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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, 05 October 11
WITH CHINA ON HOLIDAY, DRY BULK MARKET REMAINS STAGNANT - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market has remained to healthy levels after last month’s rally, but with China going on holiday this week, things are looking sta ...
Tuesday, 04 October 11
INDONESIA RAISES COAL BENCHMARK (HBA) FOR FIRST TIME IN 4 MONTHS
COALspot.com - Indonesia raised the monthly reference price for sales in October by 2.56 percent, the first increase since June.
The Ministry of ...
Tuesday, 04 October 11
COAL MINING GROUP WANTS EXPORT TAX, NOT EXCISE - JG
One of the leading English news paper in Indonesia, The Jakarta Globe reported that, the government shall reimpose a duty on coal exports, classifyi ...
Sunday, 02 October 11
INDIAN COAL IMPORTS PICKED UP - CAPT. REDDY
COALspot.com - The BDI dropped by 1 pct and Cape index dropped by 6 pct closing at 1,899 points and 3,136 points respectively. However all other seg ...
Saturday, 01 October 11
2012 TO BE ANOTHER CHALLENGING YEAR - CEO, REMI MARITIME
Shipowners are facing another challenging year in 2012 said Mr. Leonidas Polemis CEO of Remi Maritime Corporation, urging caution towards operating ...
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- Lanco Infratech Ltd - India
- Electricity Authority, New Zealand
- Pipit Mutiara Jaya. PT, Indonesia
- The State Trading Corporation of India Ltd
- Karbindo Abesyapradhi - Indoneisa
- Sakthi Sugars Limited - India
- Sree Jayajothi Cements Limited - India
- McConnell Dowell - Australia
- Bahari Cakrawala Sebuku - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Oldendorff Carriers - Singapore
- Siam City Cement - Thailand
- Asia Pacific Energy Resources Ventures Inc, Philippines
- GN Power Mariveles Coal Plant, Philippines
- Ceylon Electricity Board - Sri Lanka
- Energy Link Ltd, New Zealand
- Billiton Holdings Pty Ltd - Australia
- Georgia Ports Authority, United States
- San Jose City I Power Corp, Philippines
- Medco Energi Mining Internasional
- TeaM Sual Corporation - Philippines
- Eastern Coal Council - USA
- Global Green Power PLC Corporation, Philippines
- Bhushan Steel Limited - India
- Bhoruka Overseas - Indonesia
- Meralco Power Generation, Philippines
- Kalimantan Lumbung Energi - Indonesia
- Edison Trading Spa - Italy
- Essar Steel Hazira Ltd - India
- Globalindo Alam Lestari - Indonesia
- MS Steel International - UAE
- Posco Energy - South Korea
- PNOC Exploration Corporation - Philippines
- Coastal Gujarat Power Limited - India
- Gujarat Mineral Development Corp Ltd - India
- Mjunction Services Limited - India
- Aditya Birla Group - India
- Leighton Contractors Pty Ltd - Australia
- Wilmar Investment Holdings
- New Zealand Coal & Carbon
- Central Java Power - Indonesia
- International Coal Ventures Pvt Ltd - India
- PowerSource Philippines DevCo
- Deloitte Consulting - India
- India Bulls Power Limited - India
- Metalloyd Limited - United Kingdom
- Latin American Coal - Colombia
- Australian Commodity Traders Exchange
- Kobexindo Tractors - Indoneisa
- Interocean Group of Companies - India
- Anglo American - United Kingdom
- PTC India Limited - India
- Gujarat Sidhee Cement - India
- Heidelberg Cement - Germany
- CNBM International Corporation - China
- Asmin Koalindo Tuhup - Indonesia
- Port Waratah Coal Services - Australia
- Kumho Petrochemical, South Korea
- Intertek Mineral Services - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Dalmia Cement Bharat India
- AsiaOL BioFuels Corp., Philippines
- Kepco SPC Power Corporation, Philippines
- Coalindo Energy - Indonesia
- Central Electricity Authority - India
- Bharathi Cement Corporation - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Neyveli Lignite Corporation Ltd, - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Minerals Council of Australia
- Ministry of Finance - Indonesia
- Salva Resources Pvt Ltd - India
- Ministry of Transport, Egypt
- South Luzon Thermal Energy Corporation
- Vedanta Resources Plc - India
- Marubeni Corporation - India
- Gujarat Electricity Regulatory Commission - India
- White Energy Company Limited
- Indo Tambangraya Megah - Indonesia
- London Commodity Brokers - England
- Mintek Dendrill Indonesia
- Timah Investasi Mineral - Indoneisa
- Global Coal Blending Company Limited - Australia
- Indika Energy - Indonesia
- Baramulti Group, Indonesia
- Goldman Sachs - Singapore
- Electricity Generating Authority of Thailand
- Simpson Spence & Young - Indonesia
- LBH Netherlands Bv - Netherlands
- The Treasury - Australian Government
- Kartika Selabumi Mining - Indonesia
- SN Aboitiz Power Inc, Philippines
- Cement Manufacturers Association - India
- Iligan Light & Power Inc, Philippines
- Parliament of New Zealand
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indian Oil Corporation Limited
- Semirara Mining Corp, Philippines
- Alfred C Toepfer International GmbH - Germany
- GVK Power & Infra Limited - India
- Parry Sugars Refinery, India
- Sindya Power Generating Company Private Ltd
- Coal and Oil Company - UAE
- Grasim Industreis Ltd - India
- Indonesian Coal Mining Association
- Agrawal Coal Company - India
- CIMB Investment Bank - Malaysia
- Bulk Trading Sa - Switzerland
- Ambuja Cements Ltd - India
- Semirara Mining and Power Corporation, Philippines
- Sical Logistics Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Orica Australia Pty. Ltd.
- Rashtriya Ispat Nigam Limited - India
- OPG Power Generation Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Directorate General of MIneral and Coal - Indonesia
- Makarim & Taira - Indonesia
- Karaikal Port Pvt Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Tata Chemicals Ltd - India
- Formosa Plastics Group - Taiwan
- Vizag Seaport Private Limited - India
- Kapuas Tunggal Persada - Indonesia
- Economic Council, Georgia
- Petron Corporation, Philippines
- Ministry of Mines - Canada
- Independent Power Producers Association of India
- Australian Coal Association
- Banpu Public Company Limited - Thailand
- Kohat Cement Company Ltd. - Pakistan
- Samtan Co., Ltd - South Korea
- Pendopo Energi Batubara - Indonesia
- Directorate Of Revenue Intelligence - India
- Antam Resourcindo - Indonesia
- Borneo Indobara - Indonesia
- Riau Bara Harum - Indonesia
- Krishnapatnam Port Company Ltd. - India
- Mercator Lines Limited - India
- Trasteel International SA, Italy
- Toyota Tsusho Corporation, Japan
- Straits Asia Resources Limited - Singapore
- Ind-Barath Power Infra Limited - India
- Uttam Galva Steels Limited - India
- SMG Consultants - Indonesia
- Jaiprakash Power Ventures ltd
- Romanian Commodities Exchange
- Siam City Cement PLC, Thailand
- IHS Mccloskey Coal Group - USA
- Madhucon Powers Ltd - India
- Singapore Mercantile Exchange
- Meenaskhi Energy Private Limited - India
- SMC Global Power, Philippines
- Larsen & Toubro Limited - India
- Standard Chartered Bank - UAE
- Thai Mozambique Logistica
- Bayan Resources Tbk. - Indonesia
- Indogreen Group - Indonesia
- Renaissance Capital - South Africa
- Kideco Jaya Agung - Indonesia
- Manunggal Multi Energi - Indonesia
- Merrill Lynch Commodities Europe
- Offshore Bulk Terminal Pte Ltd, Singapore
- Star Paper Mills Limited - India
- Videocon Industries ltd - India
- VISA Power Limited - India
- GMR Energy Limited - India
- Kaltim Prima Coal - Indonesia
- ASAPP Information Group - India
- Price Waterhouse Coopers - Russia
- Savvy Resources Ltd - HongKong
- Chettinad Cement Corporation Ltd - India
- PetroVietnam Power Coal Import and Supply Company
- Altura Mining Limited, Indonesia
- Bhatia International Limited - India
- Planning Commission, India
- Jorong Barutama Greston.PT - Indonesia
- Bukit Baiduri Energy - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Bukit Makmur.PT - Indonesia
- Sarangani Energy Corporation, Philippines
- Global Business Power Corporation, Philippines
- ICICI Bank Limited - India
- Tamil Nadu electricity Board
- Malabar Cements Ltd - India
- Commonwealth Bank - Australia
- Aboitiz Power Corporation - Philippines
- European Bulk Services B.V. - Netherlands
- Maharashtra Electricity Regulatory Commission - India
- Eastern Energy - Thailand
- Indian Energy Exchange, India
- Thiess Contractors Indonesia
- Power Finance Corporation Ltd., India
- Bukit Asam (Persero) Tbk - Indonesia
- Barasentosa Lestari - Indonesia
- Jindal Steel & Power Ltd - India
- Bangladesh Power Developement Board
- Therma Luzon, Inc, Philippines
- The University of Queensland
- Mercuria Energy - Indonesia
- Wood Mackenzie - Singapore
- GAC Shipping (India) Pvt Ltd
- Sojitz Corporation - Japan
- Chamber of Mines of South Africa
- Rio Tinto Coal - Australia
- Xindia Steels Limited - India
- Carbofer General Trading SA - India
- Maheswari Brothers Coal Limited - India
- Cigading International Bulk Terminal - Indonesia
- Attock Cement Pakistan Limited
- IEA Clean Coal Centre - UK
- Africa Commodities Group - South Africa
- Miang Besar Coal Terminal - Indonesia
- Orica Mining Services - Indonesia
- Binh Thuan Hamico - Vietnam
- Energy Development Corp, Philippines
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