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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, 21 July 12
THE FREIGHT RATES ARE EXPECTED TO BE FLAT TO SOFT NEXT WEEK - VISTAAR
COALspot.com - The freight market was soft this week as all the segments were down.
The BDI was down by 6.58 pct closing at 1,037 points and the ...
Saturday, 21 July 12
INDONESIAN COMPANIES ABM INVESTAMA AND AVRA ASIA WORK OUT LONG-TERM CONTRACT - THE JAKARTA GLOBE
The Jakarta Globe, one of the leading English news papaer in Indonesia reported that, ABM Investama, a company with diversified interests in coal mi ...
Friday, 20 July 12
INDONESIA-INDIA SUPRAS BEING FIXED AT $ 10K
Handy
After a stable last week, the Handysize market has experienced softening rates in the Atlantic. Ships are ballasting from India into the Atla ...
Friday, 20 July 12
HANDYSIZES PROVE RATHER ATTRACTIVE AMONG OTHER SHIPS, IN TERMS OF FUTURE RETURNS ON INVESTMENT - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The Handysize segment of the dry bulk market appears to offer the best incentive among other ship types, for a ship owners to invest in, says Interm ...
Wednesday, 18 July 12
TAIWAN POWER COMPANY TO IMPORT 0.588 MILLION TONS OF LOW ASH AND EXTRA LOW SULFUR SUB-BITUMINOUS COAL
COALspot.com - Taiwan Power Company intends to procure 588,000 MT tons of extra low sulfur sub-bituminous coal for Taipower thermal power plant thro ...
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- Central Electricity Authority - India
- Global Coal Blending Company Limited - Australia
- Alfred C Toepfer International GmbH - Germany
- Ministry of Transport, Egypt
- IHS Mccloskey Coal Group - USA
- Central Java Power - Indonesia
- Agrawal Coal Company - India
- Port Waratah Coal Services - Australia
- IEA Clean Coal Centre - UK
- Billiton Holdings Pty Ltd - Australia
- Meenaskhi Energy Private Limited - India
- Larsen & Toubro Limited - India
- Goldman Sachs - Singapore
- Tamil Nadu electricity Board
- Ind-Barath Power Infra Limited - India
- Ministry of Mines - Canada
- Renaissance Capital - South Africa
- Directorate Of Revenue Intelligence - India
- Bangladesh Power Developement Board
- Meralco Power Generation, Philippines
- Videocon Industries ltd - India
- South Luzon Thermal Energy Corporation
- The State Trading Corporation of India Ltd
- Sindya Power Generating Company Private Ltd
- New Zealand Coal & Carbon
- Global Green Power PLC Corporation, Philippines
- Xindia Steels Limited - India
- The University of Queensland
- Wood Mackenzie - Singapore
- Interocean Group of Companies - India
- Vedanta Resources Plc - India
- VISA Power Limited - India
- Pendopo Energi Batubara - Indonesia
- Posco Energy - South Korea
- PNOC Exploration Corporation - Philippines
- Samtan Co., Ltd - South Korea
- Thai Mozambique Logistica
- Formosa Plastics Group - Taiwan
- Uttam Galva Steels Limited - India
- Ministry of Finance - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Maharashtra Electricity Regulatory Commission - India
- SMG Consultants - Indonesia
- CIMB Investment Bank - Malaysia
- International Coal Ventures Pvt Ltd - India
- Makarim & Taira - Indonesia
- Star Paper Mills Limited - India
- Riau Bara Harum - Indonesia
- Mjunction Services Limited - India
- Australian Coal Association
- Jindal Steel & Power Ltd - India
- Globalindo Alam Lestari - Indonesia
- Global Business Power Corporation, Philippines
- Maheswari Brothers Coal Limited - India
- Salva Resources Pvt Ltd - India
- Electricity Authority, New Zealand
- Cigading International Bulk Terminal - Indonesia
- Baramulti Group, Indonesia
- Mercuria Energy - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- India Bulls Power Limited - India
- Sree Jayajothi Cements Limited - India
- Latin American Coal - Colombia
- Sical Logistics Limited - India
- Borneo Indobara - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Cement Manufacturers Association - India
- Jorong Barutama Greston.PT - Indonesia
- Malabar Cements Ltd - India
- Bukit Baiduri Energy - Indonesia
- Vizag Seaport Private Limited - India
- Romanian Commodities Exchange
- Commonwealth Bank - Australia
- Savvy Resources Ltd - HongKong
- CNBM International Corporation - China
- Banpu Public Company Limited - Thailand
- Kartika Selabumi Mining - Indonesia
- Singapore Mercantile Exchange
- Bharathi Cement Corporation - India
- Trasteel International SA, Italy
- Siam City Cement PLC, Thailand
- Vijayanagar Sugar Pvt Ltd - India
- Independent Power Producers Association of India
- Kumho Petrochemical, South Korea
- Aditya Birla Group - India
- Coalindo Energy - Indonesia
- Coastal Gujarat Power Limited - India
- Madhucon Powers Ltd - India
- Chettinad Cement Corporation Ltd - India
- Power Finance Corporation Ltd., India
- TeaM Sual Corporation - Philippines
- Bhushan Steel Limited - India
- Grasim Industreis Ltd - India
- Altura Mining Limited, Indonesia
- Toyota Tsusho Corporation, Japan
- Kideco Jaya Agung - Indonesia
- Bayan Resources Tbk. - Indonesia
- Simpson Spence & Young - Indonesia
- GVK Power & Infra Limited - India
- Indian Energy Exchange, India
- Karaikal Port Pvt Ltd - India
- Africa Commodities Group - South Africa
- Intertek Mineral Services - Indonesia
- LBH Netherlands Bv - Netherlands
- Orica Mining Services - Indonesia
- Straits Asia Resources Limited - Singapore
- London Commodity Brokers - England
- Rashtriya Ispat Nigam Limited - India
- Manunggal Multi Energi - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Thiess Contractors Indonesia
- Merrill Lynch Commodities Europe
- Offshore Bulk Terminal Pte Ltd, Singapore
- Anglo American - United Kingdom
- Sinarmas Energy and Mining - Indonesia
- ASAPP Information Group - India
- Wilmar Investment Holdings
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- Holcim Trading Pte Ltd - Singapore
- Metalloyd Limited - United Kingdom
- Dalmia Cement Bharat India
- Binh Thuan Hamico - Vietnam
- Miang Besar Coal Terminal - Indonesia
- Parliament of New Zealand
- Petron Corporation, Philippines
- Oldendorff Carriers - Singapore
- Indonesian Coal Mining Association
- Gujarat Electricity Regulatory Commission - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sarangani Energy Corporation, Philippines
- Eastern Energy - Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Energy Link Ltd, New Zealand
- Gujarat Mineral Development Corp Ltd - India
- Australian Commodity Traders Exchange
- Krishnapatnam Port Company Ltd. - India
- Antam Resourcindo - Indonesia
- Kepco SPC Power Corporation, Philippines
- Orica Australia Pty. Ltd.
- Energy Development Corp, Philippines
- Indian Oil Corporation Limited
- Bhoruka Overseas - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Semirara Mining Corp, Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Siam City Cement - Thailand
- OPG Power Generation Pvt Ltd - India
- Barasentosa Lestari - Indonesia
- The Treasury - Australian Government
- Economic Council, Georgia
- Sojitz Corporation - Japan
- Chamber of Mines of South Africa
- Iligan Light & Power Inc, Philippines
- Kaltim Prima Coal - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Eastern Coal Council - USA
- Heidelberg Cement - Germany
- Rio Tinto Coal - Australia
- Bulk Trading Sa - Switzerland
- Parry Sugars Refinery, India
- Bukit Makmur.PT - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Sakthi Sugars Limited - India
- Planning Commission, India
- Carbofer General Trading SA - India
- Edison Trading Spa - Italy
- Indo Tambangraya Megah - Indonesia
- Essar Steel Hazira Ltd - India
- McConnell Dowell - Australia
- Asmin Koalindo Tuhup - Indonesia
- Attock Cement Pakistan Limited
- Medco Energi Mining Internasional
- Price Waterhouse Coopers - Russia
- Kobexindo Tractors - Indoneisa
- Minerals Council of Australia
- SMC Global Power, Philippines
- Therma Luzon, Inc, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Georgia Ports Authority, United States
- Standard Chartered Bank - UAE
- Mintek Dendrill Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- European Bulk Services B.V. - Netherlands
- Jaiprakash Power Ventures ltd
- AsiaOL BioFuels Corp., Philippines
- Aboitiz Power Corporation - Philippines
- ICICI Bank Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Ambuja Cements Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Marubeni Corporation - India
- Bhatia International Limited - India
- Tata Chemicals Ltd - India
- GMR Energy Limited - India
- Gujarat Sidhee Cement - India
- Electricity Generating Authority of Thailand
- Indika Energy - Indonesia
- Mercator Lines Limited - India
- Leighton Contractors Pty Ltd - Australia
- MS Steel International - UAE
- Lanco Infratech Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- White Energy Company Limited
- GAC Shipping (India) Pvt Ltd
- SN Aboitiz Power Inc, Philippines
- San Jose City I Power Corp, Philippines
- Indogreen Group - Indonesia
- Deloitte Consulting - India
- PTC India Limited - India
- Directorate General of MIneral and Coal - Indonesia
- Timah Investasi Mineral - Indoneisa
- Coal and Oil Company - UAE
- PowerSource Philippines DevCo
- Dr Ramakrishna Prasad Power Pvt Ltd - India
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