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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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- Cement Manufacturers Association - India
- Makarim & Taira - Indonesia
- Sinarmas Energy and Mining - Indonesia
- Wilmar Investment Holdings
- Krishnapatnam Port Company Ltd. - India
- Maheswari Brothers Coal Limited - India
- Kumho Petrochemical, South Korea
- Pipit Mutiara Jaya. PT, Indonesia
- OPG Power Generation Pvt Ltd - India
- Holcim Trading Pte Ltd - Singapore
- Banpu Public Company Limited - Thailand
- Chamber of Mines of South Africa
- IEA Clean Coal Centre - UK
- Electricity Authority, New Zealand
- India Bulls Power Limited - India
- Heidelberg Cement - Germany
- Interocean Group of Companies - India
- Pendopo Energi Batubara - Indonesia
- Romanian Commodities Exchange
- PowerSource Philippines DevCo
- Jorong Barutama Greston.PT - Indonesia
- Cigading International Bulk Terminal - Indonesia
- Iligan Light & Power Inc, Philippines
- Tata Chemicals Ltd - India
- SN Aboitiz Power Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- PTC India Limited - India
- Billiton Holdings Pty Ltd - Australia
- Coalindo Energy - Indonesia
- Uttam Galva Steels Limited - India
- ASAPP Information Group - India
- Kepco SPC Power Corporation, Philippines
- Mintek Dendrill Indonesia
- PNOC Exploration Corporation - Philippines
- Thai Mozambique Logistica
- AsiaOL BioFuels Corp., Philippines
- Karbindo Abesyapradhi - Indoneisa
- Africa Commodities Group - South Africa
- London Commodity Brokers - England
- Mjunction Services Limited - India
- Global Green Power PLC Corporation, Philippines
- Ambuja Cements Ltd - India
- LBH Netherlands Bv - Netherlands
- Maharashtra Electricity Regulatory Commission - India
- Sical Logistics Limited - India
- Semirara Mining Corp, Philippines
- Globalindo Alam Lestari - Indonesia
- Minerals Council of Australia
- Power Finance Corporation Ltd., India
- Singapore Mercantile Exchange
- New Zealand Coal & Carbon
- CIMB Investment Bank - Malaysia
- Directorate Of Revenue Intelligence - India
- Orica Australia Pty. Ltd.
- Australian Coal Association
- Commonwealth Bank - Australia
- Borneo Indobara - Indonesia
- Bharathi Cement Corporation - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Sree Jayajothi Cements Limited - India
- San Jose City I Power Corp, Philippines
- GAC Shipping (India) Pvt Ltd
- Bhushan Steel Limited - India
- Renaissance Capital - South Africa
- South Luzon Thermal Energy Corporation
- TNB Fuel Sdn Bhd - Malaysia
- Agrawal Coal Company - India
- Tamil Nadu electricity Board
- Sindya Power Generating Company Private Ltd
- Siam City Cement PLC, Thailand
- Jindal Steel & Power Ltd - India
- Leighton Contractors Pty Ltd - Australia
- Ministry of Finance - Indonesia
- Timah Investasi Mineral - Indoneisa
- Ministry of Mines - Canada
- Kalimantan Lumbung Energi - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Aboitiz Power Corporation - Philippines
- Planning Commission, India
- Sojitz Corporation - Japan
- Gujarat Sidhee Cement - India
- Merrill Lynch Commodities Europe
- Bank of Tokyo Mitsubishi UFJ Ltd
- Global Business Power Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Vizag Seaport Private Limited - India
- Indo Tambangraya Megah - Indonesia
- Samtan Co., Ltd - South Korea
- Karaikal Port Pvt Ltd - India
- Straits Asia Resources Limited - Singapore
- Attock Cement Pakistan Limited
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Australian Commodity Traders Exchange
- Jaiprakash Power Ventures ltd
- Central Java Power - Indonesia
- Metalloyd Limited - United Kingdom
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Kartika Selabumi Mining - Indonesia
- Electricity Generating Authority of Thailand
- SMG Consultants - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Manunggal Multi Energi - Indonesia
- Energy Development Corp, Philippines
- Central Electricity Authority - India
- GN Power Mariveles Coal Plant, Philippines
- Mercuria Energy - Indonesia
- Eastern Coal Council - USA
- Wood Mackenzie - Singapore
- Toyota Tsusho Corporation, Japan
- Thiess Contractors Indonesia
- Parliament of New Zealand
- Rashtriya Ispat Nigam Limited - India
- Ceylon Electricity Board - Sri Lanka
- Savvy Resources Ltd - HongKong
- Kohat Cement Company Ltd. - Pakistan
- Larsen & Toubro Limited - India
- Salva Resources Pvt Ltd - India
- Binh Thuan Hamico - Vietnam
- Marubeni Corporation - India
- Ind-Barath Power Infra Limited - India
- Standard Chartered Bank - UAE
- Riau Bara Harum - Indonesia
- Asmin Koalindo Tuhup - Indonesia
- Barasentosa Lestari - Indonesia
- Sakthi Sugars Limited - India
- Bulk Trading Sa - Switzerland
- Latin American Coal - Colombia
- Global Coal Blending Company Limited - Australia
- Energy Link Ltd, New Zealand
- Trasteel International SA, Italy
- Offshore Bulk Terminal Pte Ltd, Singapore
- Parry Sugars Refinery, India
- Simpson Spence & Young - Indonesia
- Anglo American - United Kingdom
- Star Paper Mills Limited - India
- Posco Energy - South Korea
- GVK Power & Infra Limited - India
- Oldendorff Carriers - Singapore
- Gujarat Electricity Regulatory Commission - India
- McConnell Dowell - Australia
- Xindia Steels Limited - India
- The Treasury - Australian Government
- Eastern Energy - Thailand
- TeaM Sual Corporation - Philippines
- The University of Queensland
- White Energy Company Limited
- Mercator Lines Limited - India
- Bhoruka Overseas - Indonesia
- Baramulti Group, Indonesia
- The State Trading Corporation of India Ltd
- ICICI Bank Limited - India
- Neyveli Lignite Corporation Ltd, - India
- Bhatia International Limited - India
- Coastal Gujarat Power Limited - India
- Madhucon Powers Ltd - India
- Formosa Plastics Group - Taiwan
- Bayan Resources Tbk. - Indonesia
- Sarangani Energy Corporation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Petron Corporation, Philippines
- Therma Luzon, Inc, Philippines
- Essar Steel Hazira Ltd - India
- Economic Council, Georgia
- Chettinad Cement Corporation Ltd - India
- Dalmia Cement Bharat India
- Kobexindo Tractors - Indoneisa
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Independent Power Producers Association of India
- Siam City Cement - Thailand
- Kideco Jaya Agung - Indonesia
- Aditya Birla Group - India
- Ministry of Transport, Egypt
- VISA Power Limited - India
- Deloitte Consulting - India
- Lanco Infratech Ltd - India
- Kaltim Prima Coal - Indonesia
- Coal and Oil Company - UAE
- Rio Tinto Coal - Australia
- Orica Mining Services - Indonesia
- Indonesian Coal Mining Association
- Vedanta Resources Plc - India
- Gujarat Mineral Development Corp Ltd - India
- Edison Trading Spa - Italy
- Alfred C Toepfer International GmbH - Germany
- Georgia Ports Authority, United States
- Meralco Power Generation, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- IHS Mccloskey Coal Group - USA
- Indian Oil Corporation Limited
- Videocon Industries ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Meenaskhi Energy Private Limited - India
- International Coal Ventures Pvt Ltd - India
- European Bulk Services B.V. - Netherlands
- Antam Resourcindo - Indonesia
- Indogreen Group - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Bukit Makmur.PT - Indonesia
- Indian Energy Exchange, India
- GMR Energy Limited - India
- CNBM International Corporation - China
- Altura Mining Limited, Indonesia
- Bangladesh Power Developement Board
- Grasim Industreis Ltd - India
- Carbofer General Trading SA - India
- Port Waratah Coal Services - Australia
- MS Steel International - UAE
- Goldman Sachs - Singapore
- Medco Energi Mining Internasional
- Bukit Baiduri Energy - Indonesia
- Kapuas Tunggal Persada - Indonesia
- Malabar Cements Ltd - India
- Intertek Mineral Services - Indonesia
- Indika Energy - Indonesia
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