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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, 12 March 12
DELTA DUNIA 1M OVERBURDEN DROPS 3.1% - INSIDER STORIES
Insider Stories reported that, Indonesia's second largest coal mining contractor PT Delta Dunia Makmur Tbk (DOID) reported a 25 million bank ...
Monday, 12 March 12
DRY BULK RATES WILL REMAIN LOW IN 2012 SAYS DANISH SHIP FINANCE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
In its annual shipping survey Danish Ship Finance said that the current outlook for the Dry Bulk market seems unlikely to foster higher rates in any ...
Monday, 12 March 12
WEEKLY DRY MARKET OVERVIEW - MARIA BERTZELETOU, HELLENIC SHIPPING
The first days of March appear to be more encouraging for dry bulk operators, but the outlook is still gloomy for the rest of year with earnings for ...
Sunday, 11 March 12
FREIGHT RATES FOR INDONESIA TO INDIA WILL CONTINUE TO REMAIN FIRM- VISTAAR
COALspot.com - This week saw another upward trend with all indices up except for the Cape index.
The BDI was up by 6.87 pct closing at 824 points ...
Friday, 09 March 12
MINING IN INDONESIA: RESTRICTION ON FOREIGN INVESTMENT - SUNIL K KUMBHAT
COALspot.com - Recently Govt has passed regulation instructing foreign mining companies to reduce their ownership stake.
The regulation known as ...
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Showing 4811 to 4815 news of total 6871 |
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- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Electricity Authority, New Zealand
- Indonesian Coal Mining Association
- Renaissance Capital - South Africa
- White Energy Company Limited
- Marubeni Corporation - India
- Heidelberg Cement - Germany
- Timah Investasi Mineral - Indoneisa
- Grasim Industreis Ltd - India
- Global Coal Blending Company Limited - Australia
- Parry Sugars Refinery, India
- Bukit Baiduri Energy - Indonesia
- Bangladesh Power Developement Board
- Bukit Makmur.PT - Indonesia
- Parliament of New Zealand
- Rio Tinto Coal - Australia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Sindya Power Generating Company Private Ltd
- Georgia Ports Authority, United States
- Chettinad Cement Corporation Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Metalloyd Limited - United Kingdom
- OPG Power Generation Pvt Ltd - India
- Ministry of Finance - Indonesia
- South Luzon Thermal Energy Corporation
- Bharathi Cement Corporation - India
- Deloitte Consulting - India
- Videocon Industries ltd - India
- Kobexindo Tractors - Indoneisa
- Directorate Of Revenue Intelligence - India
- International Coal Ventures Pvt Ltd - India
- Medco Energi Mining Internasional
- Vizag Seaport Private Limited - India
- Goldman Sachs - Singapore
- Star Paper Mills Limited - India
- TeaM Sual Corporation - Philippines
- Bhoruka Overseas - Indonesia
- Anglo American - United Kingdom
- Trasteel International SA, Italy
- Australian Commodity Traders Exchange
- PowerSource Philippines DevCo
- Directorate General of MIneral and Coal - Indonesia
- Gujarat Sidhee Cement - India
- Coastal Gujarat Power Limited - India
- Mercator Lines Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Jindal Steel & Power Ltd - India
- Mintek Dendrill Indonesia
- Wilmar Investment Holdings
- Kepco SPC Power Corporation, Philippines
- Pendopo Energi Batubara - Indonesia
- The State Trading Corporation of India Ltd
- Iligan Light & Power Inc, Philippines
- SMG Consultants - Indonesia
- Minerals Council of Australia
- Aboitiz Power Corporation - Philippines
- Price Waterhouse Coopers - Russia
- Kalimantan Lumbung Energi - Indonesia
- Petron Corporation, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Power Finance Corporation Ltd., India
- Gujarat Electricity Regulatory Commission - India
- Orica Australia Pty. Ltd.
- AsiaOL BioFuels Corp., Philippines
- Bhatia International Limited - India
- Ambuja Cements Ltd - India
- VISA Power Limited - India
- Baramulti Group, Indonesia
- Kideco Jaya Agung - Indonesia
- Energy Development Corp, Philippines
- Straits Asia Resources Limited - Singapore
- Barasentosa Lestari - Indonesia
- The University of Queensland
- Jaiprakash Power Ventures ltd
- Samtan Co., Ltd - South Korea
- Ministry of Mines - Canada
- SN Aboitiz Power Inc, Philippines
- Semirara Mining Corp, Philippines
- Formosa Plastics Group - Taiwan
- Holcim Trading Pte Ltd - Singapore
- Antam Resourcindo - Indonesia
- Meralco Power Generation, Philippines
- London Commodity Brokers - England
- San Jose City I Power Corp, Philippines
- Jorong Barutama Greston.PT - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Dalmia Cement Bharat India
- Asmin Koalindo Tuhup - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Sojitz Corporation - Japan
- CNBM International Corporation - China
- LBH Netherlands Bv - Netherlands
- Electricity Generating Authority of Thailand
- Cement Manufacturers Association - India
- ASAPP Information Group - India
- MS Steel International - UAE
- Sical Logistics Limited - India
- Merrill Lynch Commodities Europe
- Standard Chartered Bank - UAE
- Attock Cement Pakistan Limited
- Siam City Cement - Thailand
- Kumho Petrochemical, South Korea
- Bahari Cakrawala Sebuku - Indonesia
- Sakthi Sugars Limited - India
- Chamber of Mines of South Africa
- Madhucon Powers Ltd - India
- Indo Tambangraya Megah - Indonesia
- Indian Oil Corporation Limited
- Altura Mining Limited, Indonesia
- Singapore Mercantile Exchange
- Maharashtra Electricity Regulatory Commission - India
- Toyota Tsusho Corporation, Japan
- Energy Link Ltd, New Zealand
- Ceylon Electricity Board - Sri Lanka
- Carbofer General Trading SA - India
- Neyveli Lignite Corporation Ltd, - India
- Tata Chemicals Ltd - India
- Siam City Cement PLC, Thailand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Planning Commission, India
- Coalindo Energy - Indonesia
- Sarangani Energy Corporation, Philippines
- The Treasury - Australian Government
- Karaikal Port Pvt Ltd - India
- Cigading International Bulk Terminal - Indonesia
- GMR Energy Limited - India
- Romanian Commodities Exchange
- Lanco Infratech Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Mercuria Energy - Indonesia
- PNOC Exploration Corporation - Philippines
- Indogreen Group - Indonesia
- Ministry of Transport, Egypt
- PetroVietnam Power Coal Import and Supply Company
- Maheswari Brothers Coal Limited - India
- Borneo Indobara - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Australian Coal Association
- Rashtriya Ispat Nigam Limited - India
- Billiton Holdings Pty Ltd - Australia
- Salva Resources Pvt Ltd - India
- Latin American Coal - Colombia
- Economic Council, Georgia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Kartika Selabumi Mining - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Indian Energy Exchange, India
- Krishnapatnam Port Company Ltd. - India
- McConnell Dowell - Australia
- Bulk Trading Sa - Switzerland
- Ind-Barath Power Infra Limited - India
- Global Green Power PLC Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Thiess Contractors Indonesia
- Sree Jayajothi Cements Limited - India
- Meenaskhi Energy Private Limited - India
- Leighton Contractors Pty Ltd - Australia
- Oldendorff Carriers - Singapore
- Kaltim Prima Coal - Indonesia
- Essar Steel Hazira Ltd - India
- Agrawal Coal Company - India
- Binh Thuan Hamico - Vietnam
- Independent Power Producers Association of India
- Central Java Power - Indonesia
- New Zealand Coal & Carbon
- Coal and Oil Company - UAE
- Thai Mozambique Logistica
- CIMB Investment Bank - Malaysia
- Vedanta Resources Plc - India
- Posco Energy - South Korea
- Riau Bara Harum - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Interocean Group of Companies - India
- Aditya Birla Group - India
- Malabar Cements Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
- Bayan Resources Tbk. - Indonesia
- Wood Mackenzie - Singapore
- Port Waratah Coal Services - Australia
- SMC Global Power, Philippines
- IEA Clean Coal Centre - UK
- Eastern Coal Council - USA
- Africa Commodities Group - South Africa
- Edison Trading Spa - Italy
- European Bulk Services B.V. - Netherlands
- Larsen & Toubro Limited - India
- GAC Shipping (India) Pvt Ltd
- Eastern Energy - Thailand
- Tamil Nadu electricity Board
- Mjunction Services Limited - India
- India Bulls Power Limited - India
- TNB Fuel Sdn Bhd - Malaysia
- Therma Luzon, Inc, Philippines
- Commonwealth Bank - Australia
- Savvy Resources Ltd - HongKong
- PTC India Limited - India
- Alfred C Toepfer International GmbH - Germany
- IHS Mccloskey Coal Group - USA
- Orica Mining Services - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Intertek Mineral Services - Indonesia
- Global Business Power Corporation, Philippines
- Central Electricity Authority - India
- Simpson Spence & Young - Indonesia
- GVK Power & Infra Limited - India
- Manunggal Multi Energi - Indonesia
- Indika Energy - Indonesia
- Makarim & Taira - Indonesia
- Uttam Galva Steels Limited - India
- Bhushan Steel Limited - India
- Kapuas Tunggal Persada - Indonesia
- Banpu Public Company Limited - Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Sinarmas Energy and Mining - Indonesia
- Xindia Steels Limited - India
- ICICI Bank Limited - India
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