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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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Wednesday, 05 October 11
WITH CHINA ON HOLIDAY, DRY BULK MARKET REMAINS STAGNANT - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has remained to healthy levels after last month’s rally, but with China going on holiday this week, things are looking sta ...
Tuesday, 04 October 11
INDONESIA RAISES COAL BENCHMARK (HBA) FOR FIRST TIME IN 4 MONTHS
COALspot.com - Indonesia raised the monthly reference price for sales in October by 2.56 percent, the first increase since June.
The Ministry of ...
Tuesday, 04 October 11
COAL MINING GROUP WANTS EXPORT TAX, NOT EXCISE - JG
One of the leading English news paper in Indonesia, The Jakarta Globe reported that, the government shall reimpose a duty on coal exports, classifyi ...
Sunday, 02 October 11
INDIAN COAL IMPORTS PICKED UP - CAPT. REDDY
COALspot.com - The BDI dropped by 1 pct and Cape index dropped by 6 pct closing at 1,899 points and 3,136 points respectively. However all other seg ...
Saturday, 01 October 11
2012 TO BE ANOTHER CHALLENGING YEAR - CEO, REMI MARITIME
Shipowners are facing another challenging year in 2012 said Mr. Leonidas Polemis CEO of Remi Maritime Corporation, urging caution towards operating ...
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- Kartika Selabumi Mining - Indonesia
- ICICI Bank Limited - India
- Heidelberg Cement - Germany
- Directorate Of Revenue Intelligence - India
- Kideco Jaya Agung - Indonesia
- ASAPP Information Group - India
- Semirara Mining Corp, Philippines
- IHS Mccloskey Coal Group - USA
- PetroVietnam Power Coal Import and Supply Company
- Karbindo Abesyapradhi - Indoneisa
- International Coal Ventures Pvt Ltd - India
- Kepco SPC Power Corporation, Philippines
- PowerSource Philippines DevCo
- Asmin Koalindo Tuhup - Indonesia
- Orica Australia Pty. Ltd.
- Independent Power Producers Association of India
- PTC India Limited - India
- Baramulti Group, Indonesia
- Videocon Industries ltd - India
- Karaikal Port Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- Central Java Power - Indonesia
- Bulk Trading Sa - Switzerland
- Oldendorff Carriers - Singapore
- Miang Besar Coal Terminal - Indonesia
- South Luzon Thermal Energy Corporation
- Kaltim Prima Coal - Indonesia
- Edison Trading Spa - Italy
- Australian Coal Association
- Larsen & Toubro Limited - India
- Attock Cement Pakistan Limited
- Ambuja Cements Ltd - India
- Formosa Plastics Group - Taiwan
- GN Power Mariveles Coal Plant, Philippines
- Bukit Makmur.PT - Indonesia
- Sical Logistics Limited - India
- Planning Commission, India
- Ind-Barath Power Infra Limited - India
- Mercuria Energy - Indonesia
- Tata Chemicals Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Medco Energi Mining Internasional
- Krishnapatnam Port Company Ltd. - India
- Eastern Coal Council - USA
- Indian Oil Corporation Limited
- Meenaskhi Energy Private Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Carbofer General Trading SA - India
- Bahari Cakrawala Sebuku - Indonesia
- Ministry of Mines - Canada
- Vedanta Resources Plc - India
- Holcim Trading Pte Ltd - Singapore
- Rashtriya Ispat Nigam Limited - India
- Economic Council, Georgia
- Toyota Tsusho Corporation, Japan
- Timah Investasi Mineral - Indoneisa
- Rio Tinto Coal - Australia
- Gujarat Mineral Development Corp Ltd - India
- Trasteel International SA, Italy
- Sinarmas Energy and Mining - Indonesia
- Indonesian Coal Mining Association
- Meralco Power Generation, Philippines
- Malabar Cements Ltd - India
- Power Finance Corporation Ltd., India
- Commonwealth Bank - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Chamber of Mines of South Africa
- Indogreen Group - Indonesia
- Africa Commodities Group - South Africa
- Merrill Lynch Commodities Europe
- Directorate General of MIneral and Coal - Indonesia
- Sakthi Sugars Limited - India
- Coalindo Energy - Indonesia
- Renaissance Capital - South Africa
- Anglo American - United Kingdom
- Offshore Bulk Terminal Pte Ltd, Singapore
- Aditya Birla Group - India
- Makarim & Taira - Indonesia
- Ministry of Transport, Egypt
- Global Coal Blending Company Limited - Australia
- Leighton Contractors Pty Ltd - Australia
- PNOC Exploration Corporation - Philippines
- Interocean Group of Companies - India
- Manunggal Multi Energi - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Posco Energy - South Korea
- Kumho Petrochemical, South Korea
- Georgia Ports Authority, United States
- Xindia Steels Limited - India
- SN Aboitiz Power Inc, Philippines
- Billiton Holdings Pty Ltd - Australia
- Salva Resources Pvt Ltd - India
- CIMB Investment Bank - Malaysia
- Energy Development Corp, Philippines
- Marubeni Corporation - India
- Altura Mining Limited, Indonesia
- Indo Tambangraya Megah - Indonesia
- TeaM Sual Corporation - Philippines
- Ministry of Finance - Indonesia
- Pendopo Energi Batubara - Indonesia
- Cement Manufacturers Association - India
- Iligan Light & Power Inc, Philippines
- OPG Power Generation Pvt Ltd - India
- Samtan Co., Ltd - South Korea
- Bukit Asam (Persero) Tbk - Indonesia
- Thai Mozambique Logistica
- Indika Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Antam Resourcindo - Indonesia
- Vizag Seaport Private Limited - India
- The University of Queensland
- Bhoruka Overseas - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Savvy Resources Ltd - HongKong
- Energy Link Ltd, New Zealand
- Maheswari Brothers Coal Limited - India
- Straits Asia Resources Limited - Singapore
- Jorong Barutama Greston.PT - Indonesia
- Australian Commodity Traders Exchange
- Sree Jayajothi Cements Limited - India
- Petron Corporation, Philippines
- Bhatia International Limited - India
- Binh Thuan Hamico - Vietnam
- Maharashtra Electricity Regulatory Commission - India
- Price Waterhouse Coopers - Russia
- Wilmar Investment Holdings
- Mercator Lines Limited - India
- Coal and Oil Company - UAE
- Semirara Mining and Power Corporation, Philippines
- Orica Mining Services - Indonesia
- Electricity Authority, New Zealand
- Goldman Sachs - Singapore
- The Treasury - Australian Government
- Grasim Industreis Ltd - India
- Parliament of New Zealand
- Siam City Cement PLC, Thailand
- GVK Power & Infra Limited - India
- Gujarat Sidhee Cement - India
- Agrawal Coal Company - India
- The State Trading Corporation of India Ltd
- London Commodity Brokers - England
- SMC Global Power, Philippines
- Gujarat Electricity Regulatory Commission - India
- Romanian Commodities Exchange
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- GAC Shipping (India) Pvt Ltd
- Singapore Mercantile Exchange
- Dalmia Cement Bharat India
- Global Green Power PLC Corporation, Philippines
- Minerals Council of Australia
- Parry Sugars Refinery, India
- Lanco Infratech Ltd - India
- Sindya Power Generating Company Private Ltd
- Riau Bara Harum - Indonesia
- IEA Clean Coal Centre - UK
- Siam City Cement - Thailand
- McConnell Dowell - Australia
- CNBM International Corporation - China
- Banpu Public Company Limited - Thailand
- Globalindo Alam Lestari - Indonesia
- Jaiprakash Power Ventures ltd
- Alfred C Toepfer International GmbH - Germany
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Deloitte Consulting - India
- Indian Energy Exchange, India
- Kalimantan Lumbung Energi - Indonesia
- Uttam Galva Steels Limited - India
- Bharathi Cement Corporation - India
- Coastal Gujarat Power Limited - India
- Kobexindo Tractors - Indoneisa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- LBH Netherlands Bv - Netherlands
- VISA Power Limited - India
- Eastern Energy - Thailand
- Aboitiz Power Corporation - Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Metalloyd Limited - United Kingdom
- Central Electricity Authority - India
- Wood Mackenzie - Singapore
- Barasentosa Lestari - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Petrochimia International Co. Ltd.- Taiwan
- Borneo Indobara - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sarangani Energy Corporation, Philippines
- Madhucon Powers Ltd - India
- Thiess Contractors Indonesia
- Essar Steel Hazira Ltd - India
- Therma Luzon, Inc, Philippines
- Mintek Dendrill Indonesia
- Global Business Power Corporation, Philippines
- European Bulk Services B.V. - Netherlands
- Chettinad Cement Corporation Ltd - India
- Star Paper Mills Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Jindal Steel & Power Ltd - India
- Latin American Coal - Colombia
- Intertek Mineral Services - Indonesia
- Bangladesh Power Developement Board
- Bayan Resources Tbk. - Indonesia
- Electricity Generating Authority of Thailand
- Simpson Spence & Young - Indonesia
- San Jose City I Power Corp, Philippines
- SMG Consultants - Indonesia
- GMR Energy Limited - India
- New Zealand Coal & Carbon
- Bhushan Steel Limited - India
- Standard Chartered Bank - UAE
- Sojitz Corporation - Japan
- TNB Fuel Sdn Bhd - Malaysia
- Port Waratah Coal Services - Australia
- MS Steel International - UAE
- Tamil Nadu electricity Board
- Mjunction Services Limited - India
- White Energy Company Limited
- India Bulls Power Limited - India
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