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Thursday, 29 September 11
INDONESIA'S MINERS FACE AN UNCERTAIN FUTURE - RUPERT WALKER
 An evolving regulatory framework for the country's minerals industry could threaten its profitability and stifle investment.
The five-year surge in commodity prices has been kind to Indonesia. Certainly, there were shocks to both prices and volumes in late 2008, but the wealth created by the country's primary exports during that period has been sufficient to sustain its economic growth and underpin domestic consumption.
It has also given support to a resurgence of nationalist sentiment, reflected in legislation and the formation and implementation of new regulations. Understandably for a country that is growing more affluent and catching up with its regional neighbours, Indonesia no longer intends to be simply a repository for other countries' raw materials inputs. Instead, it plans to exploit its resources for its own burgeoning industrial and manufacturing base.
Also, as Indonesia's energy policy moves toward greater domestic coal usage, producers will be forced to negotiate new contracts at official prices with local buyers.
Earlier this year, the government said that it will ban exports of raw commodities by 2014. Miners would need to build smelters to add value to exports. For instance, ferronickel rather than the raw metal would be exported and coal would have to be blended to reach 5,600 kilo calories before it could be sold abroad.
The catalyst for the shift was the 2009 Mining Law which replaced the "Contract of Work" and "Coal Contract of Work" system in use since 1967. The aim is to stimulate the development of the country's mineral resources and help support broader-based economic growth. The 2009 act provides a basic framework, but government regulations from later that year, and in 2010, provided some clarity and are now expected to gather pace.
However, there are worries that the law will backfire and that these regulations will stifle future investment and damage the existing operations of Indonesia's miners.
"Indonesia's mining industry is undergoing a regulatory overhaul that is likely to weaken the operating and financial performance of domestic mining companies," warned Standard and Poor's Xavier Jean.
Standard & Poor’s argued in a report issued this summer that besides increasing operating uncertainty for Indonesian mining companies, the new regulations may also make the industry less attractive to foreign investors.
For instance, the mining law states that several government and ministerial regulations will need to be issued before its impact can be understood. There are also conflicts between mining operations and forestry regulations, overlapping authority between central and local governments and contradictory tax rules. Indeed, "a more clear legal framework would give investors more assurance about the predictability of policies," agreed Wellian Wiranto, Asia economist at HSBC, in a July research report. But he said he hoped that the evolving regulations "will only be implemented after intense feedback from industry players".
Domestic market obligations
It is likely some of the feedback will be about who bears an inordinate share of the burden. Some market participants note, for example, that the provisions on domestic market obligation (DMO) and reference pricing, where miners must sell a portion of the production domestically at a minimum reference price before exporting, will affect coal producers more than metals producers because the domestic demand for coal is higher than for metal ore. Given current and expected domestic coal consumption trends, Standard & Poor's estimated that the DMO could average 20% to 25% of the industry's annual coal production during the next five years, although this proportion could increase above 30% as Indonesia shifts its domestic energy mix from oil to coal during the next decade.
DMO and minimum reference price regulations could increase uncertainty about revenues and cash flows. If reference prices are set too low, it could lower the revenues for producers (given the lack of a domestic competitive market), reduce margins, and increase opportunity costs. If they are too high, they could hurt the government-owned electricity generator Perusahaan Listrik Negara (PLN), the largest domestic coal buyer, and hence make coal producers vulnerable to customer concentration risk.
Worst affected among coal miners will be those with small domestic sales because they will need to negotiate local contracts from scratch and rapidly increase local sales to meet regulatory requirements. Bayan Resources, with 2% of domestic sales last year, could fall into this category, and even Bumi Resources, whose domestic sales have been historically around 10%, might be exposed.
Meanwhile, miners now negotiating off-take contracts with PLN will be vulnerable to price risk. For example, Bukit Asam generated 64% of its revenues domestically in 2010 and is currently in negotiation for an off-take contract with PLN for 265 million tonnes of coal during the next 20 years.
Although the mining law grandfathers existing coal contracts of work, these new regulations will apply to both existing contracts and prospective mining investments. As S&P's Jean pointed out: "the provisions on DMO and reference pricing [and] domestic market processing...are likely to have the greatest impact on the Indonesian mining sector."
But, Standard & Poor's expects the government will take a few years "to calibrate the pricing system and balance producers' and consumers' interests", based on the experience from the implementation of oil and gas DMO in Indonesia. The regulatory environment is still evolving, after all, so when rules are ultimately enforced they tend to look different from their original forms.
A salutary warning
The allusion to Indonesia's oil industry is pertinent, however. The country was a substantial oil exporter until turning into an importer in 2004, and then finally leaving Opec in 2009.
Analysts blame a lack of investment in oil exploration. In the 1990s, Indonesia pumped out more than 1.5 million barrels a day; this year the average daily output is 916,000, well below the government's target of 970,000, according to HSBC's Wiranto. The World Bank calculated that investment in oil exploration is now less than half the $1 billion spent each year before the Asian financial crisis in the late 1990s.
Wiranto pointed out that Indonesia's resource riches are simply not matched by investment conditions in the commodity sector. He referred to a survey of international mining companies by the Fraser Institute that found that the "perceived lack of transparency in the legal process and the risk of regulatory duplication and inconsistencies continue to act as deterrents to more substantial investment".
Indonesia's production-to-reserves ratio for coal and copper is half that of its competitors (Australia, Chile and China), according to the World Bank. A poor investment environment could mean that the country's proven mineral resources are actually vastly underestimated.
So, it would be a pity if regulatory uncertainty and onerous obligations again prevent Indonesia from fully exploiting the benefits of its natural riches. Especially, given the laws were introduced to spur growth not cripple an industry. (By Rupert Walker)
About Rupert Walker
Rupert Walker is a senior writer and has been a financial journalist based in Hong Kong for three years. Previously he was employed by Asiamoney, and has written for various magazines and newspapers on assignments in Central Europe, Russia and Africa. Rupert was also a fund manager in London – investing in emerging markets for Govett Investment, working in capital markets for SG Warburg and Goldman Sachs, and setting up a capital markets business in Singapore for NatWest. He has a BA/MA in Modern History from Keble College, Oxford University and an MA in Anthropology from SOAS, London University. He is also a CFA charterholder.
This story was first published in FinanceAsia
The views and opinions / conclusion expressed on this article is purely the writers’ own.
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Wednesday, 19 October 11
ADARO ACQUIRES BUKIT ENIM ENERGI - INSIDER STORIES
Insider Stories reported that, Coal miner PT Adaro Energy Tbk, via its subsidiary dubbed PT Alam Tri Abadi, today revealed a 46% stake takeover of a ...
Tuesday, 18 October 11
INDONESIAN PRESIDENT APPOINTS JERO WACIK AS NEW MINISTER OF ENERGY & MINERAL RESOURCES
COALspot.com - Jero Wacik has been appointed as minister of energy and mineral resources of Indonesia replacing Darwin Saleh and Prof. Widjajono Par ...
Tuesday, 18 October 11
DELTA DUNIA MAKMUR HAS PRODUCED 3.0 MILLION TONS OF COAL LAST MONTH
COALspot.com - PT. Delta Dunia Makmur, wholly owned subsidiary, PT Bukit Makmur Mandiri Utama (BUMA), Delta Dunia Makmur has removed 1.4 million bcm ...
Monday, 17 October 11
KOWEPO TO BUY 260,000 MT BITUMINOUS COAL
COALspot.com - KOWEPO has issued a spot tender for 260,000MT of minimum 5,600kcal/kg NAR Bituminous Coal.
The tender document also mentioned tha ...
Monday, 17 October 11
CAPESIZE SHIPPING COSTS CLIMB TO 10-MONTH HIGH ON ORE IMPORTS
The cost to hire capesize vessels climbed to a 10-month high as rising imports of iron ore to China boosted demand for the ships.Monthly iron-ore sh ...
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- IHS Mccloskey Coal Group - USA
- Mercator Lines Limited - India
- International Coal Ventures Pvt Ltd - India
- Ministry of Finance - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Altura Mining Limited, Indonesia
- Posco Energy - South Korea
- Parry Sugars Refinery, India
- Directorate General of MIneral and Coal - Indonesia
- Ind-Barath Power Infra Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Xindia Steels Limited - India
- Carbofer General Trading SA - India
- Globalindo Alam Lestari - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- European Bulk Services B.V. - Netherlands
- Formosa Plastics Group - Taiwan
- The University of Queensland
- IEA Clean Coal Centre - UK
- Sindya Power Generating Company Private Ltd
- Romanian Commodities Exchange
- South Luzon Thermal Energy Corporation
- Karbindo Abesyapradhi - Indoneisa
- Maheswari Brothers Coal Limited - India
- Bhushan Steel Limited - India
- Kepco SPC Power Corporation, Philippines
- Cigading International Bulk Terminal - Indonesia
- Straits Asia Resources Limited - Singapore
- Attock Cement Pakistan Limited
- Orica Australia Pty. Ltd.
- Miang Besar Coal Terminal - Indonesia
- Leighton Contractors Pty Ltd - Australia
- TNB Fuel Sdn Bhd - Malaysia
- Neyveli Lignite Corporation Ltd, - India
- Madhucon Powers Ltd - India
- Pipit Mutiara Jaya. PT, Indonesia
- Marubeni Corporation - India
- Vedanta Resources Plc - India
- Independent Power Producers Association of India
- McConnell Dowell - Australia
- Jorong Barutama Greston.PT - Indonesia
- The State Trading Corporation of India Ltd
- Global Coal Blending Company Limited - Australia
- Sical Logistics Limited - India
- Semirara Mining Corp, Philippines
- India Bulls Power Limited - India
- Savvy Resources Ltd - HongKong
- Riau Bara Harum - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Karaikal Port Pvt Ltd - India
- Heidelberg Cement - Germany
- Wilmar Investment Holdings
- Grasim Industreis Ltd - India
- White Energy Company Limited
- Bangladesh Power Developement Board
- Oldendorff Carriers - Singapore
- Kideco Jaya Agung - Indonesia
- Intertek Mineral Services - Indonesia
- Bulk Trading Sa - Switzerland
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Malabar Cements Ltd - India
- Coastal Gujarat Power Limited - India
- Aboitiz Power Corporation - Philippines
- Bhoruka Overseas - Indonesia
- Toyota Tsusho Corporation, Japan
- Indika Energy - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Alfred C Toepfer International GmbH - Germany
- Georgia Ports Authority, United States
- Gujarat Electricity Regulatory Commission - India
- Central Electricity Authority - India
- Makarim & Taira - Indonesia
- PTC India Limited - India
- Meralco Power Generation, Philippines
- Eastern Energy - Thailand
- Uttam Galva Steels Limited - India
- Singapore Mercantile Exchange
- Manunggal Multi Energi - Indonesia
- Central Java Power - Indonesia
- Billiton Holdings Pty Ltd - Australia
- Price Waterhouse Coopers - Russia
- Mercuria Energy - Indonesia
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Electricity Authority, New Zealand
- Orica Mining Services - Indonesia
- Baramulti Group, Indonesia
- TeaM Sual Corporation - Philippines
- Kaltim Prima Coal - Indonesia
- Simpson Spence & Young - Indonesia
- SMG Consultants - Indonesia
- Australian Coal Association
- Tata Chemicals Ltd - India
- Rio Tinto Coal - Australia
- Bukit Baiduri Energy - Indonesia
- Global Green Power PLC Corporation, Philippines
- Indogreen Group - Indonesia
- Ministry of Mines - Canada
- VISA Power Limited - India
- Wood Mackenzie - Singapore
- Commonwealth Bank - Australia
- Bhatia International Limited - India
- Electricity Generating Authority of Thailand
- Kobexindo Tractors - Indoneisa
- Parliament of New Zealand
- Maharashtra Electricity Regulatory Commission - India
- Chamber of Mines of South Africa
- Meenaskhi Energy Private Limited - India
- Africa Commodities Group - South Africa
- Star Paper Mills Limited - India
- Sarangani Energy Corporation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Metalloyd Limited - United Kingdom
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Asmin Koalindo Tuhup - Indonesia
- Coal and Oil Company - UAE
- Cement Manufacturers Association - India
- Barasentosa Lestari - Indonesia
- The Treasury - Australian Government
- Bukit Makmur.PT - Indonesia
- Renaissance Capital - South Africa
- Essar Steel Hazira Ltd - India
- Tamil Nadu electricity Board
- Petrochimia International Co. Ltd.- Taiwan
- San Jose City I Power Corp, Philippines
- Indian Oil Corporation Limited
- Ambuja Cements Ltd - India
- Binh Thuan Hamico - Vietnam
- CIMB Investment Bank - Malaysia
- Trasteel International SA, Italy
- LBH Netherlands Bv - Netherlands
- Banpu Public Company Limited - Thailand
- Agrawal Coal Company - India
- PNOC Exploration Corporation - Philippines
- GAC Shipping (India) Pvt Ltd
- Chettinad Cement Corporation Ltd - India
- Iligan Light & Power Inc, Philippines
- Larsen & Toubro Limited - India
- Ministry of Transport, Egypt
- Coalindo Energy - Indonesia
- Global Business Power Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Thiess Contractors Indonesia
- Interocean Group of Companies - India
- Kumho Petrochemical, South Korea
- Energy Development Corp, Philippines
- Planning Commission, India
- SN Aboitiz Power Inc, Philippines
- Kapuas Tunggal Persada - Indonesia
- Salva Resources Pvt Ltd - India
- Borneo Indobara - Indonesia
- PowerSource Philippines DevCo
- Sree Jayajothi Cements Limited - India
- Ceylon Electricity Board - Sri Lanka
- SMC Global Power, Philippines
- Indonesian Coal Mining Association
- CNBM International Corporation - China
- Kartika Selabumi Mining - Indonesia
- Latin American Coal - Colombia
- Petron Corporation, Philippines
- Goldman Sachs - Singapore
- Indian Energy Exchange, India
- Kalimantan Lumbung Energi - Indonesia
- Minerals Council of Australia
- Pendopo Energi Batubara - Indonesia
- OPG Power Generation Pvt Ltd - India
- Standard Chartered Bank - UAE
- Deloitte Consulting - India
- Indo Tambangraya Megah - Indonesia
- Videocon Industries ltd - India
- Gujarat Sidhee Cement - India
- Antam Resourcindo - Indonesia
- Sojitz Corporation - Japan
- Jindal Steel & Power Ltd - India
- Bayan Resources Tbk. - Indonesia
- London Commodity Brokers - England
- Timah Investasi Mineral - Indoneisa
- Krishnapatnam Port Company Ltd. - India
- Anglo American - United Kingdom
- Mjunction Services Limited - India
- Vizag Seaport Private Limited - India
- GVK Power & Infra Limited - India
- Port Waratah Coal Services - Australia
- Lanco Infratech Ltd - India
- Merrill Lynch Commodities Europe
- Siam City Cement - Thailand
- ICICI Bank Limited - India
- MS Steel International - UAE
- Rashtriya Ispat Nigam Limited - India
- Medco Energi Mining Internasional
- New Zealand Coal & Carbon
- Eastern Coal Council - USA
- Gujarat Mineral Development Corp Ltd - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- PetroVietnam Power Coal Import and Supply Company
- Economic Council, Georgia
- Semirara Mining and Power Corporation, Philippines
- Samtan Co., Ltd - South Korea
- Thai Mozambique Logistica
- AsiaOL BioFuels Corp., Philippines
- Sakthi Sugars Limited - India
- Aditya Birla Group - India
- GMR Energy Limited - India
- Jaiprakash Power Ventures ltd
- Bank of Tokyo Mitsubishi UFJ Ltd
- Directorate Of Revenue Intelligence - India
- Australian Commodity Traders Exchange
- Siam City Cement PLC, Thailand
- Power Finance Corporation Ltd., India
- Energy Link Ltd, New Zealand
- Bharathi Cement Corporation - India
- Edison Trading Spa - Italy
- Dalmia Cement Bharat India
- Sinarmas Energy and Mining - Indonesia
- ASAPP Information Group - India
- Mintek Dendrill Indonesia
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