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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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Saturday, 15 October 11
BUNKER PRICES AND DEMANDS PUSHED FREIGHT RATES UP - VISTAAR
COALspot.com - The market continued to be firm with all segments moving up with biggest gain in Handy size segment up by 15 pct. The BDI was u ...
Saturday, 15 October 11
BENGAL COAL IMPORT TEST - THE TELEGRAPH
The Telegraph reported that, the power position in Bengal improved today but alarm bells are ringing over imported coal stocks that are running out ...
Friday, 14 October 11
CAPE DERIVATIVES MARKET HAS NOT REFLECTED OWNERS EXPECTATIONS' - FEARNBULK
Handy
The Atlantic market continued its upward trend, with fresh cargo entering the market. Skaw Passero to US Gulf climbed US$ 1500 from la ...
Friday, 14 October 11
ADARO BUYS SERVO MEDA FOR RP200 BIO - INSIDER STORIES
Insider Stories reported that, PT Adaro Energy Tbk (ADRO) announced that its subsidiary PT Alam Tri Abadi (ATI), acquired 35% stake in PT Serv ...
Thursday, 13 October 11
DRY BULK MARKETS RALLY CONTINUES, BUT ANALYSTS WARN IT WILL BE SHORTLIVED - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market continued its push forward yesterday, for yet another session, as the BDI (Baltic Dry Index), the industry’s benchmark edg ...
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- Billiton Holdings Pty Ltd - Australia
- Parliament of New Zealand
- Thai Mozambique Logistica
- Formosa Plastics Group - Taiwan
- OPG Power Generation Pvt Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Vedanta Resources Plc - India
- Orica Mining Services - Indonesia
- Port Waratah Coal Services - Australia
- Ministry of Mines - Canada
- ASAPP Information Group - India
- TeaM Sual Corporation - Philippines
- Mintek Dendrill Indonesia
- Cigading International Bulk Terminal - Indonesia
- Salva Resources Pvt Ltd - India
- Mjunction Services Limited - India
- Sindya Power Generating Company Private Ltd
- Semirara Mining Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- Commonwealth Bank - Australia
- Wilmar Investment Holdings
- Lanco Infratech Ltd - India
- The University of Queensland
- Toyota Tsusho Corporation, Japan
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhoruka Overseas - Indonesia
- Sree Jayajothi Cements Limited - India
- Ministry of Finance - Indonesia
- Kumho Petrochemical, South Korea
- Bukit Asam (Persero) Tbk - Indonesia
- Jindal Steel & Power Ltd - India
- Kideco Jaya Agung - Indonesia
- Manunggal Multi Energi - Indonesia
- Australian Coal Association
- Latin American Coal - Colombia
- Jorong Barutama Greston.PT - Indonesia
- Standard Chartered Bank - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Metalloyd Limited - United Kingdom
- Ind-Barath Power Infra Limited - India
- AsiaOL BioFuels Corp., Philippines
- Indo Tambangraya Megah - Indonesia
- Indian Oil Corporation Limited
- Karaikal Port Pvt Ltd - India
- Miang Besar Coal Terminal - Indonesia
- Coalindo Energy - Indonesia
- Petron Corporation, Philippines
- Kobexindo Tractors - Indoneisa
- Bayan Resources Tbk. - Indonesia
- Carbofer General Trading SA - India
- CNBM International Corporation - China
- Neyveli Lignite Corporation Ltd, - India
- Thiess Contractors Indonesia
- Deloitte Consulting - India
- Ceylon Electricity Board - Sri Lanka
- Aboitiz Power Corporation - Philippines
- Attock Cement Pakistan Limited
- Coastal Gujarat Power Limited - India
- Africa Commodities Group - South Africa
- Chettinad Cement Corporation Ltd - India
- The State Trading Corporation of India Ltd
- Makarim & Taira - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Orica Australia Pty. Ltd.
- Kepco SPC Power Corporation, Philippines
- Planning Commission, India
- Global Coal Blending Company Limited - Australia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Parry Sugars Refinery, India
- PetroVietnam Power Coal Import and Supply Company
- Power Finance Corporation Ltd., India
- Romanian Commodities Exchange
- Timah Investasi Mineral - Indoneisa
- Kaltim Prima Coal - Indonesia
- Electricity Generating Authority of Thailand
- IHS Mccloskey Coal Group - USA
- Wood Mackenzie - Singapore
- Bhatia International Limited - India
- Pendopo Energi Batubara - Indonesia
- Bukit Makmur.PT - Indonesia
- Therma Luzon, Inc, Philippines
- Price Waterhouse Coopers - Russia
- Videocon Industries ltd - India
- Krishnapatnam Port Company Ltd. - India
- Vizag Seaport Private Limited - India
- Tamil Nadu electricity Board
- Mercator Lines Limited - India
- Bhushan Steel Limited - India
- Holcim Trading Pte Ltd - Singapore
- Larsen & Toubro Limited - India
- Mercuria Energy - Indonesia
- Ambuja Cements Ltd - India
- Indika Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Agrawal Coal Company - India
- IEA Clean Coal Centre - UK
- CIMB Investment Bank - Malaysia
- Star Paper Mills Limited - India
- Sojitz Corporation - Japan
- Barasentosa Lestari - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Heidelberg Cement - Germany
- Altura Mining Limited, Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Bulk Trading Sa - Switzerland
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Electricity Authority, New Zealand
- Iligan Light & Power Inc, Philippines
- White Energy Company Limited
- PowerSource Philippines DevCo
- Xindia Steels Limited - India
- Gujarat Electricity Regulatory Commission - India
- Medco Energi Mining Internasional
- MS Steel International - UAE
- Maheswari Brothers Coal Limited - India
- Georgia Ports Authority, United States
- McConnell Dowell - Australia
- Ministry of Transport, Egypt
- Meralco Power Generation, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Oldendorff Carriers - Singapore
- PNOC Exploration Corporation - Philippines
- Energy Link Ltd, New Zealand
- SN Aboitiz Power Inc, Philippines
- Directorate Of Revenue Intelligence - India
- Pipit Mutiara Jaya. PT, Indonesia
- Aditya Birla Group - India
- New Zealand Coal & Carbon
- Goldman Sachs - Singapore
- Trasteel International SA, Italy
- Siam City Cement - Thailand
- Posco Energy - South Korea
- Bangladesh Power Developement Board
- Edison Trading Spa - Italy
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- London Commodity Brokers - England
- Intertek Mineral Services - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Simpson Spence & Young - Indonesia
- Banpu Public Company Limited - Thailand
- Rashtriya Ispat Nigam Limited - India
- Malabar Cements Ltd - India
- Rio Tinto Coal - Australia
- SMG Consultants - Indonesia
- Globalindo Alam Lestari - Indonesia
- Essar Steel Hazira Ltd - India
- Madhucon Powers Ltd - India
- Eastern Coal Council - USA
- Tata Chemicals Ltd - India
- Maharashtra Electricity Regulatory Commission - India
- Sarangani Energy Corporation, Philippines
- Grasim Industreis Ltd - India
- ICICI Bank Limited - India
- Savvy Resources Ltd - HongKong
- Coal and Oil Company - UAE
- Kalimantan Lumbung Energi - Indonesia
- SMC Global Power, Philippines
- Eastern Energy - Thailand
- Energy Development Corp, Philippines
- Anglo American - United Kingdom
- Bukit Baiduri Energy - Indonesia
- South Luzon Thermal Energy Corporation
- Antam Resourcindo - Indonesia
- GMR Energy Limited - India
- Straits Asia Resources Limited - Singapore
- The Treasury - Australian Government
- Petrochimia International Co. Ltd.- Taiwan
- Asmin Koalindo Tuhup - Indonesia
- Renaissance Capital - South Africa
- European Bulk Services B.V. - Netherlands
- Independent Power Producers Association of India
- Economic Council, Georgia
- Samtan Co., Ltd - South Korea
- Global Business Power Corporation, Philippines
- Siam City Cement PLC, Thailand
- Riau Bara Harum - Indonesia
- Indogreen Group - Indonesia
- Sakthi Sugars Limited - India
- Gujarat Mineral Development Corp Ltd - India
- PTC India Limited - India
- Marubeni Corporation - India
- India Bulls Power Limited - India
- Kartika Selabumi Mining - Indonesia
- Indonesian Coal Mining Association
- Indian Energy Exchange, India
- Interocean Group of Companies - India
- Jaiprakash Power Ventures ltd
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Australian Commodity Traders Exchange
- Borneo Indobara - Indonesia
- San Jose City I Power Corp, Philippines
- Bharathi Cement Corporation - India
- Merrill Lynch Commodities Europe
- GVK Power & Infra Limited - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Chamber of Mines of South Africa
- LBH Netherlands Bv - Netherlands
- Uttam Galva Steels Limited - India
- Global Green Power PLC Corporation, Philippines
- VISA Power Limited - India
- Sical Logistics Limited - India
- Binh Thuan Hamico - Vietnam
- Central Electricity Authority - India
- GAC Shipping (India) Pvt Ltd
- Cement Manufacturers Association - India
- Vijayanagar Sugar Pvt Ltd - India
- Singapore Mercantile Exchange
- Meenaskhi Energy Private Limited - India
- Central Java Power - Indonesia
- International Coal Ventures Pvt Ltd - India
- Baramulti Group, Indonesia
- Minerals Council of Australia
- Gujarat Sidhee Cement - India
- Dalmia Cement Bharat India
- TNB Fuel Sdn Bhd - Malaysia
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