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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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Thursday, 02 June 11
LARGE SUPRAS FOR RBCT/INDIA ROUND ARE NOW ASKING 14K - FEARNBULK
Handy
The Handy/Supra market has in general been flat and un-exciting this week. The Black Sea market is almost non existing while the US Gulf mar ...
Thursday, 02 June 11
DRY BULK SHIP OWNERS LOOKING INTO SHORTENED WEEK WITH ANXIETY - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
With most markets in the western world closed yesterday, as a result of Memorial Day, dry bulk stakeholders weren’t able to build over the pos ...
Monday, 30 May 11
MIANG BESAR COAL TERMINAL ON TARGET
COALspot.com - MBCT, to be largest coal terminal in Asia to start construction in Indonesia’s east Kalimantan Island in July 2011 says Mr. Joh ...
Sunday, 29 May 11
THE FREIGHT MARKET CONTINUED TO GAIN MOMENTUM - VISTAAR
COALspot.com - The freight market continued to gain momentum and the BDI, Cape Index and Panamax was by up almost 10-12 pct and on all sectors, Vist ...
Saturday, 28 May 11
WCI-CHINA RATES SLIDED TO 15K AND FROM ECI AROUND 12K - FEARNLEYS AS
Handy
Rates in the Atlantic remain steady/flat with the Black Sea remaining quiet with little fresh enquiries. The Continent is seeing more tonnag ...
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Showing 5241 to 5245 news of total 6871 |
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- Mercator Lines Limited - India
- Jaiprakash Power Ventures ltd
- Kartika Selabumi Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- Banpu Public Company Limited - Thailand
- Central Electricity Authority - India
- Bhatia International Limited - India
- Vedanta Resources Plc - India
- Makarim & Taira - Indonesia
- Indian Energy Exchange, India
- Simpson Spence & Young - Indonesia
- Parry Sugars Refinery, India
- Deloitte Consulting - India
- The University of Queensland
- Power Finance Corporation Ltd., India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- International Coal Ventures Pvt Ltd - India
- CNBM International Corporation - China
- The Treasury - Australian Government
- Meralco Power Generation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- London Commodity Brokers - England
- Edison Trading Spa - Italy
- Videocon Industries ltd - India
- Pendopo Energi Batubara - Indonesia
- Vizag Seaport Private Limited - India
- Kohat Cement Company Ltd. - Pakistan
- PetroVietnam Power Coal Import and Supply Company
- Independent Power Producers Association of India
- Kumho Petrochemical, South Korea
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- Latin American Coal - Colombia
- Baramulti Group, Indonesia
- Electricity Authority, New Zealand
- Medco Energi Mining Internasional
- Bangladesh Power Developement Board
- Port Waratah Coal Services - Australia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Grasim Industreis Ltd - India
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- Ceylon Electricity Board - Sri Lanka
- Holcim Trading Pte Ltd - Singapore
- Coal and Oil Company - UAE
- New Zealand Coal & Carbon
- Tamil Nadu electricity Board
- SN Aboitiz Power Inc, Philippines
- Timah Investasi Mineral - Indoneisa
- Kobexindo Tractors - Indoneisa
- Gujarat Mineral Development Corp Ltd - India
- LBH Netherlands Bv - Netherlands
- White Energy Company Limited
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- Sojitz Corporation - Japan
- Directorate Of Revenue Intelligence - India
- Alfred C Toepfer International GmbH - Germany
- Wilmar Investment Holdings
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Economic Council, Georgia
- IEA Clean Coal Centre - UK
- SMG Consultants - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Anglo American - United Kingdom
- Tata Chemicals Ltd - India
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- Toyota Tsusho Corporation, Japan
- Essar Steel Hazira Ltd - India
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- Orica Australia Pty. Ltd.
- Australian Coal Association
- Straits Asia Resources Limited - Singapore
- Energy Link Ltd, New Zealand
- Pipit Mutiara Jaya. PT, Indonesia
- Billiton Holdings Pty Ltd - Australia
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- Sarangani Energy Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Oldendorff Carriers - Singapore
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- Semirara Mining Corp, Philippines
- Thiess Contractors Indonesia
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- Therma Luzon, Inc, Philippines
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- Bulk Trading Sa - Switzerland
- Energy Development Corp, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Merrill Lynch Commodities Europe
- Indonesian Coal Mining Association
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- Truba Alam Manunggal Engineering.Tbk - Indonesia
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- Mercuria Energy - Indonesia
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- Ministry of Finance - Indonesia
- SMC Global Power, Philippines
- Semirara Mining and Power Corporation, Philippines
- Mintek Dendrill Indonesia
- VISA Power Limited - India
- McConnell Dowell - Australia
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- Formosa Plastics Group - Taiwan
- Asmin Koalindo Tuhup - Indonesia
- Bhushan Steel Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Aditya Birla Group - India
- Goldman Sachs - Singapore
- Malabar Cements Ltd - India
- CIMB Investment Bank - Malaysia
- Romanian Commodities Exchange
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- Minerals Council of Australia
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- GMR Energy Limited - India
- European Bulk Services B.V. - Netherlands
- Vijayanagar Sugar Pvt Ltd - India
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- Petron Corporation, Philippines
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- Global Business Power Corporation, Philippines
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- Attock Cement Pakistan Limited
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- OPG Power Generation Pvt Ltd - India
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- Globalindo Alam Lestari - Indonesia
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- Global Coal Blending Company Limited - Australia
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- Iligan Light & Power Inc, Philippines
- GAC Shipping (India) Pvt Ltd
- Ministry of Transport, Egypt
- Commonwealth Bank - Australia
- Coastal Gujarat Power Limited - India
- Altura Mining Limited, Indonesia
- ICICI Bank Limited - India
- Barasentosa Lestari - Indonesia
- Madhucon Powers Ltd - India
- IHS Mccloskey Coal Group - USA
- Miang Besar Coal Terminal - Indonesia
- Binh Thuan Hamico - Vietnam
- PTC India Limited - India
- Indo Tambangraya Megah - Indonesia
- Bayan Resources Tbk. - Indonesia
- Africa Commodities Group - South Africa
- Australian Commodity Traders Exchange
- Jindal Steel & Power Ltd - India
- Ministry of Mines - Canada
- Xindia Steels Limited - India
- Bukit Makmur.PT - Indonesia
- Georgia Ports Authority, United States
- Ind-Barath Power Infra Limited - India
- Maheswari Brothers Coal Limited - India
- Coalindo Energy - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Eastern Coal Council - USA
- Manunggal Multi Energi - Indonesia
- South Luzon Thermal Energy Corporation
- Orica Mining Services - Indonesia
- Singapore Mercantile Exchange
- San Jose City I Power Corp, Philippines
- Metalloyd Limited - United Kingdom
- The State Trading Corporation of India Ltd
- Parliament of New Zealand
- Marubeni Corporation - India
- India Bulls Power Limited - India
- Indian Oil Corporation Limited
- Larsen & Toubro Limited - India
- Directorate General of MIneral and Coal - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Chamber of Mines of South Africa
- Sakthi Sugars Limited - India
- Interocean Group of Companies - India
- TNB Fuel Sdn Bhd - Malaysia
- Wood Mackenzie - Singapore
- Borneo Indobara - Indonesia
- Chettinad Cement Corporation Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
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- Sical Logistics Limited - India
- Siam City Cement PLC, Thailand
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