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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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Monday, 10 October 11
MOZAMBIQUE CHANNEL TO BE THE NEW PIRACY HOTSPOT FOR THIS YEAR SAYS MARITIME SECURITY EXPERT - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The Mozambique Channel, as well as the entrance to the Persian Gulf, are expected to become some of the new pirate hotspots for piracy, says Richard ...
Sunday, 09 October 11
FREIGHT MARKET ENDED WITH A POSITIVE DIRECTION - VISTAAR
COALspot.com - The market ended with a positive note with all the segments up except for handy size. The biggest gainer was Panamax index up by 11 p ...
Saturday, 08 October 11
INDONESIAN MINER PLANS $167M IPO TO FUEL SUMATRA COAL BOOM - JG
The Jakarta Globe reported that, coal miner Atlas Resources aims to raise as much as Rp 1.5 trillion ($167 million) in an initial public offering to ...
Friday, 07 October 11
MINING REGULATIONS , OBSTACLES AND GROWTH : INDIA VS INDONESIA - SUNIL K KUMBHAT
COALspot.com - The Govt of India has passed long pending Mines & Minerals (Regulation and Development) Bill, 2011, which seeks to replace ...
Friday, 07 October 11
$100M FOR EXPANSION INTO KALIMANTAN MINING: AKR
The Jakarta Globe, one of the leading English news paper in Indonesia reported that, AKR Corporindo, a fuel and chemical distributor, has set aside ...
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- Aboitiz Power Corporation - Philippines
- Singapore Mercantile Exchange
- Wood Mackenzie - Singapore
- Central Electricity Authority - India
- Indian Energy Exchange, India
- Miang Besar Coal Terminal - Indonesia
- Kumho Petrochemical, South Korea
- Commonwealth Bank - Australia
- Mercator Lines Limited - India
- Global Business Power Corporation, Philippines
- Coalindo Energy - Indonesia
- The State Trading Corporation of India Ltd
- CNBM International Corporation - China
- Makarim & Taira - Indonesia
- Siam City Cement - Thailand
- Ceylon Electricity Board - Sri Lanka
- PowerSource Philippines DevCo
- Timah Investasi Mineral - Indoneisa
- GVK Power & Infra Limited - India
- Xindia Steels Limited - India
- Indika Energy - Indonesia
- Port Waratah Coal Services - Australia
- Karbindo Abesyapradhi - Indoneisa
- Jorong Barutama Greston.PT - Indonesia
- IHS Mccloskey Coal Group - USA
- Chettinad Cement Corporation Ltd - India
- Bayan Resources Tbk. - Indonesia
- Semirara Mining and Power Corporation, Philippines
- Sakthi Sugars Limited - India
- Mjunction Services Limited - India
- Riau Bara Harum - Indonesia
- Renaissance Capital - South Africa
- Pendopo Energi Batubara - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Economic Council, Georgia
- PetroVietnam Power Coal Import and Supply Company
- Essar Steel Hazira Ltd - India
- Bukit Makmur.PT - Indonesia
- Goldman Sachs - Singapore
- The University of Queensland
- Coal and Oil Company - UAE
- Altura Mining Limited, Indonesia
- Australian Coal Association
- CIMB Investment Bank - Malaysia
- White Energy Company Limited
- Eastern Coal Council - USA
- Electricity Generating Authority of Thailand
- Carbofer General Trading SA - India
- SMC Global Power, Philippines
- Thiess Contractors Indonesia
- Sarangani Energy Corporation, Philippines
- Borneo Indobara - Indonesia
- Global Coal Blending Company Limited - Australia
- Mintek Dendrill Indonesia
- GN Power Mariveles Coal Plant, Philippines
- The Treasury - Australian Government
- Manunggal Multi Energi - Indonesia
- Savvy Resources Ltd - HongKong
- Kapuas Tunggal Persada - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Posco Energy - South Korea
- Barasentosa Lestari - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Rio Tinto Coal - Australia
- Electricity Authority, New Zealand
- Binh Thuan Hamico - Vietnam
- Eastern Energy - Thailand
- Siam City Cement PLC, Thailand
- Samtan Co., Ltd - South Korea
- Bhatia International Limited - India
- Energy Link Ltd, New Zealand
- ASAPP Information Group - India
- Metalloyd Limited - United Kingdom
- Petron Corporation, Philippines
- Heidelberg Cement - Germany
- Minerals Council of Australia
- Billiton Holdings Pty Ltd - Australia
- Bhoruka Overseas - Indonesia
- Sindya Power Generating Company Private Ltd
- Jindal Steel & Power Ltd - India
- Semirara Mining Corp, Philippines
- MS Steel International - UAE
- Ind-Barath Power Infra Limited - India
- Anglo American - United Kingdom
- ICICI Bank Limited - India
- Kepco SPC Power Corporation, Philippines
- Ministry of Transport, Egypt
- Tata Chemicals Ltd - India
- PTC India Limited - India
- Ministry of Finance - Indonesia
- Merrill Lynch Commodities Europe
- Agrawal Coal Company - India
- San Jose City I Power Corp, Philippines
- Antam Resourcindo - Indonesia
- Globalindo Alam Lestari - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Banpu Public Company Limited - Thailand
- Vizag Seaport Private Limited - India
- Dalmia Cement Bharat India
- Alfred C Toepfer International GmbH - Germany
- Global Green Power PLC Corporation, Philippines
- Grasim Industreis Ltd - India
- Standard Chartered Bank - UAE
- Medco Energi Mining Internasional
- Parliament of New Zealand
- Planning Commission, India
- Vijayanagar Sugar Pvt Ltd - India
- OPG Power Generation Pvt Ltd - India
- Uttam Galva Steels Limited - India
- Intertek Mineral Services - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Trasteel International SA, Italy
- Toyota Tsusho Corporation, Japan
- Sojitz Corporation - Japan
- McConnell Dowell - Australia
- New Zealand Coal & Carbon
- Georgia Ports Authority, United States
- IEA Clean Coal Centre - UK
- Gujarat Electricity Regulatory Commission - India
- Chamber of Mines of South Africa
- Meralco Power Generation, Philippines
- Kobexindo Tractors - Indoneisa
- Sical Logistics Limited - India
- Indonesian Coal Mining Association
- Bank of Tokyo Mitsubishi UFJ Ltd
- European Bulk Services B.V. - Netherlands
- Indian Oil Corporation Limited
- Salva Resources Pvt Ltd - India
- Gujarat Sidhee Cement - India
- Karaikal Port Pvt Ltd - India
- Aditya Birla Group - India
- Marubeni Corporation - India
- PNOC Exploration Corporation - Philippines
- Therma Luzon, Inc, Philippines
- AsiaOL BioFuels Corp., Philippines
- Parry Sugars Refinery, India
- LBH Netherlands Bv - Netherlands
- Madhucon Powers Ltd - India
- GAC Shipping (India) Pvt Ltd
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Ambuja Cements Ltd - India
- Kaltim Prima Coal - Indonesia
- Sree Jayajothi Cements Limited - India
- Tamil Nadu electricity Board
- Power Finance Corporation Ltd., India
- Australian Commodity Traders Exchange
- Lanco Infratech Ltd - India
- Vedanta Resources Plc - India
- Ministry of Mines - Canada
- International Coal Ventures Pvt Ltd - India
- TNB Fuel Sdn Bhd - Malaysia
- Indo Tambangraya Megah - Indonesia
- India Bulls Power Limited - India
- Energy Development Corp, Philippines
- Kideco Jaya Agung - Indonesia
- Interocean Group of Companies - India
- Bahari Cakrawala Sebuku - Indonesia
- Simpson Spence & Young - Indonesia
- Meenaskhi Energy Private Limited - India
- Holcim Trading Pte Ltd - Singapore
- Mercuria Energy - Indonesia
- Central Java Power - Indonesia
- Larsen & Toubro Limited - India
- SMG Consultants - Indonesia
- Cement Manufacturers Association - India
- VISA Power Limited - India
- Videocon Industries ltd - India
- Price Waterhouse Coopers - Russia
- Rashtriya Ispat Nigam Limited - India
- Bharathi Cement Corporation - India
- Petrochimia International Co. Ltd.- Taiwan
- Malabar Cements Ltd - India
- Kartika Selabumi Mining - Indonesia
- Bulk Trading Sa - Switzerland
- Jaiprakash Power Ventures ltd
- Latin American Coal - Colombia
- Pipit Mutiara Jaya. PT, Indonesia
- Bhushan Steel Limited - India
- Orica Mining Services - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Deloitte Consulting - India
- Directorate Of Revenue Intelligence - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Formosa Plastics Group - Taiwan
- Neyveli Lignite Corporation Ltd, - India
- Maheswari Brothers Coal Limited - India
- Indogreen Group - Indonesia
- Africa Commodities Group - South Africa
- Attock Cement Pakistan Limited
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Baramulti Group, Indonesia
- Star Paper Mills Limited - India
- Romanian Commodities Exchange
- Asmin Koalindo Tuhup - Indonesia
- Iligan Light & Power Inc, Philippines
- Oldendorff Carriers - Singapore
- Orica Australia Pty. Ltd.
- Bukit Baiduri Energy - Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- GMR Energy Limited - India
- Straits Asia Resources Limited - Singapore
- London Commodity Brokers - England
- Coastal Gujarat Power Limited - India
- Bangladesh Power Developement Board
- South Luzon Thermal Energy Corporation
- SN Aboitiz Power Inc, Philippines
- Cigading International Bulk Terminal - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Wilmar Investment Holdings
- Leighton Contractors Pty Ltd - Australia
- Edison Trading Spa - Italy
- Kalimantan Lumbung Energi - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Independent Power Producers Association of India
- Thai Mozambique Logistica
- TeaM Sual Corporation - Philippines
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