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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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Monday, 08 October 18
KOMIPO INVITES BIDS FOR 520,000 TONS OF COLOMBIAN ORIGIN OF 5,700 NAR COAL
COALspot.com: South Korea state-owned utility Korea Midland Power (KOMIPO) issued a tender for 520,000 MT of min. 5700 NAR coal of Colombian origin ...
Sunday, 07 October 18
SUPRAMAX: INDO-INDIA USUAL COAL RUNS WERE COVERED AT US$ 12K - FEARNLEYS
Capesize
Average daily earnings up close to 15 pct in 5 trading days, thus patience finally paying off for owners of the big ships - Chinese play ...
Sunday, 07 October 18
A CASE FOR 20/20 VISION? IMO'S LOW SULPHUR FUEL LIMIT UNDER MARPOL ANNEX VI WHICH COMES INTO FORCE ON 1ST JANUARY 2020
KNOWLEDGE TO ELEVATE
The implementation of the global 0.5% sulphur cap for bunker fuel under MARPOL Annex VI in just under 18 months’ ti ...
Friday, 05 October 18
COAL PRODUCTION REACHES 64% OF 2018 TARGET : THE JAKARTA POST
National coal production up to August has already reached 311 million tons, or 64 percent of this year's total target of 485 million tons, acco ...
Wednesday, 03 October 18
VALUE OF AUSTRALIAN COAL EXPORTS TIPPED TO DECLINE SHARPLY OVER NEXT 18 MONTHS - THE GUARDIAN
Thermal coal prices forecast to drop 25% and metallurgical coal prices 23% as value of iron ore exports also falls
The value of Aust ...
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Showing 1596 to 1600 news of total 6871 |
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- Australian Coal Association
- PNOC Exploration Corporation - Philippines
- PowerSource Philippines DevCo
- Kohat Cement Company Ltd. - Pakistan
- Minerals Council of Australia
- Mjunction Services Limited - India
- Intertek Mineral Services - Indonesia
- Rashtriya Ispat Nigam Limited - India
- ICICI Bank Limited - India
- Jorong Barutama Greston.PT - Indonesia
- GAC Shipping (India) Pvt Ltd
- Energy Link Ltd, New Zealand
- VISA Power Limited - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Semirara Mining Corp, Philippines
- Africa Commodities Group - South Africa
- Anglo American - United Kingdom
- CNBM International Corporation - China
- Rio Tinto Coal - Australia
- Bukit Asam (Persero) Tbk - Indonesia
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- Ceylon Electricity Board - Sri Lanka
- Carbofer General Trading SA - India
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- Bayan Resources Tbk. - Indonesia
- Romanian Commodities Exchange
- Bulk Trading Sa - Switzerland
- Videocon Industries ltd - India
- Altura Mining Limited, Indonesia
- Madhucon Powers Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Bangladesh Power Developement Board
- Economic Council, Georgia
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- Tata Chemicals Ltd - India
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- Australian Commodity Traders Exchange
- Meralco Power Generation, Philippines
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- International Coal Ventures Pvt Ltd - India
- SMG Consultants - Indonesia
- Global Coal Blending Company Limited - Australia
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- Timah Investasi Mineral - Indoneisa
- Bukit Makmur.PT - Indonesia
- Pendopo Energi Batubara - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Deloitte Consulting - India
- Neyveli Lignite Corporation Ltd, - India
- IEA Clean Coal Centre - UK
- Antam Resourcindo - Indonesia
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- Therma Luzon, Inc, Philippines
- Oldendorff Carriers - Singapore
- SN Aboitiz Power Inc, Philippines
- Xindia Steels Limited - India
- Power Finance Corporation Ltd., India
- Indogreen Group - Indonesia
- Parliament of New Zealand
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- Global Green Power PLC Corporation, Philippines
- Metalloyd Limited - United Kingdom
- Straits Asia Resources Limited - Singapore
- Directorate General of MIneral and Coal - Indonesia
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- Petron Corporation, Philippines
- Coalindo Energy - Indonesia
- AsiaOL BioFuels Corp., Philippines
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- Ambuja Cements Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Electricity Generating Authority of Thailand
- Riau Bara Harum - Indonesia
- Siam City Cement - Thailand
- Latin American Coal - Colombia
- Manunggal Multi Energi - Indonesia
- Ministry of Finance - Indonesia
- Sindya Power Generating Company Private Ltd
- Krishnapatnam Port Company Ltd. - India
- Central Electricity Authority - India
- Chettinad Cement Corporation Ltd - India
- ASAPP Information Group - India
- Coastal Gujarat Power Limited - India
- Orica Australia Pty. Ltd.
- Cigading International Bulk Terminal - Indonesia
- Eastern Coal Council - USA
- Alfred C Toepfer International GmbH - Germany
- Star Paper Mills Limited - India
- Parry Sugars Refinery, India
- Thai Mozambique Logistica
- Karbindo Abesyapradhi - Indoneisa
- Merrill Lynch Commodities Europe
- Mintek Dendrill Indonesia
- OPG Power Generation Pvt Ltd - India
- Vijayanagar Sugar Pvt Ltd - India
- Kaltim Prima Coal - Indonesia
- South Luzon Thermal Energy Corporation
- Jaiprakash Power Ventures ltd
- Kobexindo Tractors - Indoneisa
- Wood Mackenzie - Singapore
- Banpu Public Company Limited - Thailand
- Karaikal Port Pvt Ltd - India
- Bukit Baiduri Energy - Indonesia
- Aditya Birla Group - India
- Thiess Contractors Indonesia
- Vedanta Resources Plc - India
- Posco Energy - South Korea
- Bhoruka Overseas - Indonesia
- London Commodity Brokers - England
- GMR Energy Limited - India
- White Energy Company Limited
- PetroVietnam Power Coal Import and Supply Company
- Binh Thuan Hamico - Vietnam
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- The Treasury - Australian Government
- Leighton Contractors Pty Ltd - Australia
- MS Steel International - UAE
- Attock Cement Pakistan Limited
- Bharathi Cement Corporation - India
- Bhushan Steel Limited - India
- Maharashtra Electricity Regulatory Commission - India
- TNB Fuel Sdn Bhd - Malaysia
- Mercator Lines Limited - India
- Interocean Group of Companies - India
- Standard Chartered Bank - UAE
- Pipit Mutiara Jaya. PT, Indonesia
- Commonwealth Bank - Australia
- New Zealand Coal & Carbon
- Independent Power Producers Association of India
- Cement Manufacturers Association - India
- Coal and Oil Company - UAE
- Dalmia Cement Bharat India
- Central Java Power - Indonesia
- Bhatia International Limited - India
- Gujarat Electricity Regulatory Commission - India
- Marubeni Corporation - India
- Indonesian Coal Mining Association
- Chamber of Mines of South Africa
- Baramulti Group, Indonesia
- Miang Besar Coal Terminal - Indonesia
- Larsen & Toubro Limited - India
- Borneo Indobara - Indonesia
- Barasentosa Lestari - Indonesia
- Simpson Spence & Young - Indonesia
- Directorate Of Revenue Intelligence - India
- Ministry of Transport, Egypt
- Edison Trading Spa - Italy
- LBH Netherlands Bv - Netherlands
- TeaM Sual Corporation - Philippines
- Sarangani Energy Corporation, Philippines
- The State Trading Corporation of India Ltd
- Essar Steel Hazira Ltd - India
- Ministry of Mines - Canada
- Kepco SPC Power Corporation, Philippines
- Kartika Selabumi Mining - Indonesia
- Sical Logistics Limited - India
- Billiton Holdings Pty Ltd - Australia
- Uttam Galva Steels Limited - India
- The University of Queensland
- Formosa Plastics Group - Taiwan
- Makarim & Taira - Indonesia
- Goldman Sachs - Singapore
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Port Waratah Coal Services - Australia
- Ind-Barath Power Infra Limited - India
- Holcim Trading Pte Ltd - Singapore
- Mercuria Energy - Indonesia
- Savvy Resources Ltd - HongKong
- Salva Resources Pvt Ltd - India
- CIMB Investment Bank - Malaysia
- Sojitz Corporation - Japan
- Trasteel International SA, Italy
- Kumho Petrochemical, South Korea
- Sakthi Sugars Limited - India
- Indian Oil Corporation Limited
- SMC Global Power, Philippines
- Sinarmas Energy and Mining - Indonesia
- Electricity Authority, New Zealand
- GVK Power & Infra Limited - India
- McConnell Dowell - Australia
- Singapore Mercantile Exchange
- Price Waterhouse Coopers - Russia
- Globalindo Alam Lestari - Indonesia
- IHS Mccloskey Coal Group - USA
- Maheswari Brothers Coal Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- San Jose City I Power Corp, Philippines
- Renaissance Capital - South Africa
- Agrawal Coal Company - India
- Tamil Nadu electricity Board
- Indian Energy Exchange, India
- Toyota Tsusho Corporation, Japan
- Heidelberg Cement - Germany
- Indika Energy - Indonesia
- Siam City Cement PLC, Thailand
- Planning Commission, India
- Iligan Light & Power Inc, Philippines
- European Bulk Services B.V. - Netherlands
- Vizag Seaport Private Limited - India
- Georgia Ports Authority, United States
- Aboitiz Power Corporation - Philippines
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- Medco Energi Mining Internasional
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- Eastern Energy - Thailand
- Global Business Power Corporation, Philippines
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- Dong Bac Coal Mineral Investment Coporation - Vietnam
- PTC India Limited - India
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