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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, 27 October 16
PANAMAX: FIRM ATLANTIC; TOPPISH PACIFIC - FEARNLEYS
Supramax
The trend from last week is passed on. ECSA still strong with Supras from N Brazil to Med fixed at $9,000 to $9,500 daily.
Accordin ...
Wednesday, 26 October 16
SHIPPING MARKET INSIGHT - KONSTANTINOS KONTOMICHIS
If the finale of a thriller movie finds the leading actor successfully surviving after all the sacrifices he has made, the audience presumes this t ...
Tuesday, 25 October 16
INDONESIAN COAL PRICES MARCH HIGHER CONTINUES
COALspot.com: A rally in thermal coal prices over the past few months, after years of decline, is still continuing and it is expected to rally at l ...
Tuesday, 25 October 16
THINGS ARE SLOWLY STARTING TO IMPROVE AS CORRECTIONS ARE MADE - ALLIED
It seems as though left, right and centre, all we see nowadays is the word “restructuring”.
There is restructuring amongst bankers ...
Monday, 24 October 16
KOMIPO INVITES BIDS FOR 0.78 MILLION TONS OF BITUMINOUS COAL
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a new tender for 780,000 Metric Tons of Bituminous Coal for its B ...
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- Billiton Holdings Pty Ltd - Australia
- Electricity Generating Authority of Thailand
- CIMB Investment Bank - Malaysia
- Kapuas Tunggal Persada - Indonesia
- International Coal Ventures Pvt Ltd - India
- Indogreen Group - Indonesia
- Energy Link Ltd, New Zealand
- Africa Commodities Group - South Africa
- Bharathi Cement Corporation - India
- Asmin Koalindo Tuhup - Indonesia
- Rio Tinto Coal - Australia
- Vizag Seaport Private Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Salva Resources Pvt Ltd - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Ind-Barath Power Infra Limited - India
- Semirara Mining Corp, Philippines
- Mercator Lines Limited - India
- SN Aboitiz Power Inc, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Coalindo Energy - Indonesia
- Indian Oil Corporation Limited
- Kideco Jaya Agung - Indonesia
- SMG Consultants - Indonesia
- Binh Thuan Hamico - Vietnam
- Krishnapatnam Port Company Ltd. - India
- Aditya Birla Group - India
- Orica Mining Services - Indonesia
- Indian Energy Exchange, India
- Merrill Lynch Commodities Europe
- Minerals Council of Australia
- VISA Power Limited - India
- ICICI Bank Limited - India
- Kumho Petrochemical, South Korea
- Sojitz Corporation - Japan
- Directorate General of MIneral and Coal - Indonesia
- The State Trading Corporation of India Ltd
- Mintek Dendrill Indonesia
- GVK Power & Infra Limited - India
- Riau Bara Harum - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- PowerSource Philippines DevCo
- Kartika Selabumi Mining - Indonesia
- Cement Manufacturers Association - India
- GAC Shipping (India) Pvt Ltd
- Uttam Galva Steels Limited - India
- Australian Coal Association
- Eastern Coal Council - USA
- Star Paper Mills Limited - India
- Interocean Group of Companies - India
- Videocon Industries ltd - India
- Baramulti Group, Indonesia
- Iligan Light & Power Inc, Philippines
- Oldendorff Carriers - Singapore
- Romanian Commodities Exchange
- Rashtriya Ispat Nigam Limited - India
- Leighton Contractors Pty Ltd - Australia
- Sakthi Sugars Limited - India
- Xindia Steels Limited - India
- Ministry of Transport, Egypt
- Larsen & Toubro Limited - India
- Toyota Tsusho Corporation, Japan
- Renaissance Capital - South Africa
- OPG Power Generation Pvt Ltd - India
- Siam City Cement - Thailand
- McConnell Dowell - Australia
- Bangladesh Power Developement Board
- Marubeni Corporation - India
- Ministry of Finance - Indonesia
- IEA Clean Coal Centre - UK
- Georgia Ports Authority, United States
- Antam Resourcindo - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Tamil Nadu electricity Board
- Formosa Plastics Group - Taiwan
- Cigading International Bulk Terminal - Indonesia
- New Zealand Coal & Carbon
- Carbofer General Trading SA - India
- Vedanta Resources Plc - India
- Central Electricity Authority - India
- Altura Mining Limited, Indonesia
- Tata Chemicals Ltd - India
- Makarim & Taira - Indonesia
- Aboitiz Power Corporation - Philippines
- Sinarmas Energy and Mining - Indonesia
- GMR Energy Limited - India
- Grasim Industreis Ltd - India
- Samtan Co., Ltd - South Korea
- Global Business Power Corporation, Philippines
- Chamber of Mines of South Africa
- TeaM Sual Corporation - Philippines
- CNBM International Corporation - China
- Bukit Asam (Persero) Tbk - Indonesia
- Anglo American - United Kingdom
- Kaltim Prima Coal - Indonesia
- Ambuja Cements Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Indonesian Coal Mining Association
- Bhushan Steel Limited - India
- Electricity Authority, New Zealand
- Energy Development Corp, Philippines
- Dalmia Cement Bharat India
- Thai Mozambique Logistica
- Goldman Sachs - Singapore
- Manunggal Multi Energi - Indonesia
- Parry Sugars Refinery, India
- Timah Investasi Mineral - Indoneisa
- Meralco Power Generation, Philippines
- Gujarat Electricity Regulatory Commission - India
- Coal and Oil Company - UAE
- ASAPP Information Group - India
- SMC Global Power, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhatia International Limited - India
- Trasteel International SA, Italy
- Siam City Cement PLC, Thailand
- Medco Energi Mining Internasional
- London Commodity Brokers - England
- Port Waratah Coal Services - Australia
- Standard Chartered Bank - UAE
- Wood Mackenzie - Singapore
- Kohat Cement Company Ltd. - Pakistan
- Malabar Cements Ltd - India
- Globalindo Alam Lestari - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Meenaskhi Energy Private Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Petron Corporation, Philippines
- Thiess Contractors Indonesia
- Lanco Infratech Ltd - India
- Bhoruka Overseas - Indonesia
- Jaiprakash Power Ventures ltd
- Holcim Trading Pte Ltd - Singapore
- Independent Power Producers Association of India
- Kobexindo Tractors - Indoneisa
- LBH Netherlands Bv - Netherlands
- Edison Trading Spa - Italy
- Maharashtra Electricity Regulatory Commission - India
- Therma Luzon, Inc, Philippines
- Straits Asia Resources Limited - Singapore
- South Luzon Thermal Energy Corporation
- Bayan Resources Tbk. - Indonesia
- Jindal Steel & Power Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- European Bulk Services B.V. - Netherlands
- Mercuria Energy - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Eastern Energy - Thailand
- Latin American Coal - Colombia
- AsiaOL BioFuels Corp., Philippines
- Barasentosa Lestari - Indonesia
- Karaikal Port Pvt Ltd - India
- Agrawal Coal Company - India
- Singapore Mercantile Exchange
- Central Java Power - Indonesia
- Heidelberg Cement - Germany
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Orica Australia Pty. Ltd.
- Sindya Power Generating Company Private Ltd
- Miang Besar Coal Terminal - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- PTC India Limited - India
- Bukit Makmur.PT - Indonesia
- IHS Mccloskey Coal Group - USA
- Bulk Trading Sa - Switzerland
- White Energy Company Limited
- Attock Cement Pakistan Limited
- Gujarat Sidhee Cement - India
- Posco Energy - South Korea
- Alfred C Toepfer International GmbH - Germany
- Simpson Spence & Young - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Australian Commodity Traders Exchange
- The University of Queensland
- GN Power Mariveles Coal Plant, Philippines
- Metalloyd Limited - United Kingdom
- Pipit Mutiara Jaya. PT, Indonesia
- Deloitte Consulting - India
- Ministry of Mines - Canada
- Maheswari Brothers Coal Limited - India
- Power Finance Corporation Ltd., India
- Essar Steel Hazira Ltd - India
- Savvy Resources Ltd - HongKong
- Bukit Baiduri Energy - Indonesia
- Parliament of New Zealand
- Global Green Power PLC Corporation, Philippines
- Madhucon Powers Ltd - India
- Mjunction Services Limited - India
- Sarangani Energy Corporation, Philippines
- The Treasury - Australian Government
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Price Waterhouse Coopers - Russia
- Wilmar Investment Holdings
- Commonwealth Bank - Australia
- Indika Energy - Indonesia
- Economic Council, Georgia
- Ceylon Electricity Board - Sri Lanka
- Banpu Public Company Limited - Thailand
- Indo Tambangraya Megah - Indonesia
- Sical Logistics Limited - India
- Directorate Of Revenue Intelligence - India
- Global Coal Blending Company Limited - Australia
- Sree Jayajothi Cements Limited - India
- Kepco SPC Power Corporation, Philippines
- Intertek Mineral Services - Indonesia
- PNOC Exploration Corporation - Philippines
- Chettinad Cement Corporation Ltd - India
- Planning Commission, India
- Borneo Indobara - Indonesia
- Pendopo Energi Batubara - Indonesia
- MS Steel International - UAE
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Coastal Gujarat Power Limited - India
- India Bulls Power Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- San Jose City I Power Corp, Philippines
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