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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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- Makarim & Taira - Indonesia
- Mercuria Energy - Indonesia
- Altura Mining Limited, Indonesia
- GAC Shipping (India) Pvt Ltd
- Cement Manufacturers Association - India
- Coal and Oil Company - UAE
- McConnell Dowell - Australia
- Binh Thuan Hamico - Vietnam
- Africa Commodities Group - South Africa
- Bulk Trading Sa - Switzerland
- Indian Oil Corporation Limited
- Baramulti Group, Indonesia
- ASAPP Information Group - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Borneo Indobara - Indonesia
- Kobexindo Tractors - Indoneisa
- Mercator Lines Limited - India
- Rio Tinto Coal - Australia
- Indo Tambangraya Megah - Indonesia
- PowerSource Philippines DevCo
- TeaM Sual Corporation - Philippines
- Coalindo Energy - Indonesia
- Parliament of New Zealand
- LBH Netherlands Bv - Netherlands
- Latin American Coal - Colombia
- Romanian Commodities Exchange
- GMR Energy Limited - India
- Anglo American - United Kingdom
- Miang Besar Coal Terminal - Indonesia
- Jindal Steel & Power Ltd - India
- Timah Investasi Mineral - Indoneisa
- Rashtriya Ispat Nigam Limited - India
- Riau Bara Harum - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Independent Power Producers Association of India
- Minerals Council of Australia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Mintek Dendrill Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Tata Chemicals Ltd - India
- Interocean Group of Companies - India
- Mjunction Services Limited - India
- Bukit Makmur.PT - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Indian Energy Exchange, India
- Orica Australia Pty. Ltd.
- Uttam Galva Steels Limited - India
- Malabar Cements Ltd - India
- Oldendorff Carriers - Singapore
- Bhatia International Limited - India
- Bhoruka Overseas - Indonesia
- Central Electricity Authority - India
- Australian Commodity Traders Exchange
- Barasentosa Lestari - Indonesia
- Ministry of Transport, Egypt
- Price Waterhouse Coopers - Russia
- Orica Mining Services - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- MS Steel International - UAE
- Coastal Gujarat Power Limited - India
- Kohat Cement Company Ltd. - Pakistan
- Sakthi Sugars Limited - India
- Directorate Of Revenue Intelligence - India
- Asmin Koalindo Tuhup - Indonesia
- Energy Link Ltd, New Zealand
- Cigading International Bulk Terminal - Indonesia
- Kumho Petrochemical, South Korea
- Metalloyd Limited - United Kingdom
- Globalindo Alam Lestari - Indonesia
- Global Green Power PLC Corporation, Philippines
- GVK Power & Infra Limited - India
- Kartika Selabumi Mining - Indonesia
- Alfred C Toepfer International GmbH - Germany
- European Bulk Services B.V. - Netherlands
- Jaiprakash Power Ventures ltd
- Karaikal Port Pvt Ltd - India
- Manunggal Multi Energi - Indonesia
- Grasim Industreis Ltd - India
- San Jose City I Power Corp, Philippines
- Central Java Power - Indonesia
- Salva Resources Pvt Ltd - India
- Indika Energy - Indonesia
- Intertek Mineral Services - Indonesia
- Videocon Industries ltd - India
- Edison Trading Spa - Italy
- Xindia Steels Limited - India
- Vedanta Resources Plc - India
- Goldman Sachs - Singapore
- Siam City Cement PLC, Thailand
- Eastern Coal Council - USA
- The Treasury - Australian Government
- Dalmia Cement Bharat India
- South Luzon Thermal Energy Corporation
- Bhushan Steel Limited - India
- Power Finance Corporation Ltd., India
- Attock Cement Pakistan Limited
- SMG Consultants - Indonesia
- Medco Energi Mining Internasional
- Heidelberg Cement - Germany
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Energy Development Corp, Philippines
- Iligan Light & Power Inc, Philippines
- Bukit Baiduri Energy - Indonesia
- Wood Mackenzie - Singapore
- Kaltim Prima Coal - Indonesia
- The University of Queensland
- Star Paper Mills Limited - India
- Holcim Trading Pte Ltd - Singapore
- Posco Energy - South Korea
- Economic Council, Georgia
- Indogreen Group - Indonesia
- Pendopo Energi Batubara - Indonesia
- Sical Logistics Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Sinarmas Energy and Mining - Indonesia
- Renaissance Capital - South Africa
- Vijayanagar Sugar Pvt Ltd - India
- Vizag Seaport Private Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Electricity Generating Authority of Thailand
- OPG Power Generation Pvt Ltd - India
- Standard Chartered Bank - UAE
- Ind-Barath Power Infra Limited - India
- Lanco Infratech Ltd - India
- Meralco Power Generation, Philippines
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Thai Mozambique Logistica
- Ministry of Finance - Indonesia
- Commonwealth Bank - Australia
- White Energy Company Limited
- Deloitte Consulting - India
- Madhucon Powers Ltd - India
- The State Trading Corporation of India Ltd
- Siam City Cement - Thailand
- Gujarat Mineral Development Corp Ltd - India
- Savvy Resources Ltd - HongKong
- London Commodity Brokers - England
- Sree Jayajothi Cements Limited - India
- Petron Corporation, Philippines
- Toyota Tsusho Corporation, Japan
- Krishnapatnam Port Company Ltd. - India
- Global Coal Blending Company Limited - Australia
- Pipit Mutiara Jaya. PT, Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Directorate General of MIneral and Coal - Indonesia
- IHS Mccloskey Coal Group - USA
- Planning Commission, India
- Formosa Plastics Group - Taiwan
- GN Power Mariveles Coal Plant, Philippines
- Georgia Ports Authority, United States
- Singapore Mercantile Exchange
- Bangladesh Power Developement Board
- Eastern Energy - Thailand
- Samtan Co., Ltd - South Korea
- Marubeni Corporation - India
- Ceylon Electricity Board - Sri Lanka
- Essar Steel Hazira Ltd - India
- VISA Power Limited - India
- Sindya Power Generating Company Private Ltd
- Australian Coal Association
- Aditya Birla Group - India
- ICICI Bank Limited - India
- International Coal Ventures Pvt Ltd - India
- Ministry of Mines - Canada
- New Zealand Coal & Carbon
- Larsen & Toubro Limited - India
- CIMB Investment Bank - Malaysia
- Ambuja Cements Ltd - India
- Gujarat Electricity Regulatory Commission - India
- Global Business Power Corporation, Philippines
- Wilmar Investment Holdings
- Port Waratah Coal Services - Australia
- Sojitz Corporation - Japan
- IEA Clean Coal Centre - UK
- Electricity Authority, New Zealand
- Thiess Contractors Indonesia
- Trasteel International SA, Italy
- Banpu Public Company Limited - Thailand
- Meenaskhi Energy Private Limited - India
- Simpson Spence & Young - Indonesia
- Straits Asia Resources Limited - Singapore
- Carbofer General Trading SA - India
- PetroVietnam Power Coal Import and Supply Company
- Antam Resourcindo - Indonesia
- Aboitiz Power Corporation - Philippines
- Merrill Lynch Commodities Europe
- Tamil Nadu electricity Board
- Petrochimia International Co. Ltd.- Taiwan
- India Bulls Power Limited - India
- Bayan Resources Tbk. - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Indonesian Coal Mining Association
- Billiton Holdings Pty Ltd - Australia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- PNOC Exploration Corporation - Philippines
- AsiaOL BioFuels Corp., Philippines
- Semirara Mining Corp, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Sarangani Energy Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- CNBM International Corporation - China
- PTC India Limited - India
- Maheswari Brothers Coal Limited - India
- Bharathi Cement Corporation - India
- Chamber of Mines of South Africa
- Parry Sugars Refinery, India
- Chettinad Cement Corporation Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Kepco SPC Power Corporation, Philippines
- SN Aboitiz Power Inc, Philippines
- Kapuas Tunggal Persada - Indonesia
- Therma Luzon, Inc, Philippines
- Gujarat Sidhee Cement - India
- Agrawal Coal Company - India
- Kideco Jaya Agung - Indonesia
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