The Coal Face: The coal price has hit its lowest point in recent memory
My father used to say to me that his children are his biggest investments. He put his hopes in us that we would be successful one day.
He gave us the best environment possible for us to prosper and grow.
However, there were some things that he wasn’t able to control, such as the people we befriended, and whether we would truly learn in school. These external influences often times would decide our life direction.
The same thing is taking place with the mining industry, especially coal.
In these times, where the coal price is at its lowest in recent memory and there is little sign showing any price recovery in the near future, business owners are trying as much as possible to control the things that they can control, such as the operational costs to stay afloat.
However, there are external factors that business owners simply cannot control, and one of the major one is the government itself.
Government, in their rule-making process, sometimes deliberately leaves the industry out of the picture.
One clear example is the recently announced royalty increase plan.
The Indonesian government is probably the one and only government in the world that is trying to increase their revenue by adding pressure to the already-under-pressure industry.
Looking at it from one side, one can say that for a long time the non-oil and gas mining sector has been one of the biggest source of government income, both through tax and non-tax (such as royalties), and the sector’s chief executives and directors are the some of the wealthiest people in Indonesia and they should pay their fair share.
On the other hand, one can also see from number of publicly traded coal mining companies’ financial statements that many of them are actually already operating at loss. Increasing the royalty will simply make things worse.
Increasing royalty in the presently weak coal market does not help the government either.
Lower net profit margin means lower capital expenditure, which in turn means lowering profit even further and thus lower tax to the government.
Furthermore, the higher costs can drive companies out of business or at least make them cut back production, either of which just lowers the royalty revenue to the government.
The problem does not end with lower government revenue. Recent statistics show that the Indonesian mining industry absorbed around 1.4 million workers in 2014, and as high as 1.6 million in 2012.
Our calculation shows that if royalty is increased using a tiered system, with Newcastle Index price of $65, more than 60 percent of the coal miners will operate at loss. Imagine what will happen with the workforce, and thus the problem of increasing unemployment the government will be facing.
Royalty is just the top of the mountain, one item that is easily digestible by the public. There are still other aspects going on such as the government’s plan to only allow coal exporters to export coal through 14 designated ports.
While these 14 designated ports may have a different purpose compared to that of the royalty increase, and that is to control the export of illegally mined coal while securing domestic quota at the same time, the result may just be the same: increased cost and possibility of default.
These 14 designated ports will definitely add some premium to the cost, again resulting in much pressured margin, or even negative margin.
The logic behind it is simple.
By using just these 14 ports, instead of using the shortest route to the sea, coal miners are forced to go through longer routes, adding supply chain costs.
This naturally increases some concerns that there may be some interested parties behind the plan. The income these ports will generate for the owners of these ports are enormous. The main question for these thoughts is the timing and the rationale behind these decisions.
From these two planned government regulations, we can have some insight into what the government is trying to do, which is to gain a good stream of income while having longevity on it, as well as securing the realization of government’s plan to develop 35,000 megawatts by 2019.
This in itself is not wrong, but the timing is suspect. In times like this, instead of pressurizing the industry by adding more cost to an already minimal margin, the government should aid the industry.
For example, look at the United States. In the economic meltdown of 2008, the government aided America’s biggest banks by loaning them billions of taxpayers’ money to help them stay liquid.
The idea behind it is not wrong. Everybody in the industry wants to preserve the national coal reserves to help our industry in the long run.
But I believe that the way the government has approached it could have been done in a much better manner.
If one looks at the production and export data provided by the Ministry of Energy and Mineral Resources (ESDM) and Central Bureau of Statistics (BPS), in 2013 there was a potential of unaccounted coal trade, with majority of them may have ended up in the sea- borne market, which leads to, by our calculation, a potential government revenue loss of up to $630 million, while not yet not accounting the loss of reserve and the problem it will cause.
Stopping illegal mining should be a top priority for our government, for it will solve the problem for both sides. Stopping illegal mining will definitely decrease the supply in the sea-borne market, therefore giving support to the coal price.
Increased coal prices will give more producers some breathing space in which to operate, which in turn will keep them afloat.
This will certainly lead to higher and sustainable income tax and royalty revenues to the government.
Eliminating illegal mining is a very tough task, which is why a concerted and integrated effort by every level of government as well as the producers themselves is necessary, especially after the implementation of registered exporter (ET) measure since October 2014 failed to bring a significant change to production levels.
In addition to the registered exporter measure, the government plans to enforce a letter of credit (LC) requirement starting from April, but the concern is that it may or may not bring significant improvement to the coal market. Whatever happens, we as producers have to be ready to be the government’s partners in implementing its plan to curb illegal mining.
At the end, our job as energy companies is to stay strong for our stakeholders.
Perhaps it is time for us and the government to work together as partners and to start thinking together about the energy policy for Indonesia for the next 25 years. Only by creating this partnership, we can start thinking of the coal sector not just as a revenue source, but as a long-term national asset that can be utilized for many decades to come.
Source: The Jakarta Globe
Writer is a deputy chairman of the Indonesia Coal Mining Association (APBI) and the finance director at coal miner Toba Bara Sejahtera.
