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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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Friday, 30 September 11
MINING BILL CLEARED, FIRMS TO SHARE 26% PROFITS WITH LOCALS - NDTV
NDTV reported that, The Union Cabinet cleared the draft mining bill aimed at regulating mining activities Friday. The bill proposes a profit-sharing ...
Friday, 30 September 11
INDIAN IRON ORE MARKET GETTING ACTIVE - FEARNLEYS AS
Handy
The Atlantic market continued its strong trend with fresh cargoes entering the market. Vessels open US Gulf fixed tick above US$ 27k back to t ...
Friday, 30 September 11
KRISHNAPATNAM PORT WINS GLOBAL PORT & COAL PORT OF THE YEAR AWARDS
COALspot.com - Krishnapatnam Port, a dynamic new generation world class port located in the East Coast of India has been adjudged the winner in the ...
Thursday, 29 September 11
DRY BULK MARKET FALLS MID-WEEK, FURTHER DROP EXPECTED NEXT WEEK ON CHINA HOLIDAYS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market, as reflected by the Baltic Dry Index (BDI) retreated by 0.36% yesterday reaching 1,920 points, with the Capesize segment suffer ...
Wednesday, 28 September 11
ATLAS RESOURCES TO SELL 25% STAKE IN IPO - INSIDER STORIES
Insider Stories reported that, coal producer PT Atlas Resources Tbk, that is controlled by Indonesian businessman Andre Abdi, plans to sell 783.33 m ...
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- Essar Steel Hazira Ltd - India
- Bharathi Cement Corporation - India
- AsiaOL BioFuels Corp., Philippines
- Salva Resources Pvt Ltd - India
- CNBM International Corporation - China
- The University of Queensland
- IHS Mccloskey Coal Group - USA
- Indian Energy Exchange, India
- Interocean Group of Companies - India
- Metalloyd Limited - United Kingdom
- OPG Power Generation Pvt Ltd - India
- Bhushan Steel Limited - India
- Samtan Co., Ltd - South Korea
- Kohat Cement Company Ltd. - Pakistan
- Posco Energy - South Korea
- Larsen & Toubro Limited - India
- The Treasury - Australian Government
- Thiess Contractors Indonesia
- Bukit Asam (Persero) Tbk - Indonesia
- Indo Tambangraya Megah - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Ind-Barath Power Infra Limited - India
- Bahari Cakrawala Sebuku - Indonesia
- Holcim Trading Pte Ltd - Singapore
- Heidelberg Cement - Germany
- Malabar Cements Ltd - India
- Standard Chartered Bank - UAE
- Semirara Mining Corp, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Indonesian Coal Mining Association
- Binh Thuan Hamico - Vietnam
- Singapore Mercantile Exchange
- Wilmar Investment Holdings
- Gujarat Sidhee Cement - India
- Global Coal Blending Company Limited - Australia
- Jindal Steel & Power Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Riau Bara Harum - Indonesia
- Aboitiz Power Corporation - Philippines
- Savvy Resources Ltd - HongKong
- Chamber of Mines of South Africa
- ASAPP Information Group - India
- Rashtriya Ispat Nigam Limited - India
- Georgia Ports Authority, United States
- Independent Power Producers Association of India
- VISA Power Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- Marubeni Corporation - India
- Ceylon Electricity Board - Sri Lanka
- Altura Mining Limited, Indonesia
- Madhucon Powers Ltd - India
- Mercator Lines Limited - India
- Iligan Light & Power Inc, Philippines
- Parliament of New Zealand
- International Coal Ventures Pvt Ltd - India
- Sojitz Corporation - Japan
- IEA Clean Coal Centre - UK
- Coalindo Energy - Indonesia
- Jaiprakash Power Ventures ltd
- Siam City Cement - Thailand
- Commonwealth Bank - Australia
- Wood Mackenzie - Singapore
- Kepco SPC Power Corporation, Philippines
- Anglo American - United Kingdom
- Pendopo Energi Batubara - Indonesia
- SMC Global Power, Philippines
- Barasentosa Lestari - Indonesia
- Ambuja Cements Ltd - India
- Globalindo Alam Lestari - Indonesia
- MS Steel International - UAE
- Attock Cement Pakistan Limited
- Eastern Energy - Thailand
- Bangladesh Power Developement Board
- Offshore Bulk Terminal Pte Ltd, Singapore
- Kaltim Prima Coal - Indonesia
- Videocon Industries ltd - India
- Banpu Public Company Limited - Thailand
- Port Waratah Coal Services - Australia
- London Commodity Brokers - England
- Meralco Power Generation, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Baramulti Group, Indonesia
- ICICI Bank Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Petron Corporation, Philippines
- Indian Oil Corporation Limited
- Latin American Coal - Colombia
- Price Waterhouse Coopers - Russia
- Mintek Dendrill Indonesia
- LBH Netherlands Bv - Netherlands
- India Bulls Power Limited - India
- Sinarmas Energy and Mining - Indonesia
- GMR Energy Limited - India
- Australian Commodity Traders Exchange
- PNOC Exploration Corporation - Philippines
- Agrawal Coal Company - India
- Manunggal Multi Energi - Indonesia
- Ministry of Mines - Canada
- Tata Chemicals Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Goldman Sachs - Singapore
- Cigading International Bulk Terminal - Indonesia
- Karbindo Abesyapradhi - Indoneisa
- Oldendorff Carriers - Singapore
- Medco Energi Mining Internasional
- Bukit Makmur.PT - Indonesia
- Formosa Plastics Group - Taiwan
- Electricity Authority, New Zealand
- Billiton Holdings Pty Ltd - Australia
- Bayan Resources Tbk. - Indonesia
- Ministry of Transport, Egypt
- Intertek Mineral Services - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Edison Trading Spa - Italy
- Deloitte Consulting - India
- Planning Commission, India
- Merrill Lynch Commodities Europe
- Sakthi Sugars Limited - India
- GAC Shipping (India) Pvt Ltd
- Cement Manufacturers Association - India
- New Zealand Coal & Carbon
- White Energy Company Limited
- Thai Mozambique Logistica
- Directorate Of Revenue Intelligence - India
- Xindia Steels Limited - India
- Kideco Jaya Agung - Indonesia
- Orica Mining Services - Indonesia
- European Bulk Services B.V. - Netherlands
- Uttam Galva Steels Limited - India
- Trasteel International SA, Italy
- Africa Commodities Group - South Africa
- Central Java Power - Indonesia
- Therma Luzon, Inc, Philippines
- Kobexindo Tractors - Indoneisa
- Bhatia International Limited - India
- Makarim & Taira - Indonesia
- Straits Asia Resources Limited - Singapore
- Mercuria Energy - Indonesia
- CIMB Investment Bank - Malaysia
- Directorate General of MIneral and Coal - Indonesia
- Tamil Nadu electricity Board
- SMG Consultants - Indonesia
- Miang Besar Coal Terminal - Indonesia
- GN Power Mariveles Coal Plant, Philippines
- Mjunction Services Limited - India
- Maheswari Brothers Coal Limited - India
- Minerals Council of Australia
- Ministry of Finance - Indonesia
- Simpson Spence & Young - Indonesia
- Parry Sugars Refinery, India
- PetroVietnam Power Coal Import and Supply Company
- Romanian Commodities Exchange
- Borneo Indobara - Indonesia
- Lanco Infratech Ltd - India
- Bulk Trading Sa - Switzerland
- Eastern Coal Council - USA
- Indika Energy - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Krishnapatnam Port Company Ltd. - India
- Leighton Contractors Pty Ltd - Australia
- South Luzon Thermal Energy Corporation
- Gujarat Electricity Regulatory Commission - India
- Central Electricity Authority - India
- Dalmia Cement Bharat India
- TNB Fuel Sdn Bhd - Malaysia
- Karaikal Port Pvt Ltd - India
- Siam City Cement PLC, Thailand
- San Jose City I Power Corp, Philippines
- Kapuas Tunggal Persada - Indonesia
- Coastal Gujarat Power Limited - India
- McConnell Dowell - Australia
- Grasim Industreis Ltd - India
- GVK Power & Infra Limited - India
- Semirara Mining and Power Corporation, Philippines
- Australian Coal Association
- Sarangani Energy Corporation, Philippines
- Kumho Petrochemical, South Korea
- Bukit Baiduri Energy - Indonesia
- Power Finance Corporation Ltd., India
- Coal and Oil Company - UAE
- Toyota Tsusho Corporation, Japan
- Sree Jayajothi Cements Limited - India
- Vedanta Resources Plc - India
- Alfred C Toepfer International GmbH - Germany
- Maharashtra Electricity Regulatory Commission - India
- PowerSource Philippines DevCo
- The State Trading Corporation of India Ltd
- Economic Council, Georgia
- Indogreen Group - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Aditya Birla Group - India
- Chettinad Cement Corporation Ltd - India
- Rio Tinto Coal - Australia
- Sical Logistics Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Electricity Generating Authority of Thailand
- SN Aboitiz Power Inc, Philippines
- Vizag Seaport Private Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Energy Development Corp, Philippines
- Sindya Power Generating Company Private Ltd
- Meenaskhi Energy Private Limited - India
- PTC India Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Energy Link Ltd, New Zealand
- Vijayanagar Sugar Pvt Ltd - India
- Renaissance Capital - South Africa
- Antam Resourcindo - Indonesia
- Global Business Power Corporation, Philippines
- Bhoruka Overseas - Indonesia
- Orica Australia Pty. Ltd.
- Kartika Selabumi Mining - Indonesia
- Global Green Power PLC Corporation, Philippines
- Carbofer General Trading SA - India
- TeaM Sual Corporation - Philippines
- Star Paper Mills Limited - India
- Timah Investasi Mineral - Indoneisa
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