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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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Friday, 30 September 11
MINING BILL CLEARED, FIRMS TO SHARE 26% PROFITS WITH LOCALS - NDTV
NDTV reported that, The Union Cabinet cleared the draft mining bill aimed at regulating mining activities Friday. The bill proposes a profit-sharing ...
Friday, 30 September 11
INDIAN IRON ORE MARKET GETTING ACTIVE - FEARNLEYS AS
Handy
The Atlantic market continued its strong trend with fresh cargoes entering the market. Vessels open US Gulf fixed tick above US$ 27k back to t ...
Friday, 30 September 11
KRISHNAPATNAM PORT WINS GLOBAL PORT & COAL PORT OF THE YEAR AWARDS
COALspot.com - Krishnapatnam Port, a dynamic new generation world class port located in the East Coast of India has been adjudged the winner in the ...
Thursday, 29 September 11
DRY BULK MARKET FALLS MID-WEEK, FURTHER DROP EXPECTED NEXT WEEK ON CHINA HOLIDAYS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market, as reflected by the Baltic Dry Index (BDI) retreated by 0.36% yesterday reaching 1,920 points, with the Capesize segment suffer ...
Wednesday, 28 September 11
ATLAS RESOURCES TO SELL 25% STAKE IN IPO - INSIDER STORIES
Insider Stories reported that, coal producer PT Atlas Resources Tbk, that is controlled by Indonesian businessman Andre Abdi, plans to sell 783.33 m ...
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- Madhucon Powers Ltd - India
- White Energy Company Limited
- Globalindo Alam Lestari - Indonesia
- Malabar Cements Ltd - India
- Uttam Galva Steels Limited - India
- Energy Link Ltd, New Zealand
- Bukit Baiduri Energy - Indonesia
- Planning Commission, India
- Indonesian Coal Mining Association
- Kalimantan Lumbung Energi - Indonesia
- PTC India Limited - India
- Bhushan Steel Limited - India
- Sojitz Corporation - Japan
- Simpson Spence & Young - Indonesia
- McConnell Dowell - Australia
- Baramulti Group, Indonesia
- Renaissance Capital - South Africa
- Agrawal Coal Company - India
- Orica Mining Services - Indonesia
- Antam Resourcindo - Indonesia
- Cement Manufacturers Association - India
- Merrill Lynch Commodities Europe
- Latin American Coal - Colombia
- Rio Tinto Coal - Australia
- LBH Netherlands Bv - Netherlands
- Meralco Power Generation, Philippines
- Minerals Council of Australia
- Carbofer General Trading SA - India
- Ministry of Finance - Indonesia
- Central Electricity Authority - India
- Indika Energy - Indonesia
- Barasentosa Lestari - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Sindya Power Generating Company Private Ltd
- Directorate General of MIneral and Coal - Indonesia
- Wood Mackenzie - Singapore
- Kaltim Prima Coal - Indonesia
- San Jose City I Power Corp, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Australian Commodity Traders Exchange
- International Coal Ventures Pvt Ltd - India
- Gujarat Sidhee Cement - India
- Makarim & Taira - Indonesia
- Trasteel International SA, Italy
- Bangladesh Power Developement Board
- Miang Besar Coal Terminal - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Mercator Lines Limited - India
- SMG Consultants - Indonesia
- IEA Clean Coal Centre - UK
- Savvy Resources Ltd - HongKong
- IHS Mccloskey Coal Group - USA
- CNBM International Corporation - China
- CIMB Investment Bank - Malaysia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bayan Resources Tbk. - Indonesia
- SMC Global Power, Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Gujarat Electricity Regulatory Commission - India
- Lanco Infratech Ltd - India
- Salva Resources Pvt Ltd - India
- Georgia Ports Authority, United States
- Tamil Nadu electricity Board
- ICICI Bank Limited - India
- Singapore Mercantile Exchange
- Anglo American - United Kingdom
- Global Business Power Corporation, Philippines
- Jindal Steel & Power Ltd - India
- SN Aboitiz Power Inc, Philippines
- GVK Power & Infra Limited - India
- Wilmar Investment Holdings
- Power Finance Corporation Ltd., India
- Electricity Generating Authority of Thailand
- Vedanta Resources Plc - India
- Goldman Sachs - Singapore
- Neyveli Lignite Corporation Ltd, - India
- Maheswari Brothers Coal Limited - India
- Economic Council, Georgia
- Timah Investasi Mineral - Indoneisa
- Maharashtra Electricity Regulatory Commission - India
- Mjunction Services Limited - India
- Pendopo Energi Batubara - Indonesia
- Karaikal Port Pvt Ltd - India
- Indian Energy Exchange, India
- The State Trading Corporation of India Ltd
- Deloitte Consulting - India
- VISA Power Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Directorate Of Revenue Intelligence - India
- Ceylon Electricity Board - Sri Lanka
- Kohat Cement Company Ltd. - Pakistan
- Sinarmas Energy and Mining - Indonesia
- Bulk Trading Sa - Switzerland
- Aditya Birla Group - India
- Billiton Holdings Pty Ltd - Australia
- Intertek Mineral Services - Indonesia
- Riau Bara Harum - Indonesia
- Banpu Public Company Limited - Thailand
- Thai Mozambique Logistica
- Indo Tambangraya Megah - Indonesia
- TeaM Sual Corporation - Philippines
- Iligan Light & Power Inc, Philippines
- Mintek Dendrill Indonesia
- Star Paper Mills Limited - India
- Thiess Contractors Indonesia
- Tata Chemicals Ltd - India
- Attock Cement Pakistan Limited
- Parliament of New Zealand
- Australian Coal Association
- Commonwealth Bank - Australia
- Kepco SPC Power Corporation, Philippines
- Standard Chartered Bank - UAE
- Global Green Power PLC Corporation, Philippines
- Ministry of Transport, Egypt
- Karbindo Abesyapradhi - Indoneisa
- Sakthi Sugars Limited - India
- Coalindo Energy - Indonesia
- PowerSource Philippines DevCo
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Toyota Tsusho Corporation, Japan
- The University of Queensland
- Pipit Mutiara Jaya. PT, Indonesia
- Larsen & Toubro Limited - India
- Meenaskhi Energy Private Limited - India
- European Bulk Services B.V. - Netherlands
- The Treasury - Australian Government
- New Zealand Coal & Carbon
- Petron Corporation, Philippines
- Electricity Authority, New Zealand
- Dalmia Cement Bharat India
- Orica Australia Pty. Ltd.
- Coal and Oil Company - UAE
- PNOC Exploration Corporation - Philippines
- London Commodity Brokers - England
- Aboitiz Power Corporation - Philippines
- GMR Energy Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Samtan Co., Ltd - South Korea
- Rashtriya Ispat Nigam Limited - India
- Bukit Makmur.PT - Indonesia
- GAC Shipping (India) Pvt Ltd
- Kartika Selabumi Mining - Indonesia
- Edison Trading Spa - Italy
- Heidelberg Cement - Germany
- Sical Logistics Limited - India
- Videocon Industries ltd - India
- Kobexindo Tractors - Indoneisa
- Cigading International Bulk Terminal - Indonesia
- Bharathi Cement Corporation - India
- Interocean Group of Companies - India
- Indogreen Group - Indonesia
- ASAPP Information Group - India
- Posco Energy - South Korea
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sree Jayajothi Cements Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Chettinad Cement Corporation Ltd - India
- South Luzon Thermal Energy Corporation
- Formosa Plastics Group - Taiwan
- Binh Thuan Hamico - Vietnam
- Indian Oil Corporation Limited
- Mercuria Energy - Indonesia
- Marubeni Corporation - India
- Port Waratah Coal Services - Australia
- Kumho Petrochemical, South Korea
- Global Coal Blending Company Limited - Australia
- Essar Steel Hazira Ltd - India
- Kapuas Tunggal Persada - Indonesia
- Siam City Cement - Thailand
- Bhatia International Limited - India
- Semirara Mining and Power Corporation, Philippines
- Altura Mining Limited, Indonesia
- Leighton Contractors Pty Ltd - Australia
- Semirara Mining Corp, Philippines
- Medco Energi Mining Internasional
- OPG Power Generation Pvt Ltd - India
- Oldendorff Carriers - Singapore
- Ambuja Cements Ltd - India
- Xindia Steels Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Romanian Commodities Exchange
- Jaiprakash Power Ventures ltd
- Chamber of Mines of South Africa
- Ministry of Mines - Canada
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Borneo Indobara - Indonesia
- Price Waterhouse Coopers - Russia
- Kideco Jaya Agung - Indonesia
- India Bulls Power Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Eastern Energy - Thailand
- Africa Commodities Group - South Africa
- Bhoruka Overseas - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Bukit Asam (Persero) Tbk - Indonesia
- Sarangani Energy Corporation, Philippines
- Eastern Coal Council - USA
- Ind-Barath Power Infra Limited - India
- Coastal Gujarat Power Limited - India
- Straits Asia Resources Limited - Singapore
- Alfred C Toepfer International GmbH - Germany
- Parry Sugars Refinery, India
- MS Steel International - UAE
- Siam City Cement PLC, Thailand
- Krishnapatnam Port Company Ltd. - India
- Vizag Seaport Private Limited - India
- Manunggal Multi Energi - Indonesia
- Therma Luzon, Inc, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Energy Development Corp, Philippines
- Central Java Power - Indonesia
- Grasim Industreis Ltd - India
- Independent Power Producers Association of India
- Metalloyd Limited - United Kingdom
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Offshore Bulk Terminal Pte Ltd, Singapore
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