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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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Showing 1191 to 1195 news of total 6871 |
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- Semirara Mining and Power Corporation, Philippines
- Africa Commodities Group - South Africa
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Medco Energi Mining Internasional
- CNBM International Corporation - China
- Marubeni Corporation - India
- Uttam Galva Steels Limited - India
- Semirara Mining Corp, Philippines
- IHS Mccloskey Coal Group - USA
- Indian Oil Corporation Limited
- CIMB Investment Bank - Malaysia
- Maharashtra Electricity Regulatory Commission - India
- Central Java Power - Indonesia
- PowerSource Philippines DevCo
- Neyveli Lignite Corporation Ltd, - India
- Vedanta Resources Plc - India
- Indonesian Coal Mining Association
- Minerals Council of Australia
- IEA Clean Coal Centre - UK
- Jindal Steel & Power Ltd - India
- Energy Development Corp, Philippines
- Edison Trading Spa - Italy
- Simpson Spence & Young - Indonesia
- Energy Link Ltd, New Zealand
- McConnell Dowell - Australia
- Baramulti Group, Indonesia
- Malabar Cements Ltd - India
- Posco Energy - South Korea
- India Bulls Power Limited - India
- New Zealand Coal & Carbon
- Savvy Resources Ltd - HongKong
- Intertek Mineral Services - Indonesia
- Jorong Barutama Greston.PT - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Chamber of Mines of South Africa
- Alfred C Toepfer International GmbH - Germany
- Makarim & Taira - Indonesia
- Interocean Group of Companies - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Krishnapatnam Port Company Ltd. - India
- Ministry of Finance - Indonesia
- Videocon Industries ltd - India
- Timah Investasi Mineral - Indoneisa
- Globalindo Alam Lestari - Indonesia
- Aboitiz Power Corporation - Philippines
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bharathi Cement Corporation - India
- Ministry of Mines - Canada
- Banpu Public Company Limited - Thailand
- SMG Consultants - Indonesia
- Madhucon Powers Ltd - India
- Ind-Barath Power Infra Limited - India
- Salva Resources Pvt Ltd - India
- Eastern Coal Council - USA
- GAC Shipping (India) Pvt Ltd
- South Luzon Thermal Energy Corporation
- Independent Power Producers Association of India
- Global Green Power PLC Corporation, Philippines
- Wilmar Investment Holdings
- Bhoruka Overseas - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Mercuria Energy - Indonesia
- Star Paper Mills Limited - India
- Holcim Trading Pte Ltd - Singapore
- GVK Power & Infra Limited - India
- Power Finance Corporation Ltd., India
- Indo Tambangraya Megah - Indonesia
- Chettinad Cement Corporation Ltd - India
- Rio Tinto Coal - Australia
- Planning Commission, India
- The University of Queensland
- Xindia Steels Limited - India
- Merrill Lynch Commodities Europe
- Siam City Cement - Thailand
- Mjunction Services Limited - India
- Vijayanagar Sugar Pvt Ltd - India
- Commonwealth Bank - Australia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- LBH Netherlands Bv - Netherlands
- ASAPP Information Group - India
- Parry Sugars Refinery, India
- Vizag Seaport Private Limited - India
- OPG Power Generation Pvt Ltd - India
- Gujarat Mineral Development Corp Ltd - India
- Iligan Light & Power Inc, Philippines
- The Treasury - Australian Government
- Trasteel International SA, Italy
- TNB Fuel Sdn Bhd - Malaysia
- AsiaOL BioFuels Corp., Philippines
- Latin American Coal - Colombia
- Coal and Oil Company - UAE
- Jaiprakash Power Ventures ltd
- Karaikal Port Pvt Ltd - India
- Sical Logistics Limited - India
- Anglo American - United Kingdom
- Goldman Sachs - Singapore
- Essar Steel Hazira Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Therma Luzon, Inc, Philippines
- Bukit Makmur.PT - Indonesia
- Sindya Power Generating Company Private Ltd
- Manunggal Multi Energi - Indonesia
- Bangladesh Power Developement Board
- Coalindo Energy - Indonesia
- Mintek Dendrill Indonesia
- Singapore Mercantile Exchange
- Ambuja Cements Ltd - India
- Kideco Jaya Agung - Indonesia
- Kobexindo Tractors - Indoneisa
- Bulk Trading Sa - Switzerland
- SN Aboitiz Power Inc, Philippines
- Attock Cement Pakistan Limited
- Metalloyd Limited - United Kingdom
- Directorate General of MIneral and Coal - Indonesia
- ICICI Bank Limited - India
- Gujarat Electricity Regulatory Commission - India
- Lanco Infratech Ltd - India
- Electricity Authority, New Zealand
- Kaltim Prima Coal - Indonesia
- Tamil Nadu electricity Board
- Thiess Contractors Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Thai Mozambique Logistica
- Bayan Resources Tbk. - Indonesia
- Heidelberg Cement - Germany
- PTC India Limited - India
- Maheswari Brothers Coal Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Antam Resourcindo - Indonesia
- Orica Mining Services - Indonesia
- Toyota Tsusho Corporation, Japan
- Billiton Holdings Pty Ltd - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Larsen & Toubro Limited - India
- Kepco SPC Power Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Sarangani Energy Corporation, Philippines
- Karbindo Abesyapradhi - Indoneisa
- Indogreen Group - Indonesia
- GMR Energy Limited - India
- MS Steel International - UAE
- Dalmia Cement Bharat India
- Gujarat Sidhee Cement - India
- SMC Global Power, Philippines
- Renaissance Capital - South Africa
- Borneo Indobara - Indonesia
- Barasentosa Lestari - Indonesia
- Australian Commodity Traders Exchange
- Wood Mackenzie - Singapore
- Mercator Lines Limited - India
- PNOC Exploration Corporation - Philippines
- European Bulk Services B.V. - Netherlands
- Offshore Bulk Terminal Pte Ltd, Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Georgia Ports Authority, United States
- Kohat Cement Company Ltd. - Pakistan
- Aditya Birla Group - India
- Grasim Industreis Ltd - India
- Meralco Power Generation, Philippines
- Deloitte Consulting - India
- Binh Thuan Hamico - Vietnam
- Coastal Gujarat Power Limited - India
- Kumho Petrochemical, South Korea
- Port Waratah Coal Services - Australia
- Price Waterhouse Coopers - Russia
- Eastern Energy - Thailand
- Miang Besar Coal Terminal - Indonesia
- Parliament of New Zealand
- VISA Power Limited - India
- Australian Coal Association
- Bhatia International Limited - India
- Standard Chartered Bank - UAE
- Carbofer General Trading SA - India
- Kapuas Tunggal Persada - Indonesia
- Formosa Plastics Group - Taiwan
- Central Electricity Authority - India
- The State Trading Corporation of India Ltd
- London Commodity Brokers - England
- Sakthi Sugars Limited - India
- Global Coal Blending Company Limited - Australia
- Bahari Cakrawala Sebuku - Indonesia
- White Energy Company Limited
- Bukit Baiduri Energy - Indonesia
- Cement Manufacturers Association - India
- Riau Bara Harum - Indonesia
- Ceylon Electricity Board - Sri Lanka
- San Jose City I Power Corp, Philippines
- Ministry of Transport, Egypt
- Directorate Of Revenue Intelligence - India
- TeaM Sual Corporation - Philippines
- Kartika Selabumi Mining - Indonesia
- Electricity Generating Authority of Thailand
- Pendopo Energi Batubara - Indonesia
- Indian Energy Exchange, India
- Agrawal Coal Company - India
- Sojitz Corporation - Japan
- Siam City Cement PLC, Thailand
- Bukit Asam (Persero) Tbk - Indonesia
- Economic Council, Georgia
- Straits Asia Resources Limited - Singapore
- Bhushan Steel Limited - India
- Oldendorff Carriers - Singapore
- GN Power Mariveles Coal Plant, Philippines
- Meenaskhi Energy Private Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Sree Jayajothi Cements Limited - India
- Romanian Commodities Exchange
- International Coal Ventures Pvt Ltd - India
- Altura Mining Limited, Indonesia
- Petron Corporation, Philippines
- Leighton Contractors Pty Ltd - Australia
- Cigading International Bulk Terminal - Indonesia
- Orica Australia Pty. Ltd.
- Global Business Power Corporation, Philippines
- Tata Chemicals Ltd - India
- Indika Energy - Indonesia
- Rashtriya Ispat Nigam Limited - India
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