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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, 23 March 13
WORLD COAL TRADE FIRST PASSES 1 BILLION TONS IN 2012 - VEREIN DER KOHLENIMPORTEURE E.V
Press Release: Hard coal imports to Germany on the previous year's level in spite of regenerative energies. Imports for power plants at an all-time ...
Thursday, 21 March 13
HANDY : RBCT ROUNDS FIXED AT $ 9000 + 300K BB - FEARNRESEARCH
Handy
The Atlantic market remains firm with cargoes seen to support healthy rates as per last week. The USG-Feast was at USD 25k and Black Sea-Feas ...
Wednesday, 20 March 13
NTPC TO IMPORT SEVEN MILLION TONS COAL FOR FOUR MONTHS
COALspot.com : NTPC Limited (formerly National Thermal Power Corporation) is the largest Indian state-owned electric utilities company has awarded&n ...
Tuesday, 19 March 13
CHINA GAS PRICE REFORMS AND APAC GAS PRICING - FITCH STREET VIEW
Fitch Ratings says pricing reform in the Chinese gas sector is unlikely to materially impact gas distributors' margins, and low gas prices in the U ...
Tuesday, 19 March 13
NEWCASTLE COAL EXPORTS FALL BY 4.27 PERCENT ON WEEK
COALspot.com - Newcastle port in Australia has loaded 2,365,561 MT of thermal and coking coal for week ended 0700 hours 18 March 2013, Newcast ...
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Showing 4341 to 4345 news of total 6871 |
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- Global Coal Blending Company Limited - Australia
- The State Trading Corporation of India Ltd
- Directorate General of MIneral and Coal - Indonesia
- Africa Commodities Group - South Africa
- PNOC Exploration Corporation - Philippines
- Jindal Steel & Power Ltd - India
- International Coal Ventures Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Orica Australia Pty. Ltd.
- Rio Tinto Coal - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Heidelberg Cement - Germany
- Globalindo Alam Lestari - Indonesia
- Uttam Galva Steels Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Independent Power Producers Association of India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Aboitiz Power Corporation - Philippines
- Siam City Cement - Thailand
- Toyota Tsusho Corporation, Japan
- Georgia Ports Authority, United States
- Alfred C Toepfer International GmbH - Germany
- Vedanta Resources Plc - India
- Chettinad Cement Corporation Ltd - India
- Sindya Power Generating Company Private Ltd
- Eastern Coal Council - USA
- Attock Cement Pakistan Limited
- Cement Manufacturers Association - India
- Wilmar Investment Holdings
- Mjunction Services Limited - India
- Power Finance Corporation Ltd., India
- Bukit Asam (Persero) Tbk - Indonesia
- Lanco Infratech Ltd - India
- SMC Global Power, Philippines
- TeaM Sual Corporation - Philippines
- CIMB Investment Bank - Malaysia
- Essar Steel Hazira Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Semirara Mining and Power Corporation, Philippines
- Kepco SPC Power Corporation, Philippines
- Bharathi Cement Corporation - India
- Altura Mining Limited, Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Bangladesh Power Developement Board
- Maharashtra Electricity Regulatory Commission - India
- Economic Council, Georgia
- Banpu Public Company Limited - Thailand
- Jorong Barutama Greston.PT - Indonesia
- Indogreen Group - Indonesia
- Vizag Seaport Private Limited - India
- Kaltim Prima Coal - Indonesia
- Commonwealth Bank - Australia
- VISA Power Limited - India
- PTC India Limited - India
- Timah Investasi Mineral - Indoneisa
- Posco Energy - South Korea
- Bank of Tokyo Mitsubishi UFJ Ltd
- Thai Mozambique Logistica
- Semirara Mining Corp, Philippines
- Manunggal Multi Energi - Indonesia
- Kartika Selabumi Mining - Indonesia
- Kobexindo Tractors - Indoneisa
- Tamil Nadu electricity Board
- Ind-Barath Power Infra Limited - India
- Coal and Oil Company - UAE
- Pendopo Energi Batubara - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Antam Resourcindo - Indonesia
- Videocon Industries ltd - India
- Latin American Coal - Colombia
- European Bulk Services B.V. - Netherlands
- The Treasury - Australian Government
- Star Paper Mills Limited - India
- Agrawal Coal Company - India
- Goldman Sachs - Singapore
- Krishnapatnam Port Company Ltd. - India
- Larsen & Toubro Limited - India
- Coastal Gujarat Power Limited - India
- Sakthi Sugars Limited - India
- Carbofer General Trading SA - India
- LBH Netherlands Bv - Netherlands
- Iligan Light & Power Inc, Philippines
- Oldendorff Carriers - Singapore
- Formosa Plastics Group - Taiwan
- PowerSource Philippines DevCo
- Global Business Power Corporation, Philippines
- Sarangani Energy Corporation, Philippines
- Mintek Dendrill Indonesia
- Barasentosa Lestari - Indonesia
- Electricity Authority, New Zealand
- Renaissance Capital - South Africa
- GN Power Mariveles Coal Plant, Philippines
- Directorate Of Revenue Intelligence - India
- Bhushan Steel Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Intertek Mineral Services - Indonesia
- Malabar Cements Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- IHS Mccloskey Coal Group - USA
- Bukit Baiduri Energy - Indonesia
- Kideco Jaya Agung - Indonesia
- GAC Shipping (India) Pvt Ltd
- Marubeni Corporation - India
- Central Electricity Authority - India
- Merrill Lynch Commodities Europe
- Metalloyd Limited - United Kingdom
- Indo Tambangraya Megah - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Kumho Petrochemical, South Korea
- Central Java Power - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Port Waratah Coal Services - Australia
- White Energy Company Limited
- Grasim Industreis Ltd - India
- ICICI Bank Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Price Waterhouse Coopers - Russia
- Savvy Resources Ltd - HongKong
- Ceylon Electricity Board - Sri Lanka
- AsiaOL BioFuels Corp., Philippines
- Therma Luzon, Inc, Philippines
- Energy Development Corp, Philippines
- Bhoruka Overseas - Indonesia
- Anglo American - United Kingdom
- Karaikal Port Pvt Ltd - India
- Orica Mining Services - Indonesia
- Salva Resources Pvt Ltd - India
- Aditya Birla Group - India
- Meenaskhi Energy Private Limited - India
- Meralco Power Generation, Philippines
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Parry Sugars Refinery, India
- Simpson Spence & Young - Indonesia
- IEA Clean Coal Centre - UK
- MS Steel International - UAE
- Parliament of New Zealand
- OPG Power Generation Pvt Ltd - India
- Ambuja Cements Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Edison Trading Spa - Italy
- Makarim & Taira - Indonesia
- Thiess Contractors Indonesia
- Indonesian Coal Mining Association
- Xindia Steels Limited - India
- Singapore Mercantile Exchange
- Standard Chartered Bank - UAE
- Chamber of Mines of South Africa
- Sinarmas Energy and Mining - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Ministry of Mines - Canada
- San Jose City I Power Corp, Philippines
- Ministry of Transport, Egypt
- Gujarat Electricity Regulatory Commission - India
- McConnell Dowell - Australia
- Planning Commission, India
- Vijayanagar Sugar Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Deloitte Consulting - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- New Zealand Coal & Carbon
- Gujarat Sidhee Cement - India
- Global Green Power PLC Corporation, Philippines
- Sical Logistics Limited - India
- SMG Consultants - Indonesia
- Siam City Cement PLC, Thailand
- GMR Energy Limited - India
- Australian Commodity Traders Exchange
- Leighton Contractors Pty Ltd - Australia
- Eastern Energy - Thailand
- Romanian Commodities Exchange
- South Luzon Thermal Energy Corporation
- Jaiprakash Power Ventures ltd
- Rashtriya Ispat Nigam Limited - India
- London Commodity Brokers - England
- Baramulti Group, Indonesia
- Samtan Co., Ltd - South Korea
- Bhatia International Limited - India
- Dalmia Cement Bharat India
- Madhucon Powers Ltd - India
- Australian Coal Association
- Neyveli Lignite Corporation Ltd, - India
- Holcim Trading Pte Ltd - Singapore
- ASAPP Information Group - India
- Miang Besar Coal Terminal - Indonesia
- Riau Bara Harum - Indonesia
- Wood Mackenzie - Singapore
- Mercuria Energy - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Ministry of Finance - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- CNBM International Corporation - China
- Electricity Generating Authority of Thailand
- Minerals Council of Australia
- Tata Chemicals Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Indika Energy - Indonesia
- Trasteel International SA, Italy
- Maheswari Brothers Coal Limited - India
- India Bulls Power Limited - India
- Binh Thuan Hamico - Vietnam
- The University of Queensland
- GVK Power & Infra Limited - India
- Sree Jayajothi Cements Limited - India
- Mercator Lines Limited - India
- Borneo Indobara - Indonesia
- Medco Energi Mining Internasional
- Bulk Trading Sa - Switzerland
- SN Aboitiz Power Inc, Philippines
- Petron Corporation, Philippines
- Indian Energy Exchange, India
- Interocean Group of Companies - India
- Indian Oil Corporation Limited
- Sojitz Corporation - Japan
- Energy Link Ltd, New Zealand
- Karbindo Abesyapradhi - Indoneisa
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