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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, 09 March 12
SHIP OWNERS LOOKING TO CHINA FOR REVIVAL, WHILE THEY KEEP SELLING OLD SHIPS FOR SCRAP - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
With China’s economic policy plan for the future on every ship owner’s mind, at least those involved in the dry bulk industry, the lates ...
Thursday, 08 March 12
INDONESIA'S COAL SECTOR CAN BENEFIT FROM CLEARER REGULATIONS - FITCH RATINGS
Fitch Ratings says Indonesia's coal mining sector should continue to see strong growth prospects but can benefit from clearer and more predictable ...
Thursday, 08 March 12
DRY BULK MARKET ON THE RISE; CHINAS COAL IMPORTS COULD INCREASE - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market kept on rising back to healthier levels yesterday, with the BDI (Baltic Dry Index) the industry’s benchmark, marking its 8 ...
Wednesday, 07 March 12
INDONESIA COAL BENCHMARK PRICE GAINS FOR SECOND MONTH
COALspot.com - Indonesia raised the monthly coal reference price for sales in March by 1.15 percent, the second increase since February.
The Mini ...
Wednesday, 07 March 12
INDONESIA TO LIMIT FOREIGN OWNERSHIP IN MINES TO 49 PERCENT WITHIN 10 YEARS OF PRODUCTION
COALspot.com - Foreign holders of mining licenses in Indonesia have to divert 51% of their stakes to Indonesian government or domestic entitie ...
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Showing 4816 to 4820 news of total 6871 |
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- Straits Asia Resources Limited - Singapore
- Africa Commodities Group - South Africa
- Anglo American - United Kingdom
- New Zealand Coal & Carbon
- Electricity Authority, New Zealand
- Renaissance Capital - South Africa
- Malabar Cements Ltd - India
- Directorate Of Revenue Intelligence - India
- Gujarat Electricity Regulatory Commission - India
- Cigading International Bulk Terminal - Indonesia
- Riau Bara Harum - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- MS Steel International - UAE
- Kepco SPC Power Corporation, Philippines
- Dalmia Cement Bharat India
- ASAPP Information Group - India
- Trasteel International SA, Italy
- Economic Council, Georgia
- Mjunction Services Limited - India
- Gujarat Sidhee Cement - India
- Banpu Public Company Limited - Thailand
- Mercuria Energy - Indonesia
- Ministry of Finance - Indonesia
- San Jose City I Power Corp, Philippines
- Bangladesh Power Developement Board
- Maheswari Brothers Coal Limited - India
- Indika Energy - Indonesia
- Ministry of Transport, Egypt
- The University of Queensland
- Billiton Holdings Pty Ltd - Australia
- Indian Oil Corporation Limited
- India Bulls Power Limited - India
- Semirara Mining and Power Corporation, Philippines
- Planning Commission, India
- Kobexindo Tractors - Indoneisa
- LBH Netherlands Bv - Netherlands
- Rio Tinto Coal - Australia
- Australian Commodity Traders Exchange
- Orica Mining Services - Indonesia
- Siam City Cement - Thailand
- Mintek Dendrill Indonesia
- Vizag Seaport Private Limited - India
- Madhucon Powers Ltd - India
- Salva Resources Pvt Ltd - India
- Heidelberg Cement - Germany
- Simpson Spence & Young - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Energy Development Corp, Philippines
- Parry Sugars Refinery, India
- ICICI Bank Limited - India
- Eastern Energy - Thailand
- Rashtriya Ispat Nigam Limited - India
- Orica Australia Pty. Ltd.
- Indonesian Coal Mining Association
- Aditya Birla Group - India
- Tata Chemicals Ltd - India
- Ceylon Electricity Board - Sri Lanka
- Global Coal Blending Company Limited - Australia
- Grasim Industreis Ltd - India
- PTC India Limited - India
- Thiess Contractors Indonesia
- GAC Shipping (India) Pvt Ltd
- Oldendorff Carriers - Singapore
- Agrawal Coal Company - India
- Larsen & Toubro Limited - India
- International Coal Ventures Pvt Ltd - India
- Parliament of New Zealand
- Central Java Power - Indonesia
- Toyota Tsusho Corporation, Japan
- Altura Mining Limited, Indonesia
- Petron Corporation, Philippines
- Mercator Lines Limited - India
- Therma Luzon, Inc, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Semirara Mining Corp, Philippines
- SN Aboitiz Power Inc, Philippines
- Price Waterhouse Coopers - Russia
- Kideco Jaya Agung - Indonesia
- Latin American Coal - Colombia
- Meenaskhi Energy Private Limited - India
- GVK Power & Infra Limited - India
- Bharathi Cement Corporation - India
- Georgia Ports Authority, United States
- Offshore Bulk Terminal Pte Ltd, Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Coal and Oil Company - UAE
- Bayan Resources Tbk. - Indonesia
- Chamber of Mines of South Africa
- Wilmar Investment Holdings
- Coastal Gujarat Power Limited - India
- Antam Resourcindo - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- TeaM Sual Corporation - Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Ambuja Cements Ltd - India
- Ministry of Mines - Canada
- Indo Tambangraya Megah - Indonesia
- Interocean Group of Companies - India
- Sojitz Corporation - Japan
- Vijayanagar Sugar Pvt Ltd - India
- Aboitiz Power Corporation - Philippines
- Lanco Infratech Ltd - India
- Thai Mozambique Logistica
- Kapuas Tunggal Persada - Indonesia
- Sarangani Energy Corporation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Electricity Generating Authority of Thailand
- Central Electricity Authority - India
- Globalindo Alam Lestari - Indonesia
- Medco Energi Mining Internasional
- Baramulti Group, Indonesia
- Krishnapatnam Port Company Ltd. - India
- Power Finance Corporation Ltd., India
- Kohat Cement Company Ltd. - Pakistan
- Videocon Industries ltd - India
- Miang Besar Coal Terminal - Indonesia
- CIMB Investment Bank - Malaysia
- Bhoruka Overseas - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Barasentosa Lestari - Indonesia
- Independent Power Producers Association of India
- Deloitte Consulting - India
- Vedanta Resources Plc - India
- Coalindo Energy - Indonesia
- Merrill Lynch Commodities Europe
- Carbofer General Trading SA - India
- Samtan Co., Ltd - South Korea
- Bukit Baiduri Energy - Indonesia
- Posco Energy - South Korea
- Gujarat Mineral Development Corp Ltd - India
- Jindal Steel & Power Ltd - India
- Jaiprakash Power Ventures ltd
- Sindya Power Generating Company Private Ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Sree Jayajothi Cements Limited - India
- IEA Clean Coal Centre - UK
- Singapore Mercantile Exchange
- Pendopo Energi Batubara - Indonesia
- Bulk Trading Sa - Switzerland
- Energy Link Ltd, New Zealand
- Commonwealth Bank - Australia
- Sakthi Sugars Limited - India
- Binh Thuan Hamico - Vietnam
- Makarim & Taira - Indonesia
- Star Paper Mills Limited - India
- Formosa Plastics Group - Taiwan
- White Energy Company Limited
- Asmin Koalindo Tuhup - Indonesia
- Minerals Council of Australia
- Timah Investasi Mineral - Indoneisa
- Meralco Power Generation, Philippines
- Edison Trading Spa - Italy
- Kartika Selabumi Mining - Indonesia
- Manunggal Multi Energi - Indonesia
- Iligan Light & Power Inc, Philippines
- Sical Logistics Limited - India
- Essar Steel Hazira Ltd - India
- Uttam Galva Steels Limited - India
- Intertek Mineral Services - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Tamil Nadu electricity Board
- Pipit Mutiara Jaya. PT, Indonesia
- AsiaOL BioFuels Corp., Philippines
- Australian Coal Association
- Bukit Makmur.PT - Indonesia
- Standard Chartered Bank - UAE
- TNB Fuel Sdn Bhd - Malaysia
- Jorong Barutama Greston.PT - Indonesia
- Indogreen Group - Indonesia
- Global Business Power Corporation, Philippines
- SMG Consultants - Indonesia
- European Bulk Services B.V. - Netherlands
- Eastern Coal Council - USA
- OPG Power Generation Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Maharashtra Electricity Regulatory Commission - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- The Treasury - Australian Government
- Metalloyd Limited - United Kingdom
- Kaltim Prima Coal - Indonesia
- South Luzon Thermal Energy Corporation
- Karaikal Port Pvt Ltd - India
- Wood Mackenzie - Singapore
- Karbindo Abesyapradhi - Indoneisa
- Siam City Cement PLC, Thailand
- Attock Cement Pakistan Limited
- Kumho Petrochemical, South Korea
- Leighton Contractors Pty Ltd - Australia
- Savvy Resources Ltd - HongKong
- Bhushan Steel Limited - India
- PowerSource Philippines DevCo
- IHS Mccloskey Coal Group - USA
- Cement Manufacturers Association - India
- The State Trading Corporation of India Ltd
- Chettinad Cement Corporation Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- London Commodity Brokers - England
- Borneo Indobara - Indonesia
- Bhatia International Limited - India
- PNOC Exploration Corporation - Philippines
- Kalimantan Lumbung Energi - Indonesia
- GMR Energy Limited - India
- SMC Global Power, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Goldman Sachs - Singapore
- Neyveli Lignite Corporation Ltd, - India
- VISA Power Limited - India
- McConnell Dowell - Australia
- Romanian Commodities Exchange
- Global Green Power PLC Corporation, Philippines
- Ind-Barath Power Infra Limited - India
- Marubeni Corporation - India
- Xindia Steels Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Indian Energy Exchange, India
- CNBM International Corporation - China
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