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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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Friday, 22 October 21
CHINA WANTS TO COOL COAL PRICES. SIMILAR MOVES FOR METALS, CRUDE FAILED - REUTERS
China’s latest attempt to lower runaway commodity prices, this time for thermal coal, is likely to follow a familiar pattern of initial succe ...
Friday, 22 October 21
HARD COAL REMAINS AN IMPORTANT FACTOR FOR SECURITY OF SUPPLY - COAL IMPORTERS ASSOCIATION, GERMANY
- Hard coal remains an important factor for security of supply
- Increase of around 35% in hard-coal-fired power generation in the first three ...
Wednesday, 20 October 21
CHINA'S COAL SHORTAGE TO EASE IN COMING MONTHS, INDUSTRY BODY SAYS - REUTERS
China’s coal shortage will likely ease in coming months, with domestic production and imports already showing signs of picking up, a coal ind ...
Wednesday, 20 October 21
CHINA'S RAW COAL OUTPUT DROPS IN SEPTEMBER - XINHUA
China’s raw coal output dropped 0.9 percent year on year to 330 million tonnes last month, data from the National Bureau of Statistics (NBS) ...
Wednesday, 20 October 21
OVER-RELIANCE ON COAL IN OUR POWER MIX HURTING INDIA - LIVEMINT
In spite of the renewables push, coal still accounts for about 50% of India’s installed power capacity. That means a simultaneous demand and ...
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Showing 441 to 445 news of total 6871 |
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- Directorate General of MIneral and Coal - Indonesia
- Siam City Cement PLC, Thailand
- Bhoruka Overseas - Indonesia
- ICICI Bank Limited - India
- Semirara Mining and Power Corporation, Philippines
- Indo Tambangraya Megah - Indonesia
- Wood Mackenzie - Singapore
- Central Java Power - Indonesia
- Dalmia Cement Bharat India
- PowerSource Philippines DevCo
- Therma Luzon, Inc, Philippines
- Baramulti Group, Indonesia
- Meralco Power Generation, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Price Waterhouse Coopers - Russia
- Kalimantan Lumbung Energi - Indonesia
- Mercuria Energy - Indonesia
- Star Paper Mills Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- AsiaOL BioFuels Corp., Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Sakthi Sugars Limited - India
- India Bulls Power Limited - India
- Renaissance Capital - South Africa
- PetroVietnam Power Coal Import and Supply Company
- Agrawal Coal Company - India
- Eastern Coal Council - USA
- TeaM Sual Corporation - Philippines
- Kideco Jaya Agung - Indonesia
- Grasim Industreis Ltd - India
- Thiess Contractors Indonesia
- ASAPP Information Group - India
- Petron Corporation, Philippines
- Independent Power Producers Association of India
- GAC Shipping (India) Pvt Ltd
- Parry Sugars Refinery, India
- Uttam Galva Steels Limited - India
- Semirara Mining Corp, Philippines
- London Commodity Brokers - England
- Kaltim Prima Coal - Indonesia
- Metalloyd Limited - United Kingdom
- European Bulk Services B.V. - Netherlands
- Mjunction Services Limited - India
- Kartika Selabumi Mining - Indonesia
- Oldendorff Carriers - Singapore
- Indian Oil Corporation Limited
- CNBM International Corporation - China
- Bayan Resources Tbk. - Indonesia
- Ministry of Transport, Egypt
- Simpson Spence & Young - Indonesia
- Bhatia International Limited - India
- Kobexindo Tractors - Indoneisa
- Larsen & Toubro Limited - India
- Latin American Coal - Colombia
- SMG Consultants - Indonesia
- Iligan Light & Power Inc, Philippines
- Central Electricity Authority - India
- San Jose City I Power Corp, Philippines
- Energy Link Ltd, New Zealand
- Cement Manufacturers Association - India
- Wilmar Investment Holdings
- Ambuja Cements Ltd - India
- Videocon Industries ltd - India
- Georgia Ports Authority, United States
- SMC Global Power, Philippines
- Banpu Public Company Limited - Thailand
- Australian Coal Association
- The State Trading Corporation of India Ltd
- Leighton Contractors Pty Ltd - Australia
- South Luzon Thermal Energy Corporation
- Global Coal Blending Company Limited - Australia
- Port Waratah Coal Services - Australia
- Asmin Koalindo Tuhup - Indonesia
- Straits Asia Resources Limited - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- IEA Clean Coal Centre - UK
- Sinarmas Energy and Mining - Indonesia
- Directorate Of Revenue Intelligence - India
- Aboitiz Power Corporation - Philippines
- Globalindo Alam Lestari - Indonesia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Minerals Council of Australia
- Neyveli Lignite Corporation Ltd, - India
- Bharathi Cement Corporation - India
- Ind-Barath Power Infra Limited - India
- Alfred C Toepfer International GmbH - Germany
- Maheswari Brothers Coal Limited - India
- Attock Cement Pakistan Limited
- Sindya Power Generating Company Private Ltd
- Aditya Birla Group - India
- Samtan Co., Ltd - South Korea
- Bhushan Steel Limited - India
- Thai Mozambique Logistica
- Jindal Steel & Power Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Global Green Power PLC Corporation, Philippines
- Eastern Energy - Thailand
- Formosa Plastics Group - Taiwan
- Electricity Authority, New Zealand
- PTC India Limited - India
- GVK Power & Infra Limited - India
- Power Finance Corporation Ltd., India
- Economic Council, Georgia
- Interocean Group of Companies - India
- Gujarat Electricity Regulatory Commission - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Savvy Resources Ltd - HongKong
- Gujarat Sidhee Cement - India
- Africa Commodities Group - South Africa
- Rio Tinto Coal - Australia
- Energy Development Corp, Philippines
- Holcim Trading Pte Ltd - Singapore
- Sojitz Corporation - Japan
- Anglo American - United Kingdom
- Borneo Indobara - Indonesia
- The Treasury - Australian Government
- Kohat Cement Company Ltd. - Pakistan
- Mercator Lines Limited - India
- Miang Besar Coal Terminal - Indonesia
- Ministry of Mines - Canada
- Bank of Tokyo Mitsubishi UFJ Ltd
- PNOC Exploration Corporation - Philippines
- TNB Fuel Sdn Bhd - Malaysia
- Orica Australia Pty. Ltd.
- CIMB Investment Bank - Malaysia
- Trasteel International SA, Italy
- Bukit Baiduri Energy - Indonesia
- Vedanta Resources Plc - India
- Planning Commission, India
- Rashtriya Ispat Nigam Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Chettinad Cement Corporation Ltd - India
- Coastal Gujarat Power Limited - India
- Salva Resources Pvt Ltd - India
- Coalindo Energy - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Intertek Mineral Services - Indonesia
- Barasentosa Lestari - Indonesia
- Romanian Commodities Exchange
- Bahari Cakrawala Sebuku - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Cigading International Bulk Terminal - Indonesia
- Ceylon Electricity Board - Sri Lanka
- Manunggal Multi Energi - Indonesia
- Sarangani Energy Corporation, Philippines
- Mintek Dendrill Indonesia
- Electricity Generating Authority of Thailand
- Edison Trading Spa - Italy
- Bukit Asam (Persero) Tbk - Indonesia
- Commonwealth Bank - Australia
- MS Steel International - UAE
- Kapuas Tunggal Persada - Indonesia
- Standard Chartered Bank - UAE
- Indika Energy - Indonesia
- VISA Power Limited - India
- Goldman Sachs - Singapore
- Vizag Seaport Private Limited - India
- Toyota Tsusho Corporation, Japan
- Bulk Trading Sa - Switzerland
- Essar Steel Hazira Ltd - India
- Orica Mining Services - Indonesia
- Marubeni Corporation - India
- Maharashtra Electricity Regulatory Commission - India
- Malabar Cements Ltd - India
- Indian Energy Exchange, India
- Binh Thuan Hamico - Vietnam
- Coal and Oil Company - UAE
- Lanco Infratech Ltd - India
- GMR Energy Limited - India
- Tamil Nadu electricity Board
- Parliament of New Zealand
- Sree Jayajothi Cements Limited - India
- Altura Mining Limited, Indonesia
- Medco Energi Mining Internasional
- Timah Investasi Mineral - Indoneisa
- Kepco SPC Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- Singapore Mercantile Exchange
- International Coal Ventures Pvt Ltd - India
- Chamber of Mines of South Africa
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Billiton Holdings Pty Ltd - Australia
- Jaiprakash Power Ventures ltd
- Bukit Makmur.PT - Indonesia
- Heidelberg Cement - Germany
- Vijayanagar Sugar Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Antam Resourcindo - Indonesia
- The University of Queensland
- Meenaskhi Energy Private Limited - India
- Pendopo Energi Batubara - Indonesia
- Siam City Cement - Thailand
- Indonesian Coal Mining Association
- SN Aboitiz Power Inc, Philippines
- Krishnapatnam Port Company Ltd. - India
- Deloitte Consulting - India
- McConnell Dowell - Australia
- White Energy Company Limited
- New Zealand Coal & Carbon
- Tata Chemicals Ltd - India
- Global Business Power Corporation, Philippines
- Petrochimia International Co. Ltd.- Taiwan
- Kumho Petrochemical, South Korea
- Madhucon Powers Ltd - India
- IHS Mccloskey Coal Group - USA
- Ministry of Finance - Indonesia
- Karaikal Port Pvt Ltd - India
- Merrill Lynch Commodities Europe
- Carbofer General Trading SA - India
- Sical Logistics Limited - India
- Australian Commodity Traders Exchange
- Indogreen Group - Indonesia
- Riau Bara Harum - Indonesia
- Posco Energy - South Korea
- Makarim & Taira - Indonesia
- Bangladesh Power Developement Board
- Xindia Steels Limited - India
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