Power Corporation, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Krishnapatnam Port Company Ltd. - India
- Gujarat Electricity Regulatory Commission - India
- Iligan Light & Power Inc, Philippines
- PowerSource Philippines DevCo
- Singapore Mercantile Exchange
- Kohat Cement Company Ltd. - Pakistan
- New Zealand Coal & Carbon
- Parry Sugars Refinery, India
- Eastern Energy - Thailand
- Sical Logistics Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Star Paper Mills Limited - India
- ASAPP Information Group - India
- Mercator Lines Limited - India
- Bangladesh Power Developement Board
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Agrawal Coal Company - India
- Vijayanagar Sugar Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Indonesian Coal Mining Association
- Bhushan Steel Limited - India
- Global Business Power Corporation, Philippines
- Karaikal Port Pvt Ltd - India
- Wood Mackenzie - Singapore
- Sindya Power Generating Company Private Ltd
- Therma Luzon, Inc, Philippines
- Vizag Seaport Private Limited - India
- The Treasury - Australian Government
- SMG Consultants - Indonesia
- Baramulti Group, Indonesia
- Alfred C Toepfer International GmbH - Germany
- Bank of Tokyo Mitsubishi UFJ Ltd
- The University of Queensland
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- IEA Clean Coal Centre - UK
- Sinarmas Energy and Mining - Indonesia
- Renaissance Capital - South Africa
- TNB Fuel Sdn Bhd - Malaysia
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- Malabar Cements Ltd - India
- Electricity Generating Authority of Thailand
- Gujarat Sidhee Cement - India
- Marubeni Corporation - India
- Standard Chartered Bank - UAE
- Interocean Group of Companies - India
- Goldman Sachs - Singapore
- Formosa Plastics Group - Taiwan
- Thai Mozambique Logistica
- Electricity Authority, New Zealand
- Energy Development Corp, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Kartika Selabumi Mining - Indonesia
- Maheswari Brothers Coal Limited - India
- Semirara Mining Corp, Philippines
- Ministry of Transport, Egypt
- Kapuas Tunggal Persada - Indonesia
- Tamil Nadu electricity Board
- Timah Investasi Mineral - Indoneisa
- Meralco Power Generation, Philippines
- Salva Resources Pvt Ltd - India
- VISA Power Limited - India
- Kobexindo Tractors - Indoneisa
- India Bulls Power Limited - India
- Deloitte Consulting - India
- Directorate General of MIneral and Coal - Indonesia
- Essar Steel Hazira Ltd - India
- Central Java Power - Indonesia
- Aboitiz Power Corporation - Philippines
- Romanian Commodities Exchange
- Orica Australia Pty. Ltd.
- Energy Link Ltd, New Zealand
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Indogreen Group - Indonesia
- Planning Commission, India
- Ambuja Cements Ltd - India
- Georgia Ports Authority, United States
- Rio Tinto Coal - Australia
- Straits Asia Resources Limited - Singapore
- Madhucon Powers Ltd - India
- Edison Trading Spa - Italy
- Petrochimia International Co. Ltd.- Taiwan
- PTC India Limited - India
- AsiaOL BioFuels Corp., Philippines
- Trasteel International SA, Italy
- Coastal Gujarat Power Limited - India
- White Energy Company Limited
- Parliament of New Zealand
- Mintek Dendrill Indonesia
- GAC Shipping (India) Pvt Ltd
- Aditya Birla Group - India
- Xindia Steels Limited - India
- Ind-Barath Power Infra Limited - India
- Economic Council, Georgia
- Bharathi Cement Corporation - India
- Samtan Co., Ltd - South Korea
- Petron Corporation, Philippines
- Wilmar Investment Holdings
- Siam City Cement - Thailand
- Medco Energi Mining Internasional
- Karbindo Abesyapradhi - Indoneisa
- Sojitz Corporation - Japan
- San Jose City I Power Corp, Philippines
- Siam City Cement PLC, Thailand
- Jindal Steel & Power Ltd - India
- Latin American Coal - Colombia
- TeaM Sual Corporation - Philippines
- Merrill Lynch Commodities Europe
- Vedanta Resources Plc - India
- Indo Tambangraya Megah - Indonesia
- Thiess Contractors Indonesia
- Ministry of Finance - Indonesia
- Port Waratah Coal Services - Australia
- Holcim Trading Pte Ltd - Singapore
- Attock Cement Pakistan Limited
- Sakthi Sugars Limited - India
- Savvy Resources Ltd - HongKong
- Bhatia International Limited - India
- Jaiprakash Power Ventures ltd
- Cement Manufacturers Association - India
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