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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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Showing 1796 to 1800 news of total 6871 |
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- Indian Energy Exchange, India
- Wilmar Investment Holdings
- Ministry of Finance - Indonesia
- Sakthi Sugars Limited - India
- Gujarat Sidhee Cement - India
- Holcim Trading Pte Ltd - Singapore
- Heidelberg Cement - Germany
- Borneo Indobara - Indonesia
- Cement Manufacturers Association - India
- PTC India Limited - India
- Uttam Galva Steels Limited - India
- Bharathi Cement Corporation - India
- GAC Shipping (India) Pvt Ltd
- San Jose City I Power Corp, Philippines
- Meralco Power Generation, Philippines
- Straits Asia Resources Limited - Singapore
- Indogreen Group - Indonesia
- Kideco Jaya Agung - Indonesia
- Orica Australia Pty. Ltd.
- ASAPP Information Group - India
- Indian Oil Corporation Limited
- PNOC Exploration Corporation - Philippines
- Minerals Council of Australia
- SMC Global Power, Philippines
- Maheswari Brothers Coal Limited - India
- Medco Energi Mining Internasional
- Mercator Lines Limited - India
- Kepco SPC Power Corporation, Philippines
- The University of Queensland
- Directorate Of Revenue Intelligence - India
- Mintek Dendrill Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Global Business Power Corporation, Philippines
- Kaltim Prima Coal - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Agrawal Coal Company - India
- New Zealand Coal & Carbon
- PetroVietnam Power Coal Import and Supply Company
- South Luzon Thermal Energy Corporation
- Electricity Authority, New Zealand
- Maharashtra Electricity Regulatory Commission - India
- Dalmia Cement Bharat India
- Sindya Power Generating Company Private Ltd
- Mjunction Services Limited - India
- Iligan Light & Power Inc, Philippines
- Interocean Group of Companies - India
- The State Trading Corporation of India Ltd
- Samtan Co., Ltd - South Korea
- Larsen & Toubro Limited - India
- IHS Mccloskey Coal Group - USA
- Singapore Mercantile Exchange
- Neyveli Lignite Corporation Ltd, - India
- Lanco Infratech Ltd - India
- Altura Mining Limited, Indonesia
- Cigading International Bulk Terminal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Tata Chemicals Ltd - India
- Electricity Generating Authority of Thailand
- Aditya Birla Group - India
- Georgia Ports Authority, United States
- Aboitiz Power Corporation - Philippines
- Barasentosa Lestari - Indonesia
- Indo Tambangraya Megah - Indonesia
- Mercuria Energy - Indonesia
- Sree Jayajothi Cements Limited - India
- Bhoruka Overseas - Indonesia
- The Treasury - Australian Government
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Standard Chartered Bank - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Ceylon Electricity Board - Sri Lanka
- International Coal Ventures Pvt Ltd - India
- Romanian Commodities Exchange
- Gujarat Mineral Development Corp Ltd - India
- Goldman Sachs - Singapore
- Simpson Spence & Young - Indonesia
- Manunggal Multi Energi - Indonesia
- Central Electricity Authority - India
- LBH Netherlands Bv - Netherlands
- PowerSource Philippines DevCo
- ICICI Bank Limited - India
- Antam Resourcindo - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Rashtriya Ispat Nigam Limited - India
- Africa Commodities Group - South Africa
- Indika Energy - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Indonesian Coal Mining Association
- Makarim & Taira - Indonesia
- Bayan Resources Tbk. - Indonesia
- Oldendorff Carriers - Singapore
- Metalloyd Limited - United Kingdom
- Jaiprakash Power Ventures ltd
- Kohat Cement Company Ltd. - Pakistan
- Chettinad Cement Corporation Ltd - India
- Carbofer General Trading SA - India
- Tamil Nadu electricity Board
- GVK Power & Infra Limited - India
- Meenaskhi Energy Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- CNBM International Corporation - China
- Sojitz Corporation - Japan
- Bhatia International Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Thiess Contractors Indonesia
- Toyota Tsusho Corporation, Japan
- IEA Clean Coal Centre - UK
- Parry Sugars Refinery, India
- Energy Link Ltd, New Zealand
- Siam City Cement - Thailand
- Thai Mozambique Logistica
- European Bulk Services B.V. - Netherlands
- Gujarat Electricity Regulatory Commission - India
- McConnell Dowell - Australia
- Wood Mackenzie - Singapore
- Jindal Steel & Power Ltd - India
- Coalindo Energy - Indonesia
- Attock Cement Pakistan Limited
- Kartika Selabumi Mining - Indonesia
- India Bulls Power Limited - India
- Economic Council, Georgia
- Price Waterhouse Coopers - Russia
- Energy Development Corp, Philippines
- Semirara Mining and Power Corporation, Philippines
- Independent Power Producers Association of India
- Salva Resources Pvt Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Latin American Coal - Colombia
- Vedanta Resources Plc - India
- Commonwealth Bank - Australia
- Globalindo Alam Lestari - Indonesia
- Kobexindo Tractors - Indoneisa
- Kapuas Tunggal Persada - Indonesia
- Semirara Mining Corp, Philippines
- Malabar Cements Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Riau Bara Harum - Indonesia
- Ambuja Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Marubeni Corporation - India
- Edison Trading Spa - Italy
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Planning Commission, India
- White Energy Company Limited
- Bukit Asam (Persero) Tbk - Indonesia
- Chamber of Mines of South Africa
- Anglo American - United Kingdom
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Petron Corporation, Philippines
- SMG Consultants - Indonesia
- London Commodity Brokers - England
- Australian Commodity Traders Exchange
- Asmin Koalindo Tuhup - Indonesia
- Orica Mining Services - Indonesia
- Savvy Resources Ltd - HongKong
- Central Java Power - Indonesia
- Coastal Gujarat Power Limited - India
- Ministry of Mines - Canada
- Power Finance Corporation Ltd., India
- Karaikal Port Pvt Ltd - India
- Xindia Steels Limited - India
- Bangladesh Power Developement Board
- MS Steel International - UAE
- Bulk Trading Sa - Switzerland
- Renaissance Capital - South Africa
- Ministry of Transport, Egypt
- Billiton Holdings Pty Ltd - Australia
- Global Green Power PLC Corporation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- GMR Energy Limited - India
- CIMB Investment Bank - Malaysia
- Bukit Baiduri Energy - Indonesia
- Deloitte Consulting - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kumho Petrochemical, South Korea
- Posco Energy - South Korea
- Vizag Seaport Private Limited - India
- Siam City Cement PLC, Thailand
- Bahari Cakrawala Sebuku - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Miang Besar Coal Terminal - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- TeaM Sual Corporation - Philippines
- Formosa Plastics Group - Taiwan
- Ind-Barath Power Infra Limited - India
- Baramulti Group, Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Timah Investasi Mineral - Indoneisa
- Eastern Energy - Thailand
- Grasim Industreis Ltd - India
- Bhushan Steel Limited - India
- Eastern Coal Council - USA
- Global Coal Blending Company Limited - Australia
- Binh Thuan Hamico - Vietnam
- Coal and Oil Company - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Merrill Lynch Commodities Europe
- SN Aboitiz Power Inc, Philippines
- VISA Power Limited - India
- Banpu Public Company Limited - Thailand
- Sarangani Energy Corporation, Philippines
- Trasteel International SA, Italy
- Videocon Industries ltd - India
- Krishnapatnam Port Company Ltd. - India
- GN Power Mariveles Coal Plant, Philippines
- Port Waratah Coal Services - Australia
- Therma Luzon, Inc, Philippines
- Sical Logistics Limited - India
- Star Paper Mills Limited - India
- Parliament of New Zealand
- Essar Steel Hazira Ltd - India
- Madhucon Powers Ltd - India
- Rio Tinto Coal - Australia
- Australian Coal Association
- Alfred C Toepfer International GmbH - Germany
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