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Thursday, 29 September 11
INDONESIA'S MINERS FACE AN UNCERTAIN FUTURE - RUPERT WALKER
 An evolving regulatory framework for the country's minerals industry could threaten its profitability and stifle investment.
The five-year surge in commodity prices has been kind to Indonesia. Certainly, there were shocks to both prices and volumes in late 2008, but the wealth created by the country's primary exports during that period has been sufficient to sustain its economic growth and underpin domestic consumption.
It has also given support to a resurgence of nationalist sentiment, reflected in legislation and the formation and implementation of new regulations. Understandably for a country that is growing more affluent and catching up with its regional neighbours, Indonesia no longer intends to be simply a repository for other countries' raw materials inputs. Instead, it plans to exploit its resources for its own burgeoning industrial and manufacturing base.
Also, as Indonesia's energy policy moves toward greater domestic coal usage, producers will be forced to negotiate new contracts at official prices with local buyers.
Earlier this year, the government said that it will ban exports of raw commodities by 2014. Miners would need to build smelters to add value to exports. For instance, ferronickel rather than the raw metal would be exported and coal would have to be blended to reach 5,600 kilo calories before it could be sold abroad.
The catalyst for the shift was the 2009 Mining Law which replaced the "Contract of Work" and "Coal Contract of Work" system in use since 1967. The aim is to stimulate the development of the country's mineral resources and help support broader-based economic growth. The 2009 act provides a basic framework, but government regulations from later that year, and in 2010, provided some clarity and are now expected to gather pace.
However, there are worries that the law will backfire and that these regulations will stifle future investment and damage the existing operations of Indonesia's miners.
"Indonesia's mining industry is undergoing a regulatory overhaul that is likely to weaken the operating and financial performance of domestic mining companies," warned Standard and Poor's Xavier Jean.
Standard & Poor’s argued in a report issued this summer that besides increasing operating uncertainty for Indonesian mining companies, the new regulations may also make the industry less attractive to foreign investors.
For instance, the mining law states that several government and ministerial regulations will need to be issued before its impact can be understood. There are also conflicts between mining operations and forestry regulations, overlapping authority between central and local governments and contradictory tax rules. Indeed, "a more clear legal framework would give investors more assurance about the predictability of policies," agreed Wellian Wiranto, Asia economist at HSBC, in a July research report. But he said he hoped that the evolving regulations "will only be implemented after intense feedback from industry players".
Domestic market obligations
It is likely some of the feedback will be about who bears an inordinate share of the burden. Some market participants note, for example, that the provisions on domestic market obligation (DMO) and reference pricing, where miners must sell a portion of the production domestically at a minimum reference price before exporting, will affect coal producers more than metals producers because the domestic demand for coal is higher than for metal ore. Given current and expected domestic coal consumption trends, Standard & Poor's estimated that the DMO could average 20% to 25% of the industry's annual coal production during the next five years, although this proportion could increase above 30% as Indonesia shifts its domestic energy mix from oil to coal during the next decade.
DMO and minimum reference price regulations could increase uncertainty about revenues and cash flows. If reference prices are set too low, it could lower the revenues for producers (given the lack of a domestic competitive market), reduce margins, and increase opportunity costs. If they are too high, they could hurt the government-owned electricity generator Perusahaan Listrik Negara (PLN), the largest domestic coal buyer, and hence make coal producers vulnerable to customer concentration risk.
Worst affected among coal miners will be those with small domestic sales because they will need to negotiate local contracts from scratch and rapidly increase local sales to meet regulatory requirements. Bayan Resources, with 2% of domestic sales last year, could fall into this category, and even Bumi Resources, whose domestic sales have been historically around 10%, might be exposed.
Meanwhile, miners now negotiating off-take contracts with PLN will be vulnerable to price risk. For example, Bukit Asam generated 64% of its revenues domestically in 2010 and is currently in negotiation for an off-take contract with PLN for 265 million tonnes of coal during the next 20 years.
Although the mining law grandfathers existing coal contracts of work, these new regulations will apply to both existing contracts and prospective mining investments. As S&P's Jean pointed out: "the provisions on DMO and reference pricing [and] domestic market processing...are likely to have the greatest impact on the Indonesian mining sector."
But, Standard & Poor's expects the government will take a few years "to calibrate the pricing system and balance producers' and consumers' interests", based on the experience from the implementation of oil and gas DMO in Indonesia. The regulatory environment is still evolving, after all, so when rules are ultimately enforced they tend to look different from their original forms.
A salutary warning
The allusion to Indonesia's oil industry is pertinent, however. The country was a substantial oil exporter until turning into an importer in 2004, and then finally leaving Opec in 2009.
Analysts blame a lack of investment in oil exploration. In the 1990s, Indonesia pumped out more than 1.5 million barrels a day; this year the average daily output is 916,000, well below the government's target of 970,000, according to HSBC's Wiranto. The World Bank calculated that investment in oil exploration is now less than half the $1 billion spent each year before the Asian financial crisis in the late 1990s.
Wiranto pointed out that Indonesia's resource riches are simply not matched by investment conditions in the commodity sector. He referred to a survey of international mining companies by the Fraser Institute that found that the "perceived lack of transparency in the legal process and the risk of regulatory duplication and inconsistencies continue to act as deterrents to more substantial investment".
Indonesia's production-to-reserves ratio for coal and copper is half that of its competitors (Australia, Chile and China), according to the World Bank. A poor investment environment could mean that the country's proven mineral resources are actually vastly underestimated.
So, it would be a pity if regulatory uncertainty and onerous obligations again prevent Indonesia from fully exploiting the benefits of its natural riches. Especially, given the laws were introduced to spur growth not cripple an industry. (By Rupert Walker)
About Rupert Walker
Rupert Walker is a senior writer and has been a financial journalist based in Hong Kong for three years. Previously he was employed by Asiamoney, and has written for various magazines and newspapers on assignments in Central Europe, Russia and Africa. Rupert was also a fund manager in London – investing in emerging markets for Govett Investment, working in capital markets for SG Warburg and Goldman Sachs, and setting up a capital markets business in Singapore for NatWest. He has a BA/MA in Modern History from Keble College, Oxford University and an MA in Anthropology from SOAS, London University. He is also a CFA charterholder.
This story was first published in FinanceAsia
The views and opinions / conclusion expressed on this article is purely the writers’ own.
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Thursday, 06 October 11
REALM SECURES 51% OF KATINGAN RIA COAL PROJECT IN CENTRAL KALIMANTAN
•Realm secures 51% of PT Katingan Ria Thermal Coal Project in Central Kalimantan
•Realm takes ownership of Kalres Limited
•Acquisit ...
Thursday, 06 October 11
SOUTH EAST ASIAS AGGRESSIVE POWER DEMAND GROWTH WILL REQUIRE INVESTMENT OF US$125 BN BY 2020 - WOOD MACKENZIE
COALspot.com - Wood Mackenzie says that South East Asia’s demand growth for new power generation is so aggressive that new power generation in ...
Thursday, 06 October 11
CHINESE DEMAND FOR COAL IMPORTS TO MODERATE IN 2012 - MISWIN MAHESH
COALspot.com - We expect Chinese demand growth for imported steam coal to moderate over the next year. Steam coal imports into China will modera ...
Wednesday, 05 October 11
MINISTRY STICKING TO RAW COMMODITY EXPORT BAN DESPITE INDUSTRY FEARS - JG
The Jakarta Globe, the one of the leading English news paper in Indonesia, reported that, the details of a controversial new regulation that would b ...
Wednesday, 05 October 11
ATLANTIC AND PACIFIC BASINS BECAME TIGHTER FOR PANAMAX LAST WEEK - BRS
A slump for both the Capes and Panamaxes sent the BDI down 1% this week, falling to 1,899 points.
The Capes saw the greatest movement, sliding - ...
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- Savvy Resources Ltd - HongKong
- Bhushan Steel Limited - India
- SMC Global Power, Philippines
- GAC Shipping (India) Pvt Ltd
- Antam Resourcindo - Indonesia
- International Coal Ventures Pvt Ltd - India
- Latin American Coal - Colombia
- ICICI Bank Limited - India
- Aditya Birla Group - India
- Anglo American - United Kingdom
- Orica Australia Pty. Ltd.
- Indian Energy Exchange, India
- Ministry of Finance - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Parliament of New Zealand
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Offshore Bulk Terminal Pte Ltd, Singapore
- Pipit Mutiara Jaya. PT, Indonesia
- Kartika Selabumi Mining - Indonesia
- Medco Energi Mining Internasional
- Indonesian Coal Mining Association
- Malabar Cements Ltd - India
- Ind-Barath Power Infra Limited - India
- India Bulls Power Limited - India
- Gujarat Electricity Regulatory Commission - India
- Essar Steel Hazira Ltd - India
- Chettinad Cement Corporation Ltd - India
- Star Paper Mills Limited - India
- Binh Thuan Hamico - Vietnam
- San Jose City I Power Corp, Philippines
- Indian Oil Corporation Limited
- Electricity Authority, New Zealand
- Toyota Tsusho Corporation, Japan
- PTC India Limited - India
- IHS Mccloskey Coal Group - USA
- Ambuja Cements Ltd - India
- European Bulk Services B.V. - Netherlands
- South Luzon Thermal Energy Corporation
- Energy Link Ltd, New Zealand
- Globalindo Alam Lestari - Indonesia
- Global Coal Blending Company Limited - Australia
- Jorong Barutama Greston.PT - Indonesia
- Cement Manufacturers Association - India
- Xindia Steels Limited - India
- Thai Mozambique Logistica
- Bharathi Cement Corporation - India
- The State Trading Corporation of India Ltd
- Thiess Contractors Indonesia
- Deloitte Consulting - India
- GMR Energy Limited - India
- Lanco Infratech Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Mercuria Energy - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Standard Chartered Bank - UAE
- Cigading International Bulk Terminal - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Economic Council, Georgia
- TeaM Sual Corporation - Philippines
- VISA Power Limited - India
- Merrill Lynch Commodities Europe
- Eastern Coal Council - USA
- MS Steel International - UAE
- Alfred C Toepfer International GmbH - Germany
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bukit Baiduri Energy - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- ASAPP Information Group - India
- PetroVietnam Power Coal Import and Supply Company
- Uttam Galva Steels Limited - India
- Intertek Mineral Services - Indonesia
- McConnell Dowell - Australia
- Chamber of Mines of South Africa
- Siam City Cement PLC, Thailand
- Port Waratah Coal Services - Australia
- Jindal Steel & Power Ltd - India
- Wilmar Investment Holdings
- Formosa Plastics Group - Taiwan
- Posco Energy - South Korea
- Semirara Mining Corp, Philippines
- Romanian Commodities Exchange
- Timah Investasi Mineral - Indoneisa
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kumho Petrochemical, South Korea
- Coal and Oil Company - UAE
- Indika Energy - Indonesia
- Maheswari Brothers Coal Limited - India
- Rashtriya Ispat Nigam Limited - India
- Semirara Mining and Power Corporation, Philippines
- Borneo Indobara - Indonesia
- OPG Power Generation Pvt Ltd - India
- Salva Resources Pvt Ltd - India
- Maharashtra Electricity Regulatory Commission - India
- Neyveli Lignite Corporation Ltd, - India
- White Energy Company Limited
- Vijayanagar Sugar Pvt Ltd - India
- Trasteel International SA, Italy
- London Commodity Brokers - England
- Global Business Power Corporation, Philippines
- Kaltim Prima Coal - Indonesia
- CNBM International Corporation - China
- Makarim & Taira - Indonesia
- Bhatia International Limited - India
- The Treasury - Australian Government
- Madhucon Powers Ltd - India
- Barasentosa Lestari - Indonesia
- Vizag Seaport Private Limited - India
- Electricity Generating Authority of Thailand
- Tamil Nadu electricity Board
- Australian Coal Association
- LBH Netherlands Bv - Netherlands
- Orica Mining Services - Indonesia
- Central Java Power - Indonesia
- Minerals Council of Australia
- Sree Jayajothi Cements Limited - India
- Meenaskhi Energy Private Limited - India
- Bayan Resources Tbk. - Indonesia
- Mjunction Services Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Coalindo Energy - Indonesia
- Parry Sugars Refinery, India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- SMG Consultants - Indonesia
- Indogreen Group - Indonesia
- Directorate Of Revenue Intelligence - India
- Kepco SPC Power Corporation, Philippines
- Tata Chemicals Ltd - India
- Global Green Power PLC Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- Carbofer General Trading SA - India
- Sinarmas Energy and Mining - Indonesia
- Heidelberg Cement - Germany
- Africa Commodities Group - South Africa
- Manunggal Multi Energi - Indonesia
- Energy Development Corp, Philippines
- Attock Cement Pakistan Limited
- Planning Commission, India
- Miang Besar Coal Terminal - Indonesia
- The University of Queensland
- Sarangani Energy Corporation, Philippines
- New Zealand Coal & Carbon
- PowerSource Philippines DevCo
- Bangladesh Power Developement Board
- Interocean Group of Companies - India
- Goldman Sachs - Singapore
- Sical Logistics Limited - India
- Bhoruka Overseas - Indonesia
- Dalmia Cement Bharat India
- Renaissance Capital - South Africa
- Asmin Koalindo Tuhup - Indonesia
- Baramulti Group, Indonesia
- CIMB Investment Bank - Malaysia
- Eastern Energy - Thailand
- Coastal Gujarat Power Limited - India
- Holcim Trading Pte Ltd - Singapore
- Meralco Power Generation, Philippines
- Rio Tinto Coal - Australia
- Bahari Cakrawala Sebuku - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Vedanta Resources Plc - India
- Wood Mackenzie - Singapore
- Riau Bara Harum - Indonesia
- Samtan Co., Ltd - South Korea
- Central Electricity Authority - India
- GVK Power & Infra Limited - India
- Agrawal Coal Company - India
- Indo Tambangraya Megah - Indonesia
- Pendopo Energi Batubara - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Siam City Cement - Thailand
- Larsen & Toubro Limited - India
- Altura Mining Limited, Indonesia
- Price Waterhouse Coopers - Russia
- Sindya Power Generating Company Private Ltd
- Kapuas Tunggal Persada - Indonesia
- Georgia Ports Authority, United States
- Commonwealth Bank - Australia
- Singapore Mercantile Exchange
- Billiton Holdings Pty Ltd - Australia
- Edison Trading Spa - Italy
- Iligan Light & Power Inc, Philippines
- Bulk Trading Sa - Switzerland
- Metalloyd Limited - United Kingdom
- Therma Luzon, Inc, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Mercator Lines Limited - India
- Petron Corporation, Philippines
- Videocon Industries ltd - India
- Mintek Dendrill Indonesia
- Jaiprakash Power Ventures ltd
- Power Finance Corporation Ltd., India
- PNOC Exploration Corporation - Philippines
- Simpson Spence & Young - Indonesia
- Kobexindo Tractors - Indoneisa
- Australian Commodity Traders Exchange
- Marubeni Corporation - India
- Petrochimia International Co. Ltd.- Taiwan
- Ministry of Mines - Canada
- Sakthi Sugars Limited - India
- Oldendorff Carriers - Singapore
- Banpu Public Company Limited - Thailand
- Bukit Makmur.PT - Indonesia
- Independent Power Producers Association of India
- Gujarat Sidhee Cement - India
- IEA Clean Coal Centre - UK
- Karaikal Port Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Ministry of Transport, Egypt
- Sojitz Corporation - Japan
- Kideco Jaya Agung - Indonesia
- Leighton Contractors Pty Ltd - Australia
- SN Aboitiz Power Inc, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Krishnapatnam Port Company Ltd. - India
- Grasim Industreis Ltd - India
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