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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 $1 billion spent each year before the Asian financial crisis in the late 1990s.
Wiranto pointed out that Indonesia's resource riches are simply not matched by investment conditions in the commodity sector. He referred to a survey of international mining companies by the Fraser Institute that found that the "perceived lack of transparency in the legal process and the risk of regulatory duplication and inconsistencies continue to act as deterrents to more substantial investment".
Indonesia's production-to-reserves ratio for coal and copper is half that of its competitors (Australia, Chile and China), according to the World Bank. A poor investment environment could mean that the country's proven mineral resources are actually vastly underestimated.
So, it would be a pity if regulatory uncertainty and onerous obligations again prevent Indonesia from fully exploiting the benefits of its natural riches. Especially, given the laws were introduced to spur growth not cripple an industry. (By Rupert Walker)
About Rupert Walker
Rupert Walker is a senior writer and has been a financial journalist based in Hong Kong for three years. Previously he was employed by Asiamoney, and has written for various magazines and newspapers on assignments in Central Europe, Russia and Africa. Rupert was also a fund manager in London – investing in emerging markets for Govett Investment, working in capital markets for SG Warburg and Goldman Sachs, and setting up a capital markets business in Singapore for NatWest. He has a BA/MA in Modern History from Keble College, Oxford University and an MA in Anthropology from SOAS, London University. He is also a CFA charterholder.
This story was first published in FinanceAsia
The views and opinions / conclusion expressed on this article is purely the writers’ own.
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Saturday, 17 September 11
GVK ACQUIRES HANCOCK COAL AND INFRASTRUCTURE FOR US$ 1.26 BILLION
COALspot.com - GVK group, India’s leading infrastructure developer,confirmed arrangements for the acquisition of a strategic part of large, hi ...
Saturday, 17 September 11
INDIA'S GVK ACQUIRES HANCOCK COAL AND INFRASTRUCTURE PROJECTS IN AUSTRALIA
COALspot.com - GVK group, India’s leading infrastructure developer, today confirmed arrangements for the acquisition of a strategic part of la ...
Friday, 16 September 11
DELTA DUNIA MAKMUR REMOVED 30.9 MILLION BCM OVERBURDEN IN AUGUST 2011
COALspot.com - PT. Delta Dunia Makmur Tbk has removed 30.9 million bcm (+13.2% YoY) overburden in August 2011 while coal production was at 2.9 ...
Thursday, 15 September 11
RUSSIAN COAL EXPORTS UP 10.9% IN JAN-AUG TO 71.50 MILLION TONS - PORT NEWS / HELLENIC SHIPPING
Port News reported that, Coal exports from Russia in January-August 2011 grew by 10.9% compared with the same period last year, to 71.50 million ton ...
Thursday, 15 September 11
INDIAN GOVT PLANS TO DEVELOP 9 NEW MAJOR PORTS BY 2016 - INVEST MONEY / HELLENIC SHIPPING
The government has announced to make a investment of more than Rs 22,000 crore (approximately US$ 4,623,791,331) to develop nine new major ...
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- Malabar Cements Ltd - India
- Samtan Co., Ltd - South Korea
- Karbindo Abesyapradhi - Indoneisa
- New Zealand Coal & Carbon
- Kideco Jaya Agung - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- McConnell Dowell - Australia
- Wood Mackenzie - Singapore
- LBH Netherlands Bv - Netherlands
- Neyveli Lignite Corporation Ltd, - India
- Maharashtra Electricity Regulatory Commission - India
- Indo Tambangraya Megah - Indonesia
- Antam Resourcindo - Indonesia
- ICICI Bank Limited - India
- Tata Chemicals Ltd - India
- Price Waterhouse Coopers - Russia
- Sindya Power Generating Company Private Ltd
- Timah Investasi Mineral - Indoneisa
- South Luzon Thermal Energy Corporation
- Eastern Coal Council - USA
- Bahari Cakrawala Sebuku - Indonesia
- Indogreen Group - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Siam City Cement PLC, Thailand
- Edison Trading Spa - Italy
- Sakthi Sugars Limited - India
- Gujarat Sidhee Cement - India
- Videocon Industries ltd - India
- San Jose City I Power Corp, Philippines
- Petron Corporation, Philippines
- Bharathi Cement Corporation - India
- Global Business Power Corporation, Philippines
- Ceylon Electricity Board - Sri Lanka
- Makarim & Taira - Indonesia
- Energy Development Corp, Philippines
- Formosa Plastics Group - Taiwan
- Mercuria Energy - Indonesia
- SMC Global Power, Philippines
- IHS Mccloskey Coal Group - USA
- Deloitte Consulting - India
- Ministry of Finance - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- International Coal Ventures Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Mercator Lines Limited - India
- Krishnapatnam Port Company Ltd. - India
- Larsen & Toubro Limited - India
- Mjunction Services Limited - India
- PowerSource Philippines DevCo
- Global Coal Blending Company Limited - Australia
- Renaissance Capital - South Africa
- Bhatia International Limited - India
- Riau Bara Harum - Indonesia
- ASAPP Information Group - India
- Bulk Trading Sa - Switzerland
- Medco Energi Mining Internasional
- Vedanta Resources Plc - India
- Maheswari Brothers Coal Limited - India
- Salva Resources Pvt Ltd - India
- Central Electricity Authority - India
- Power Finance Corporation Ltd., India
- Vijayanagar Sugar Pvt Ltd - India
- Orica Australia Pty. Ltd.
- Merrill Lynch Commodities Europe
- Star Paper Mills Limited - India
- Planning Commission, India
- Simpson Spence & Young - Indonesia
- Straits Asia Resources Limited - Singapore
- Ministry of Transport, Egypt
- Siam City Cement - Thailand
- TeaM Sual Corporation - Philippines
- Attock Cement Pakistan Limited
- Gujarat Electricity Regulatory Commission - India
- GVK Power & Infra Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Marubeni Corporation - India
- Jindal Steel & Power Ltd - India
- Bayan Resources Tbk. - Indonesia
- Thiess Contractors Indonesia
- Bukit Makmur.PT - Indonesia
- Thai Mozambique Logistica
- Meralco Power Generation, Philippines
- Essar Steel Hazira Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Tamil Nadu electricity Board
- Standard Chartered Bank - UAE
- Minerals Council of Australia
- Ambuja Cements Ltd - India
- Alfred C Toepfer International GmbH - Germany
- PNOC Exploration Corporation - Philippines
- Ind-Barath Power Infra Limited - India
- Chettinad Cement Corporation Ltd - India
- Semirara Mining Corp, Philippines
- Karaikal Port Pvt Ltd - India
- White Energy Company Limited
- Central Java Power - Indonesia
- Orica Mining Services - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Romanian Commodities Exchange
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- SN Aboitiz Power Inc, Philippines
- Commonwealth Bank - Australia
- The University of Queensland
- Africa Commodities Group - South Africa
- Banpu Public Company Limited - Thailand
- TNB Fuel Sdn Bhd - Malaysia
- India Bulls Power Limited - India
- Sree Jayajothi Cements Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kobexindo Tractors - Indoneisa
- Aditya Birla Group - India
- Interocean Group of Companies - India
- Electricity Generating Authority of Thailand
- Sarangani Energy Corporation, Philippines
- Latin American Coal - Colombia
- Rio Tinto Coal - Australia
- London Commodity Brokers - England
- Savvy Resources Ltd - HongKong
- Mintek Dendrill Indonesia
- Wilmar Investment Holdings
- Billiton Holdings Pty Ltd - Australia
- Meenaskhi Energy Private Limited - India
- Chamber of Mines of South Africa
- Economic Council, Georgia
- Cement Manufacturers Association - India
- Metalloyd Limited - United Kingdom
- Independent Power Producers Association of India
- GMR Energy Limited - India
- OPG Power Generation Pvt Ltd - India
- Baramulti Group, Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Heidelberg Cement - Germany
- Binh Thuan Hamico - Vietnam
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bangladesh Power Developement Board
- Cigading International Bulk Terminal - Indonesia
- Lanco Infratech Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Gujarat Mineral Development Corp Ltd - India
- Kalimantan Lumbung Energi - Indonesia
- IEA Clean Coal Centre - UK
- Energy Link Ltd, New Zealand
- Intertek Mineral Services - Indonesia
- Georgia Ports Authority, United States
- GAC Shipping (India) Pvt Ltd
- Global Green Power PLC Corporation, Philippines
- Directorate Of Revenue Intelligence - India
- Toyota Tsusho Corporation, Japan
- Anglo American - United Kingdom
- Bhoruka Overseas - Indonesia
- Uttam Galva Steels Limited - India
- Altura Mining Limited, Indonesia
- Rashtriya Ispat Nigam Limited - India
- Ministry of Mines - Canada
- Kepco SPC Power Corporation, Philippines
- Agrawal Coal Company - India
- Leighton Contractors Pty Ltd - Australia
- Parry Sugars Refinery, India
- Therma Luzon, Inc, Philippines
- Pipit Mutiara Jaya. PT, Indonesia
- Goldman Sachs - Singapore
- Bhushan Steel Limited - India
- Bukit Baiduri Energy - Indonesia
- Electricity Authority, New Zealand
- Indonesian Coal Mining Association
- Carbofer General Trading SA - India
- CIMB Investment Bank - Malaysia
- Sinarmas Energy and Mining - Indonesia
- Coalindo Energy - Indonesia
- PTC India Limited - India
- Sical Logistics Limited - India
- Sojitz Corporation - Japan
- Miang Besar Coal Terminal - Indonesia
- Iligan Light & Power Inc, Philippines
- The State Trading Corporation of India Ltd
- Indian Energy Exchange, India
- Port Waratah Coal Services - Australia
- Manunggal Multi Energi - Indonesia
- Globalindo Alam Lestari - Indonesia
- Indika Energy - Indonesia
- Coal and Oil Company - UAE
- Aboitiz Power Corporation - Philippines
- Indian Oil Corporation Limited
- Oldendorff Carriers - Singapore
- Posco Energy - South Korea
- VISA Power Limited - India
- Eastern Energy - Thailand
- Xindia Steels Limited - India
- Coastal Gujarat Power Limited - India
- AsiaOL BioFuels Corp., Philippines
- Borneo Indobara - Indonesia
- Kumho Petrochemical, South Korea
- Bank of Tokyo Mitsubishi UFJ Ltd
- Kartika Selabumi Mining - Indonesia
- Jaiprakash Power Ventures ltd
- Australian Coal Association
- Bukit Asam (Persero) Tbk - Indonesia
- Madhucon Powers Ltd - India
- MS Steel International - UAE
- The Treasury - Australian Government
- European Bulk Services B.V. - Netherlands
- Barasentosa Lestari - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- CNBM International Corporation - China
- SMG Consultants - Indonesia
- Trasteel International SA, Italy
- Singapore Mercantile Exchange
- Kapuas Tunggal Persada - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Grasim Industreis Ltd - India
- Australian Commodity Traders Exchange
- Dalmia Cement Bharat India
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Parliament of New Zealand
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