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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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Monday, 19 December 11
PLN WILL NO LONGER BUY COAL FROM TRADERS
COALspot.com - Indonesia's state electricity company PT Perusahaan Listrik Negara will no longer allow traders to become their suppliers, said, its ...
Saturday, 17 December 11
THE FREIGHT MARKET SEEMS TO HAVE ALMOST BOTTOMED OUT AND MAY REMAIN STEADY AT THESE LEVELS CAPT REDDY
COALspot.com - The BDI and Cape index closed lower this week with BDI closing at 1,888 points (down by 1.76 pct) and Cape index at 3,572 points (dow ...
Friday, 16 December 11
DRY BULK MARKET LOSES TRACK ON CAPESIZE LOSSES, SHIP FINANCING REMAINS TROUBLESOME - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market didn’t manage to sustain earlier gains, losing track yesterday, on reduced Capesize demand and persisting troubles in smal ...
Thursday, 15 December 11
BERAU SEES INDIA AS POTENTIAL MARKET FOR LOW-CALORIE COAL - THE JAKARTA POST
The Jakarta Post reported that, Publicly listed coal mining company PT Berau Coal Energy (BRAU), the fifth largest coal producer in Indonesia, sees ...
Thursday, 15 December 11
PANAMAX HARDLY AFFECTED BY THE RECENT FIRMER TENDENCY FOR THE BIG SISTERS - FEARNBULK
Handy
The rates are more or less the same as last week. Continent/US Gulf fixing at tick below USD 10k and Gulf/Continent levels at USD 25k. Trips ...
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Showing 4926 to 4930 news of total 6871 |
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- Alfred C Toepfer International GmbH - Germany
- Goldman Sachs - Singapore
- Mintek Dendrill Indonesia
- European Bulk Services B.V. - Netherlands
- Indian Oil Corporation Limited
- SMG Consultants - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Orica Mining Services - Indonesia
- Petron Corporation, Philippines
- Iligan Light & Power Inc, Philippines
- Manunggal Multi Energi - Indonesia
- Indogreen Group - Indonesia
- GAC Shipping (India) Pvt Ltd
- Timah Investasi Mineral - Indoneisa
- Central Electricity Authority - India
- PNOC Exploration Corporation - Philippines
- Krishnapatnam Port Company Ltd. - India
- Sojitz Corporation - Japan
- PTC India Limited - India
- Mjunction Services Limited - India
- AsiaOL BioFuels Corp., Philippines
- Interocean Group of Companies - India
- Parry Sugars Refinery, India
- Essar Steel Hazira Ltd - India
- Kohat Cement Company Ltd. - Pakistan
- London Commodity Brokers - England
- Bhatia International Limited - India
- GVK Power & Infra Limited - India
- Kepco SPC Power Corporation, Philippines
- SN Aboitiz Power Inc, Philippines
- Billiton Holdings Pty Ltd - Australia
- Kalimantan Lumbung Energi - Indonesia
- Baramulti Group, Indonesia
- ASAPP Information Group - India
- Sinarmas Energy and Mining - Indonesia
- Wood Mackenzie - Singapore
- Wilmar Investment Holdings
- Mercuria Energy - Indonesia
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- Videocon Industries ltd - India
- Heidelberg Cement - Germany
- Marubeni Corporation - India
- Kapuas Tunggal Persada - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Deloitte Consulting - India
- Indika Energy - Indonesia
- PowerSource Philippines DevCo
- Cement Manufacturers Association - India
- Orica Australia Pty. Ltd.
- Indian Energy Exchange, India
- Tamil Nadu electricity Board
- Meenaskhi Energy Private Limited - India
- Uttam Galva Steels Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Planning Commission, India
- Mercator Lines Limited - India
- Grasim Industreis Ltd - India
- LBH Netherlands Bv - Netherlands
- Parliament of New Zealand
- Holcim Trading Pte Ltd - Singapore
- Bank of Tokyo Mitsubishi UFJ Ltd
- Standard Chartered Bank - UAE
- Jorong Barutama Greston.PT - Indonesia
- International Coal Ventures Pvt Ltd - India
- Australian Commodity Traders Exchange
- Savvy Resources Ltd - HongKong
- Therma Luzon, Inc, Philippines
- Kideco Jaya Agung - Indonesia
- Simpson Spence & Young - Indonesia
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- Coalindo Energy - Indonesia
- Gujarat Sidhee Cement - India
- Commonwealth Bank - Australia
- Star Paper Mills Limited - India
- Tata Chemicals Ltd - India
- Bukit Baiduri Energy - Indonesia
- Ministry of Finance - Indonesia
- McConnell Dowell - Australia
- Metalloyd Limited - United Kingdom
- White Energy Company Limited
- Siam City Cement - Thailand
- Australian Coal Association
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Agrawal Coal Company - India
- Vedanta Resources Plc - India
- Larsen & Toubro Limited - India
- Chettinad Cement Corporation Ltd - India
- Ministry of Mines - Canada
- Electricity Generating Authority of Thailand
- Dalmia Cement Bharat India
- Gujarat Mineral Development Corp Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- SMC Global Power, Philippines
- IHS Mccloskey Coal Group - USA
- Eastern Energy - Thailand
- Electricity Authority, New Zealand
- San Jose City I Power Corp, Philippines
- Semirara Mining Corp, Philippines
- Maheswari Brothers Coal Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Aboitiz Power Corporation - Philippines
- Anglo American - United Kingdom
- Bahari Cakrawala Sebuku - Indonesia
- Price Waterhouse Coopers - Russia
- Maharashtra Electricity Regulatory Commission - India
- Port Waratah Coal Services - Australia
- Ministry of Transport, Egypt
- Posco Energy - South Korea
- MS Steel International - UAE
- Minerals Council of Australia
- New Zealand Coal & Carbon
- OPG Power Generation Pvt Ltd - India
- Xindia Steels Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Thai Mozambique Logistica
- Bayan Resources Tbk. - Indonesia
- Georgia Ports Authority, United States
- Global Coal Blending Company Limited - Australia
- Coastal Gujarat Power Limited - India
- Central Java Power - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Meralco Power Generation, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Singapore Mercantile Exchange
- Altura Mining Limited, Indonesia
- Power Finance Corporation Ltd., India
- The University of Queensland
- Neyveli Lignite Corporation Ltd, - India
- Formosa Plastics Group - Taiwan
- Renaissance Capital - South Africa
- Directorate General of MIneral and Coal - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Coal and Oil Company - UAE
- Makarim & Taira - Indonesia
- Aditya Birla Group - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Africa Commodities Group - South Africa
- VISA Power Limited - India
- Energy Development Corp, Philippines
- Attock Cement Pakistan Limited
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- GN Power Mariveles Coal Plant, Philippines
- Banpu Public Company Limited - Thailand
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- Chamber of Mines of South Africa
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- Samtan Co., Ltd - South Korea
- Kaltim Prima Coal - Indonesia
- Bukit Makmur.PT - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Rio Tinto Coal - Australia
- Toyota Tsusho Corporation, Japan
- Jaiprakash Power Ventures ltd
- GMR Energy Limited - India
- Ceylon Electricity Board - Sri Lanka
- South Luzon Thermal Energy Corporation
- Antam Resourcindo - Indonesia
- Kumho Petrochemical, South Korea
- CNBM International Corporation - China
- Medco Energi Mining Internasional
- Bangladesh Power Developement Board
- Indonesian Coal Mining Association
- Sree Jayajothi Cements Limited - India
- Siam City Cement PLC, Thailand
- Global Business Power Corporation, Philippines
- The State Trading Corporation of India Ltd
- Gujarat Electricity Regulatory Commission - India
- Vijayanagar Sugar Pvt Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Romanian Commodities Exchange
- Karaikal Port Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- Globalindo Alam Lestari - Indonesia
- CIMB Investment Bank - Malaysia
- Malabar Cements Ltd - India
- Trasteel International SA, Italy
- Eastern Coal Council - USA
- The Treasury - Australian Government
- Sindya Power Generating Company Private Ltd
- Sakthi Sugars Limited - India
- Carbofer General Trading SA - India
- Bhoruka Overseas - Indonesia
- Kartika Selabumi Mining - Indonesia
- Global Green Power PLC Corporation, Philippines
- Salva Resources Pvt Ltd - India
- Indo Tambangraya Megah - Indonesia
- Ind-Barath Power Infra Limited - India
- Intertek Mineral Services - Indonesia
- Oldendorff Carriers - Singapore
- Rashtriya Ispat Nigam Limited - India
- Straits Asia Resources Limited - Singapore
- Thiess Contractors Indonesia
- Sical Logistics Limited - India
- Energy Link Ltd, New Zealand
- India Bulls Power Limited - India
- Bharathi Cement Corporation - India
- Ambuja Cements Ltd - India
- ICICI Bank Limited - India
- Borneo Indobara - Indonesia
- Vizag Seaport Private Limited - India
- Economic Council, Georgia
- Edison Trading Spa - Italy
- Kobexindo Tractors - Indoneisa
- Riau Bara Harum - Indonesia
- Lanco Infratech Ltd - India
- Latin American Coal - Colombia
- Independent Power Producers Association of India
- Bhushan Steel Limited - India
- Barasentosa Lestari - Indonesia
- Binh Thuan Hamico - Vietnam
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- IEA Clean Coal Centre - UK
- Bukit Asam (Persero) Tbk - Indonesia
- Merrill Lynch Commodities Europe
- Bulk Trading Sa - Switzerland
- Sarangani Energy Corporation, Philippines
- Jindal Steel & Power Ltd - India
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