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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, 03 December 15
DRY BULK: THERMAL COAL LOWER USAGE UNDER A POTENTIAL NEW CLIMATE DEAL WILL ADVERSELY IMPACT THE MARKET'S RECOVERY - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
In direct contrast to the tanker market, the dry bulk one has seen demand for key commodities, such a coal, dwindling down over the course of the p ...
Thursday, 03 December 15
PANAMAX BUSINESS REMAINED UNDER PRESSURE LAST WEEK
COALspot.com: Following the new record lows the Dry Bulk market witnessed the week prior, the BDI took a much needed breath during the past days.
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Wednesday, 02 December 15
Q3' 16 FOB RICHARDS BAY COAL SWAP SLIGHTLY UP FOR THE THIRD STRAIGHT WEEK
COALspot.com: API4 FOB Richards Bay Coal swap for delivery Q1’ 2016 up month over month and fell week over week.
The Q1’ 2016 &nbs ...
Wednesday, 02 December 15
MARKET INSIGHT - VASSILIS LOGOTHETIS
Boom and bust cycles in commodity prices are not something rare, yet they have important implications both for the world economy in general and for ...
Tuesday, 01 December 15
FOB NEWCASTLE COAL SWAP UP THIS PAST WEEK
COALspot.com: API 5 FOB Newcastle Coal swap for Q1’ 2016 delivery slid $3.75 per ton (9.26%) month over month to US$ 36.75 per ton. The swap ...
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- Ministry of Finance - Indonesia
- Eastern Energy - Thailand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Orica Mining Services - Indonesia
- Standard Chartered Bank - UAE
- Toyota Tsusho Corporation, Japan
- Gujarat Sidhee Cement - India
- Krishnapatnam Port Company Ltd. - India
- Karbindo Abesyapradhi - Indoneisa
- Minerals Council of Australia
- Oldendorff Carriers - Singapore
- San Jose City I Power Corp, Philippines
- Meenaskhi Energy Private Limited - India
- Riau Bara Harum - Indonesia
- Energy Development Corp, Philippines
- Thiess Contractors Indonesia
- Karaikal Port Pvt Ltd - India
- PNOC Exploration Corporation - Philippines
- Jindal Steel & Power Ltd - India
- The State Trading Corporation of India Ltd
- Ambuja Cements Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Chettinad Cement Corporation Ltd - India
- GMR Energy Limited - India
- Central Java Power - Indonesia
- Energy Link Ltd, New Zealand
- Siam City Cement PLC, Thailand
- Vijayanagar Sugar Pvt Ltd - India
- Rashtriya Ispat Nigam Limited - India
- Dalmia Cement Bharat India
- Rio Tinto Coal - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Lanco Infratech Ltd - India
- Ministry of Transport, Egypt
- Bhoruka Overseas - Indonesia
- Agrawal Coal Company - India
- Larsen & Toubro Limited - India
- Global Coal Blending Company Limited - Australia
- Bukit Makmur.PT - Indonesia
- Savvy Resources Ltd - HongKong
- Formosa Plastics Group - Taiwan
- Indo Tambangraya Megah - Indonesia
- Chamber of Mines of South Africa
- Vedanta Resources Plc - India
- McConnell Dowell - Australia
- Miang Besar Coal Terminal - Indonesia
- White Energy Company Limited
- Wilmar Investment Holdings
- Africa Commodities Group - South Africa
- Jorong Barutama Greston.PT - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Billiton Holdings Pty Ltd - Australia
- Thai Mozambique Logistica
- Gujarat Electricity Regulatory Commission - India
- Xindia Steels Limited - India
- South Luzon Thermal Energy Corporation
- Tamil Nadu electricity Board
- Global Green Power PLC Corporation, Philippines
- Kideco Jaya Agung - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Therma Luzon, Inc, Philippines
- Barasentosa Lestari - Indonesia
- Directorate Of Revenue Intelligence - India
- Indian Energy Exchange, India
- Power Finance Corporation Ltd., India
- European Bulk Services B.V. - Netherlands
- Baramulti Group, Indonesia
- PTC India Limited - India
- Leighton Contractors Pty Ltd - Australia
- OPG Power Generation Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Posco Energy - South Korea
- Uttam Galva Steels Limited - India
- Deloitte Consulting - India
- Samtan Co., Ltd - South Korea
- MS Steel International - UAE
- LBH Netherlands Bv - Netherlands
- Ind-Barath Power Infra Limited - India
- Anglo American - United Kingdom
- Indian Oil Corporation Limited
- International Coal Ventures Pvt Ltd - India
- Star Paper Mills Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Merrill Lynch Commodities Europe
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Marubeni Corporation - India
- Bukit Baiduri Energy - Indonesia
- Trasteel International SA, Italy
- CNBM International Corporation - China
- Kobexindo Tractors - Indoneisa
- New Zealand Coal & Carbon
- Sree Jayajothi Cements Limited - India
- GVK Power & Infra Limited - India
- GAC Shipping (India) Pvt Ltd
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- PowerSource Philippines DevCo
- Madhucon Powers Ltd - India
- Jaiprakash Power Ventures ltd
- Coal and Oil Company - UAE
- Meralco Power Generation, Philippines
- Commonwealth Bank - Australia
- SN Aboitiz Power Inc, Philippines
- TeaM Sual Corporation - Philippines
- Maharashtra Electricity Regulatory Commission - India
- Metalloyd Limited - United Kingdom
- Mjunction Services Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Salva Resources Pvt Ltd - India
- Antam Resourcindo - Indonesia
- Sakthi Sugars Limited - India
- Mintek Dendrill Indonesia
- Edison Trading Spa - Italy
- Electricity Authority, New Zealand
- SMG Consultants - Indonesia
- Mercator Lines Limited - India
- Eastern Coal Council - USA
- Borneo Indobara - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Parliament of New Zealand
- Intertek Mineral Services - Indonesia
- Central Electricity Authority - India
- Banpu Public Company Limited - Thailand
- Planning Commission, India
- Latin American Coal - Colombia
- Grasim Industreis Ltd - India
- Indika Energy - Indonesia
- Orica Australia Pty. Ltd.
- Kepco SPC Power Corporation, Philippines
- Mercuria Energy - Indonesia
- Singapore Mercantile Exchange
- Aboitiz Power Corporation - Philippines
- London Commodity Brokers - England
- Bharathi Cement Corporation - India
- Siam City Cement - Thailand
- SMC Global Power, Philippines
- Port Waratah Coal Services - Australia
- Neyveli Lignite Corporation Ltd, - India
- Kaltim Prima Coal - Indonesia
- Pendopo Energi Batubara - Indonesia
- Indonesian Coal Mining Association
- Aditya Birla Group - India
- IHS Mccloskey Coal Group - USA
- Medco Energi Mining Internasional
- Cigading International Bulk Terminal - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Coalindo Energy - Indonesia
- Ministry of Mines - Canada
- Sarangani Energy Corporation, Philippines
- Makarim & Taira - Indonesia
- Renaissance Capital - South Africa
- Parry Sugars Refinery, India
- Australian Commodity Traders Exchange
- AsiaOL BioFuels Corp., Philippines
- Alfred C Toepfer International GmbH - Germany
- Essar Steel Hazira Ltd - India
- Malabar Cements Ltd - India
- Semirara Mining Corp, Philippines
- Cement Manufacturers Association - India
- Tata Chemicals Ltd - India
- Vizag Seaport Private Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Georgia Ports Authority, United States
- Bhushan Steel Limited - India
- The University of Queensland
- Semirara Mining and Power Corporation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Electricity Generating Authority of Thailand
- ASAPP Information Group - India
- Kapuas Tunggal Persada - Indonesia
- Attock Cement Pakistan Limited
- Wood Mackenzie - Singapore
- Holcim Trading Pte Ltd - Singapore
- Goldman Sachs - Singapore
- ICICI Bank Limited - India
- Romanian Commodities Exchange
- Coastal Gujarat Power Limited - India
- Carbofer General Trading SA - India
- Pipit Mutiara Jaya. PT, Indonesia
- Binh Thuan Hamico - Vietnam
- TNB Fuel Sdn Bhd - Malaysia
- Price Waterhouse Coopers - Russia
- Straits Asia Resources Limited - Singapore
- Kumho Petrochemical, South Korea
- The Treasury - Australian Government
- Simpson Spence & Young - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Independent Power Producers Association of India
- VISA Power Limited - India
- Manunggal Multi Energi - Indonesia
- Videocon Industries ltd - India
- India Bulls Power Limited - India
- Maheswari Brothers Coal Limited - India
- Kartika Selabumi Mining - Indonesia
- Sojitz Corporation - Japan
- Globalindo Alam Lestari - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Heidelberg Cement - Germany
- Bayan Resources Tbk. - Indonesia
- Global Business Power Corporation, Philippines
- Bangladesh Power Developement Board
- Sical Logistics Limited - India
- Interocean Group of Companies - India
- Australian Coal Association
- Iligan Light & Power Inc, Philippines
- Petron Corporation, Philippines
- Economic Council, Georgia
- CIMB Investment Bank - Malaysia
- IEA Clean Coal Centre - UK
- Bukit Asam (Persero) Tbk - Indonesia
- Sindya Power Generating Company Private Ltd
- Altura Mining Limited, Indonesia
- Bhatia International Limited - India
- Indogreen Group - Indonesia
- Timah Investasi Mineral - Indoneisa
- Bulk Trading Sa - Switzerland
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