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Monday, 05 September 11
INDONESIAN COAL BENCHMARK PRICE - ANALYSIS
 Analyst : Sunil K Kumbhat
COALspot.com - As a part of the Government’s efforts to stop transfer pricing abuses which have resulted in the loss of production royalties in recent years Govt of Indonesia issued Regulation No.17 of 2010 entitled "Procedures to Determine the Benchmark Price for Mineral and Coal Sales" .
Apart from setting out the procedures to determine the benchmark price for the sale of coal and minerals, Regulation imposes other obligations on mineral and coal producers (that is, the holders of Production Operation IUPs and IUPKs) when making sales.This move has been seen as important as the benchmark Coal price is expected to provide optimum price and help goverment in calculating potential State Revenue. The new regulations will allow the Indonesian government to get the right amount of royalty , and the taxable revenues from the sector will also move up to the correct levels. It will also stop the practice of transfer pricing. The government has put in a strong framework.
The following are some key points highlights the provisions of regulation and the likely impact it will have on mine owners, including on their sales activities, royalty calculations and administrative obligations:
Obligation to follow benchmark price
Regulation provides that mineral and coal producers are obliged to sell minerals and coal based on a regulated benchmark price, whether for domestic or export sales.
The benchmark pricing obligation applies to all minerals and coal sales to third parties, including to any affiliate of the mineral and coal producer (which includes any party that has direct ownership in the holder of a Production Operation IUP or a Production Operation IUPK as well as any party that may indirectly influence the decision-making of such holders).
Determination of benchmark price
Regulation provides that the benchmark price for minerals and coal will be determined by the Director General of Minerals and Coal (DGMC) . The benchmark price for non-metallic minerals and rocks will be determined by either the Governor or the Regent/Mayor, as appropriate.
Different methods will be used to determine the benchmark price for different commodities. For metallic minerals, the DGMC will determine the benchmark price for each metallic mineral monthly using a formula that refers to international market prices. For coal, the DGMC will determine separate benchmark prices for metallurgical coal, thermal coal and low rank coal monthly.No formal definition of low rank coal exists , however in the past ;MEMR has referred to low rank coal as any coal with gross calorific value( ADB Basis) of less than 5100 kca/kg. The benchmark price for metallurgical and thermal coal will use a formula that refers to the average coal prices based on local and international market indices.As a system government will determine Coal Price Reference (Harga Batubara Acuan or HPA) by averaging the calorie value of coal in four coal price indexes, namely :
1.Newcastle Coal Index,
2.Global Coal Index,
3.Platts and
4.Indonesia Coal Index (ICI).
The first two indexes represented international price, while the last two indexes represent local coal prices. Each coal category has a weight of 25 percent. The coal category will divided based on coal quality, which is set at 6,322 kcal/kg (arb), moisture content at 8 percent (arb), sulfur content of 0.8 percent (arb), and ash content at 15 percent (arb).
After determining the Coal Price Reference (HBA), the benchmark coal price (HPB) is then determined. There will be 8 benchmark prices category, representing the quality of the coal, starting from 4,200 up to 7,000 kcal/kg.
For that price of coal other than 8 classes of HPB, prices are determined by interpolation approaches or determining HPB based on a certain formula.
Sales of minerals and coal
The benchmark price is set on the basis of the price paid for Coal at the point of Sale by way of FOB Vessel. Sales of metals, ore, concentrate or other intermediary products can be made :
1.Free on Board (FOB) mother vessel or
2.FOB barge basis.
3.Sales can also be made to end users domestically or in the form of Cost Insurance Freight (CIF) or
4.Cost and Freight (C&F).
In calculating the sales price for FOB mother vessel sales for royalty payment purposes, holders of Production Operation IUPs for metallic minerals must refer to the benchmark price. For sales that are not made FOB mother vessel basis (including FOB barge sales), the benchmark price may be adjusted by adding or subtracting an amount based on certain recognised costs approved by the DGMC.
While the principle of deducting certain costs from the benchmark price for the purpose of royalty calculations would appear to be reasonable, Regulation leaves open the possibility that there may be costs that could adjust the benchmark price by being added to, rather than being subtracted from, the benchmark price. The circumstances under which costs would be added to the benchmark price are not yet regulated.
Adjustments can include costs incurred for barging, survey, trans-shipment, treatment as well as refinery and/or metal payable and/or insurance costs. For coal, sales are contemplated in the form of FOB mother vessel, FOB barge, within an island to an end user or on a CIF or CF basis. In calculating the sales price, holders of Production Operation IUPs for coal to be sold FOB mother vessel must refer to the benchmark price. Again, for non-FOB mother vessel sales (including FOB barge sales), certain costs may be added or subtracted as approved by the DGMC.
Under the new sales price regime for coal, the production royalty for FOB mother vessel sales will effectively also be imposed on barge transportation and trans-shipment costs (as well as survey and insurance costs), which are not able to be subtracted from the selling price.
Accordingly, all royalties for FOB mother vessel sales are now assessed on the full delivered cost FOB mother vessel without adjustment for costs. Regulation provides that further details on the procedures to determine the amount of “adjustment costs” will be set out by the DGMC in a separate DGMC regulation.
Benchmark Price for calculation of royalties
For royalty calculations, regulation provides that for minerals and coal sales made FOB mother vessel basis, the Government will take the higher of the contractually-agreed price or the benchmark price. On the other hand, for non-FOB mother vessel sales such as mineral or coal sales by way of FOB barge, the production royalties will be calculated using:
• (a) the contracted sales price, if the contracted sales price is higher than the benchmark price, after adding or subtracting the adjustment amount (adjusted benchmark price); or
• (b) the adjusted benchmark price, if the sales price is the same as or lower than the adjusted benchmark price.
Post sales Reporting
Coal producers are required to submit post-sales reports on the sales of their mineral and coal commodities every month, together with supporting information including invoices and bills of lading,quality reports and barging Costs as well as export declarations and surveyor reports for exported commodities. This new reporting obligations will add significant administrative burdens to mining companies.
Sale of coal for certain purposes
Coal of certain types (including fine coal, reject coal and coal with certain impurities) for domestic use may be sold below the coal benchmark price, upon approval of the Govt (DGMC) which will issue separate regulations regarding what types of coal will fall within this exception.
Similarly, coal to be used for certain purposes in the domestic market may be sold below the coal benchmark price, upon approval of the Govt.
The Govt will issue further regulations on the purposes that will be exempted. Regulation indicates that coal used for individual needs or for the development of underdeveloped or poorly developed regions will be exempted from the benchmark pricing requirements.
Impact on existing coal and/or mineral sales contracts
All existing supply contracts ( Both Spot and term Contracts) with Indonesian mining firms will have to be brought in line with this new benchmark regulations by 22nd September 2011. Spot sale contracts must be adjusted by no later than six months after the effective date of Regulation No. 17 (that is, by 22 March 2011).
Term sales contracts must be adjusted by no later than 12 months after the effective date of Regulation No. 17 (that is, by 22 September 2011).
Sanctions
Regulation provides that the Government can impose a range of administrative penalties on mineral and coal producers who fail to comply with the provisions of Regulation.
Penalties range from written warnings, temporary suspension of sales, and ultimately, cancellation of the licences’. Due to the severity of such sanctions, mining companies will need to pay particular notice to the requirement of this new regulation.
Indian Impact
For India, the situation will be aggravated by stagnation in domestic production even as demand has increased. With up to 100,000 MW of capacity addition likely in the 12 th plan period starting next year, more coal-based projects may need to scout overseas for fuel.
Three to five years back, domestic coal production was able to keep pace with the demand from power producers. However in 2010, domestic production has remained at a flat level, while there has been a sudden increase in demand from Indian power companies.
With a substantial part of its imported coal requirement already coming from Indonesia, India’s appetite is expected to grow further. India's coal imports from Indonesia are rising every year. In 2010, it overtook Japan to become the second largest importer of Indonesian coal after China. It is expected that India may become the biggest importer of Indonesian coal in 2012.
The regulation is likely to increase the price of coal mainly for all Indian Power Projects using imported coal from Indonesia. The impact on the tariff of such projects may vary, depending upon the quality of imported coal and fuel mix. All existing supply agreements with Indonesian mining firms will have to be brought in line with this new benchmark by 22nd September 2011. The implementation of this new regulation will adversely impact all existing and future Coal based power plants importing Coal from Indonesia.The new regulations will allow the Indonesian government to get the right amount of royalty , and the taxable revenues from the sector will also move up to the correct levels. It will also stop the practice of transfer pricing. The government has put in a strong framework.
Given the long-term demand fundamentals, current high coal price scenario may continue to squeeze margins (of Indian power producers). This may well be the end of the road for cheap Indonesian coal.
Conclusion
Whilst the intention behind the minimum pricing regulation is to stop transfer pricing abuses which according to Govt, have plagued the Indonesian mining industry( particularly the Coal mining Industry) over recent years, the question is whether this intention has been implemented in a way which is inconsistent with genuine , arms -length commercial practices which exist in the market. (updated on 5 Sept 2011)
Analyst By : Sunil K Kumbhat
The views and opinions / conclusion expressed on this analysis is purely the writers’ own
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Wednesday, 29 June 11
ANOTHER STRONG PERFORMANCE BY CAPESIZE - BRS
Another strong performance by the Capesize market this week, bringing the BCI up 8% to 1,974 points. However the Panamax market was penalised, losin ...
Monday, 27 June 11
THE IRON ORE IMPORTS BY CHINA SEEMED TO SLOW DOWN - VISTAAR
COALspot.com - The BDI was holding as previous week and was just up by 1 point and closed at 1424 points end of last week. The biggest gain was ...
Friday, 24 June 11
THE INDONESIAN GOVERNMENT WILL NOT EXTEND ALL EXPIRED MINING CONTRACTS - JAKARTA UPDATES
The Indonesian Government have decided not to extend all mining concessions under the scheme called Contract of Work and instead will take over the ...
Friday, 24 June 11
BERAU EYEING 70 PERCENT GROWTH IN EBITDA
Indonesia's coal producer PT Berau Coal Energy Tbk (BRAU) is eyeing a 60 -70 percent growth in EBITDA to US$ 560 million-US$595 million this year. ...
Thursday, 23 June 11
DRY BULK MARKET KEEPS EXHIBITING SIGNS OF WEAKNESS THIS WEEK - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market seems to be unable to climb at new highs this week, showing signs of weakness, across most ship types. Yesterday, the Baltic Dry ...
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Showing 5211 to 5215 news of total 6871 |
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- The State Trading Corporation of India Ltd
- Kumho Petrochemical, South Korea
- London Commodity Brokers - England
- Coalindo Energy - Indonesia
- VISA Power Limited - India
- Neyveli Lignite Corporation Ltd, - India
- ASAPP Information Group - India
- Gujarat Sidhee Cement - India
- Lanco Infratech Ltd - India
- Economic Council, Georgia
- Binh Thuan Hamico - Vietnam
- Leighton Contractors Pty Ltd - Australia
- PetroVietnam Power Coal Import and Supply Company
- Indika Energy - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Eastern Energy - Thailand
- Singapore Mercantile Exchange
- Manunggal Multi Energi - Indonesia
- Goldman Sachs - Singapore
- GVK Power & Infra Limited - India
- Ministry of Transport, Egypt
- International Coal Ventures Pvt Ltd - India
- Ambuja Cements Ltd - India
- Attock Cement Pakistan Limited
- Rio Tinto Coal - Australia
- Toyota Tsusho Corporation, Japan
- Kartika Selabumi Mining - Indonesia
- Maheswari Brothers Coal Limited - India
- Carbofer General Trading SA - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- GMR Energy Limited - India
- Bhoruka Overseas - Indonesia
- Anglo American - United Kingdom
- Holcim Trading Pte Ltd - Singapore
- Directorate General of MIneral and Coal - Indonesia
- SMC Global Power, Philippines
- Directorate Of Revenue Intelligence - India
- Indian Energy Exchange, India
- Mercuria Energy - Indonesia
- The University of Queensland
- Global Business Power Corporation, Philippines
- Makarim & Taira - Indonesia
- Altura Mining Limited, Indonesia
- CNBM International Corporation - China
- Georgia Ports Authority, United States
- Price Waterhouse Coopers - Russia
- Maharashtra Electricity Regulatory Commission - India
- Central Electricity Authority - India
- Ministry of Finance - Indonesia
- Australian Coal Association
- Africa Commodities Group - South Africa
- Cement Manufacturers Association - India
- Electricity Generating Authority of Thailand
- Kobexindo Tractors - Indoneisa
- PTC India Limited - India
- Cigading International Bulk Terminal - Indonesia
- Energy Link Ltd, New Zealand
- Global Green Power PLC Corporation, Philippines
- PowerSource Philippines DevCo
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Trasteel International SA, Italy
- Indo Tambangraya Megah - Indonesia
- Karaikal Port Pvt Ltd - India
- Thiess Contractors Indonesia
- Baramulti Group, Indonesia
- Meenaskhi Energy Private Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Rashtriya Ispat Nigam Limited - India
- Edison Trading Spa - Italy
- Bhatia International Limited - India
- Eastern Coal Council - USA
- Jindal Steel & Power Ltd - India
- Uttam Galva Steels Limited - India
- Simpson Spence & Young - Indonesia
- Commonwealth Bank - Australia
- SMG Consultants - Indonesia
- Agrawal Coal Company - India
- Sinarmas Energy and Mining - Indonesia
- Savvy Resources Ltd - HongKong
- CIMB Investment Bank - Malaysia
- Independent Power Producers Association of India
- Madhucon Powers Ltd - India
- Sakthi Sugars Limited - India
- Mercator Lines Limited - India
- Xindia Steels Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Globalindo Alam Lestari - Indonesia
- India Bulls Power Limited - India
- Thai Mozambique Logistica
- Pipit Mutiara Jaya. PT, Indonesia
- Straits Asia Resources Limited - Singapore
- Vizag Seaport Private Limited - India
- LBH Netherlands Bv - Netherlands
- Borneo Indobara - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Latin American Coal - Colombia
- Riau Bara Harum - Indonesia
- Semirara Mining Corp, Philippines
- San Jose City I Power Corp, Philippines
- Jaiprakash Power Ventures ltd
- Star Paper Mills Limited - India
- Chamber of Mines of South Africa
- Global Coal Blending Company Limited - Australia
- Parry Sugars Refinery, India
- Wilmar Investment Holdings
- Sree Jayajothi Cements Limited - India
- Iligan Light & Power Inc, Philippines
- Essar Steel Hazira Ltd - India
- Bangladesh Power Developement Board
- Wood Mackenzie - Singapore
- Krishnapatnam Port Company Ltd. - India
- Bukit Asam (Persero) Tbk - Indonesia
- Mjunction Services Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- Ind-Barath Power Infra Limited - India
- Electricity Authority, New Zealand
- Orica Mining Services - Indonesia
- McConnell Dowell - Australia
- Bukit Makmur.PT - Indonesia
- Meralco Power Generation, Philippines
- Interocean Group of Companies - India
- Petron Corporation, Philippines
- Videocon Industries ltd - India
- Energy Development Corp, Philippines
- Mintek Dendrill Indonesia
- Timah Investasi Mineral - Indoneisa
- Metalloyd Limited - United Kingdom
- Kapuas Tunggal Persada - Indonesia
- Medco Energi Mining Internasional
- GAC Shipping (India) Pvt Ltd
- Kalimantan Lumbung Energi - Indonesia
- Banpu Public Company Limited - Thailand
- Gujarat Mineral Development Corp Ltd - India
- Tata Chemicals Ltd - India
- Parliament of New Zealand
- Australian Commodity Traders Exchange
- White Energy Company Limited
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Tamil Nadu electricity Board
- Heidelberg Cement - Germany
- Port Waratah Coal Services - Australia
- GN Power Mariveles Coal Plant, Philippines
- Aditya Birla Group - India
- Bhushan Steel Limited - India
- The Treasury - Australian Government
- South Luzon Thermal Energy Corporation
- Indogreen Group - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Chettinad Cement Corporation Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- OPG Power Generation Pvt Ltd - India
- Malabar Cements Ltd - India
- Salva Resources Pvt Ltd - India
- Indonesian Coal Mining Association
- Larsen & Toubro Limited - India
- Renaissance Capital - South Africa
- Planning Commission, India
- Ministry of Mines - Canada
- Bulk Trading Sa - Switzerland
- IHS Mccloskey Coal Group - USA
- Bayan Resources Tbk. - Indonesia
- Formosa Plastics Group - Taiwan
- Billiton Holdings Pty Ltd - Australia
- Power Finance Corporation Ltd., India
- Kepco SPC Power Corporation, Philippines
- AsiaOL BioFuels Corp., Philippines
- Alfred C Toepfer International GmbH - Germany
- Aboitiz Power Corporation - Philippines
- Coastal Gujarat Power Limited - India
- Sical Logistics Limited - India
- Antam Resourcindo - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Posco Energy - South Korea
- Sojitz Corporation - Japan
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kideco Jaya Agung - Indonesia
- Indian Oil Corporation Limited
- Sarangani Energy Corporation, Philippines
- Central Java Power - Indonesia
- Bukit Baiduri Energy - Indonesia
- ICICI Bank Limited - India
- Oldendorff Carriers - Singapore
- Romanian Commodities Exchange
- Minerals Council of Australia
- Samtan Co., Ltd - South Korea
- Kaltim Prima Coal - Indonesia
- New Zealand Coal & Carbon
- Marubeni Corporation - India
- Bharathi Cement Corporation - India
- MS Steel International - UAE
- TeaM Sual Corporation - Philippines
- Siam City Cement - Thailand
- IEA Clean Coal Centre - UK
- Pendopo Energi Batubara - Indonesia
- Barasentosa Lestari - Indonesia
- Merrill Lynch Commodities Europe
- Miang Besar Coal Terminal - Indonesia
- Sindya Power Generating Company Private Ltd
- Vedanta Resources Plc - India
- Coal and Oil Company - UAE
- Therma Luzon, Inc, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Orica Australia Pty. Ltd.
- TNB Fuel Sdn Bhd - Malaysia
- Siam City Cement PLC, Thailand
- Deloitte Consulting - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- SN Aboitiz Power Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Dalmia Cement Bharat India
- Petrochimia International Co. Ltd.- Taiwan
- Grasim Industreis Ltd - India
- PNOC Exploration Corporation - Philippines
- Gujarat Electricity Regulatory Commission - India
- Standard Chartered Bank - UAE
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