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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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Saturday, 27 July 13
INDONESIA TO INDIA SUPRAMAX FREIGHT RATES ARE EXPECTED TO REMAIN STEADY - CAPT.REDDY
COALspot.com : The freight market seemed to soften this week with BDI , Cape and Panamax indices dropped average 5 percent on week.
The BDI was d ...
Thursday, 25 July 13
CAPESIZE : PACIFIC AND ATLANTIC RATES ARE HOLDING STEADY - FEARNLEYS AS
Handy
The Far East market remains quiet even if some Indo coal trip orders were fed in the market at early this week. Prompt ships passing Singapor ...
Thursday, 25 July 13
SUMMER LULL CHIPPING AWAY RECENT GAINS IN DRY BULK FREIGHT RATES - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING NEWS
In what seems to be establishing as a permanent trend, at least for the time being, the dry bulk market kept on retreating yesterday, even if this r ...
Tuesday, 23 July 13
NEWCASTLE'S COAL EXPORTS CLIMB 17.82% ON WEEK, PORT'S DATA SHOWS
COALspot.com: Newcastle port in Australia has loaded 3,369,865 tons of coal for the week ended 0700 hours 22 July 2013, Newcastle Port Corp. s ...
Monday, 22 July 13
DRY BULK MARKET DIFFICULT TO MAINTAIN POSITIVE DRIVE CLAIMS SHIPBROKER - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has seen a significant recovery in recent weeks, leading most ship classes to earnings above their operating expenses, thus brin ...
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- ICICI Bank Limited - India
- Metalloyd Limited - United Kingdom
- Chamber of Mines of South Africa
- Bukit Baiduri Energy - Indonesia
- Indo Tambangraya Megah - Indonesia
- Globalindo Alam Lestari - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Madhucon Powers Ltd - India
- GVK Power & Infra Limited - India
- Ministry of Finance - Indonesia
- Central Electricity Authority - India
- Interocean Group of Companies - India
- Dalmia Cement Bharat India
- Port Waratah Coal Services - Australia
- Energy Link Ltd, New Zealand
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Salva Resources Pvt Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- Pipit Mutiara Jaya. PT, Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Jaiprakash Power Ventures ltd
- Bangladesh Power Developement Board
- Chettinad Cement Corporation Ltd - India
- The Treasury - Australian Government
- Bayan Resources Tbk. - Indonesia
- Wood Mackenzie - Singapore
- Bukit Makmur.PT - Indonesia
- Indika Energy - Indonesia
- Semirara Mining Corp, Philippines
- Electricity Authority, New Zealand
- Leighton Contractors Pty Ltd - Australia
- Coal and Oil Company - UAE
- Vedanta Resources Plc - India
- Jindal Steel & Power Ltd - India
- Independent Power Producers Association of India
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- South Luzon Thermal Energy Corporation
- Maheswari Brothers Coal Limited - India
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- Billiton Holdings Pty Ltd - Australia
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- Kumho Petrochemical, South Korea
- Bulk Trading Sa - Switzerland
- Essar Steel Hazira Ltd - India
- Therma Luzon, Inc, Philippines
- Eastern Coal Council - USA
- Aditya Birla Group - India
- Holcim Trading Pte Ltd - Singapore
- Barasentosa Lestari - Indonesia
- Rio Tinto Coal - Australia
- Xindia Steels Limited - India
- Global Green Power PLC Corporation, Philippines
- VISA Power Limited - India
- Thiess Contractors Indonesia
- Larsen & Toubro Limited - India
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- Samtan Co., Ltd - South Korea
- Australian Coal Association
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- Bank of Tokyo Mitsubishi UFJ Ltd
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- ASAPP Information Group - India
- Kartika Selabumi Mining - Indonesia
- Petron Corporation, Philippines
- Uttam Galva Steels Limited - India
- Gujarat Sidhee Cement - India
- Goldman Sachs - Singapore
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- IHS Mccloskey Coal Group - USA
- Meralco Power Generation, Philippines
- Sakthi Sugars Limited - India
- Siam City Cement - Thailand
- Thai Mozambique Logistica
- CNBM International Corporation - China
- Indogreen Group - Indonesia
- OPG Power Generation Pvt Ltd - India
- Sree Jayajothi Cements Limited - India
- Wilmar Investment Holdings
- Toyota Tsusho Corporation, Japan
- Ministry of Transport, Egypt
- Antam Resourcindo - Indonesia
- Vizag Seaport Private Limited - India
- Edison Trading Spa - Italy
- Economic Council, Georgia
- AsiaOL BioFuels Corp., Philippines
- Oldendorff Carriers - Singapore
- Sinarmas Energy and Mining - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- International Coal Ventures Pvt Ltd - India
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- Attock Cement Pakistan Limited
- GAC Shipping (India) Pvt Ltd
- SMG Consultants - Indonesia
- Lanco Infratech Ltd - India
- Romanian Commodities Exchange
- Kapuas Tunggal Persada - Indonesia
- Simpson Spence & Young - Indonesia
- The State Trading Corporation of India Ltd
- Straits Asia Resources Limited - Singapore
- Directorate General of MIneral and Coal - Indonesia
- Parry Sugars Refinery, India
- Anglo American - United Kingdom
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- Siam City Cement PLC, Thailand
- Electricity Generating Authority of Thailand
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- PTC India Limited - India
- Latin American Coal - Colombia
- The University of Queensland
- Global Business Power Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Sindya Power Generating Company Private Ltd
- Kepco SPC Power Corporation, Philippines
- Agrawal Coal Company - India
- India Bulls Power Limited - India
- Orica Australia Pty. Ltd.
- Bahari Cakrawala Sebuku - Indonesia
- Karaikal Port Pvt Ltd - India
- Renaissance Capital - South Africa
- Parliament of New Zealand
- Singapore Mercantile Exchange
- Coalindo Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- Binh Thuan Hamico - Vietnam
- New Zealand Coal & Carbon
- Kobexindo Tractors - Indoneisa
- Standard Chartered Bank - UAE
- Karbindo Abesyapradhi - Indoneisa
- Eastern Energy - Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Coastal Gujarat Power Limited - India
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- Africa Commodities Group - South Africa
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- Bhoruka Overseas - Indonesia
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- Gujarat Electricity Regulatory Commission - India
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- Aboitiz Power Corporation - Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Iligan Light & Power Inc, Philippines
- McConnell Dowell - Australia
- Asmin Koalindo Tuhup - Indonesia
- CIMB Investment Bank - Malaysia
- White Energy Company Limited
- Miang Besar Coal Terminal - Indonesia
- Merrill Lynch Commodities Europe
- Medco Energi Mining Internasional
- TNB Fuel Sdn Bhd - Malaysia
- Posco Energy - South Korea
- Sojitz Corporation - Japan
- Baramulti Group, Indonesia
- Commonwealth Bank - Australia
- Orica Mining Services - Indonesia
- Bharathi Cement Corporation - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Riau Bara Harum - Indonesia
- Malabar Cements Ltd - India
- Bhatia International Limited - India
- Directorate Of Revenue Intelligence - India
- Alfred C Toepfer International GmbH - Germany
- Gujarat Mineral Development Corp Ltd - India
- Planning Commission, India
- London Commodity Brokers - England
- Ambuja Cements Ltd - India
- Trasteel International SA, Italy
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GMR Energy Limited - India
- Formosa Plastics Group - Taiwan
- Semirara Mining and Power Corporation, Philippines
- IEA Clean Coal Centre - UK
- MS Steel International - UAE
- European Bulk Services B.V. - Netherlands
- Indonesian Coal Mining Association
- Marubeni Corporation - India
- Bhushan Steel Limited - India
- Indian Oil Corporation Limited
- Ind-Barath Power Infra Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Tata Chemicals Ltd - India
- Timah Investasi Mineral - Indoneisa
- Power Finance Corporation Ltd., India
- Altura Mining Limited, Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Mjunction Services Limited - India
- Indian Energy Exchange, India
- PetroVietnam Power Coal Import and Supply Company
- Pendopo Energi Batubara - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Global Coal Blending Company Limited - Australia
- PNOC Exploration Corporation - Philippines
- Intertek Mineral Services - Indonesia
- Grasim Industreis Ltd - India
- Minerals Council of Australia
- Videocon Industries ltd - India
- PowerSource Philippines DevCo
- Tamil Nadu electricity Board
- Australian Commodity Traders Exchange
- Georgia Ports Authority, United States
- Mintek Dendrill Indonesia
- Ministry of Mines - Canada
- Maharashtra Electricity Regulatory Commission - India
- Sarangani Energy Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Carbofer General Trading SA - India
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