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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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Tuesday, 27 September 11
A STRONG REBOUND FOR THE CAPE MARKET - BRS
A strong rebound for the Cape market, as cargoes continued to flow into the market and tonnage remained tight in the Atlantic, according to Barry Ro ...
Tuesday, 27 September 11
INTRACO SEALS US$25.3 MIO ORDER - INSIDER STORIES
Insider Stories reported that, Heavy equipment distributor PT Intraco Penta Tbk (INTA) obtained a US$25.3 million order on hand of heavy equipments ...
Sunday, 25 September 11
THE CHARTER RATES FOR INDONESIA TO INDIA WAS FIRM - VISTAAR
COALspot.com - The freight market moved up sharply with the cape Index up by 11 pct pushing the BDI by almost 6 pct and closing at 1,920 point ...
Saturday, 24 September 11
GOVT PLANS TO RENEGOTIATE ALL CONTRACTS INCLUDING FREEPORT - JP
The Jakarta Post reported that, the Energy and Mineral Resources Ministry has confirmed plans to renegotiate all mining contracts including those wi ...
Friday, 23 September 11
ICMA TO BUILD UPGRADE FACILITIES TO ANTICIPATE BAN ON LOW-GRADE COAL EXPORT BY 2014
COALspot.com - January to August of this year, Indonesia’s coal production had already reached 235 million tons. Earlier estimates had targete ...
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- Toyota Tsusho Corporation, Japan
- AsiaOL BioFuels Corp., Philippines
- Tata Chemicals Ltd - India
- Savvy Resources Ltd - HongKong
- Edison Trading Spa - Italy
- Mintek Dendrill Indonesia
- PowerSource Philippines DevCo
- Gujarat Sidhee Cement - India
- Ceylon Electricity Board - Sri Lanka
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Thai Mozambique Logistica
- Commonwealth Bank - Australia
- Bhoruka Overseas - Indonesia
- Romanian Commodities Exchange
- Kapuas Tunggal Persada - Indonesia
- Semirara Mining Corp, Philippines
- Binh Thuan Hamico - Vietnam
- Aditya Birla Group - India
- Attock Cement Pakistan Limited
- Independent Power Producers Association of India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Port Waratah Coal Services - Australia
- Wilmar Investment Holdings
- Intertek Mineral Services - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- Uttam Galva Steels Limited - India
- Barasentosa Lestari - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Salva Resources Pvt Ltd - India
- Planning Commission, India
- Indian Energy Exchange, India
- Alfred C Toepfer International GmbH - Germany
- Latin American Coal - Colombia
- Riau Bara Harum - Indonesia
- Manunggal Multi Energi - Indonesia
- Star Paper Mills Limited - India
- PetroVietnam Power Coal Import and Supply Company
- Rio Tinto Coal - Australia
- Rashtriya Ispat Nigam Limited - India
- Sical Logistics Limited - India
- Indika Energy - Indonesia
- Mercuria Energy - Indonesia
- Larsen & Toubro Limited - India
- Xindia Steels Limited - India
- Siam City Cement PLC, Thailand
- Global Business Power Corporation, Philippines
- Gujarat Mineral Development Corp Ltd - India
- Antam Resourcindo - Indonesia
- Vedanta Resources Plc - India
- San Jose City I Power Corp, Philippines
- London Commodity Brokers - England
- Karbindo Abesyapradhi - Indoneisa
- Vijayanagar Sugar Pvt Ltd - India
- Energy Development Corp, Philippines
- CNBM International Corporation - China
- Borneo Indobara - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Straits Asia Resources Limited - Singapore
- Kideco Jaya Agung - Indonesia
- Bharathi Cement Corporation - India
- Merrill Lynch Commodities Europe
- Georgia Ports Authority, United States
- Malabar Cements Ltd - India
- OPG Power Generation Pvt Ltd - India
- Timah Investasi Mineral - Indoneisa
- Australian Coal Association
- Chamber of Mines of South Africa
- Cigading International Bulk Terminal - Indonesia
- SMG Consultants - Indonesia
- Kobexindo Tractors - Indoneisa
- Sakthi Sugars Limited - India
- Coal and Oil Company - UAE
- Formosa Plastics Group - Taiwan
- Grasim Industreis Ltd - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- CIMB Investment Bank - Malaysia
- Krishnapatnam Port Company Ltd. - India
- Parry Sugars Refinery, India
- McConnell Dowell - Australia
- Ind-Barath Power Infra Limited - India
- Deloitte Consulting - India
- Sarangani Energy Corporation, Philippines
- IEA Clean Coal Centre - UK
- Sojitz Corporation - Japan
- TeaM Sual Corporation - Philippines
- GMR Energy Limited - India
- Cement Manufacturers Association - India
- Simpson Spence & Young - Indonesia
- MS Steel International - UAE
- The Treasury - Australian Government
- GVK Power & Infra Limited - India
- Indo Tambangraya Megah - Indonesia
- Lanco Infratech Ltd - India
- Sindya Power Generating Company Private Ltd
- Anglo American - United Kingdom
- Jindal Steel & Power Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Bhushan Steel Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Gujarat Electricity Regulatory Commission - India
- Altura Mining Limited, Indonesia
- Tamil Nadu electricity Board
- Global Coal Blending Company Limited - Australia
- Maharashtra Electricity Regulatory Commission - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Electricity Authority, New Zealand
- Ministry of Transport, Egypt
- Medco Energi Mining Internasional
- South Luzon Thermal Energy Corporation
- The University of Queensland
- Siam City Cement - Thailand
- Iligan Light & Power Inc, Philippines
- Karaikal Port Pvt Ltd - India
- Global Green Power PLC Corporation, Philippines
- International Coal Ventures Pvt Ltd - India
- Therma Luzon, Inc, Philippines
- Mercator Lines Limited - India
- Bukit Baiduri Energy - Indonesia
- Eastern Coal Council - USA
- Madhucon Powers Ltd - India
- Agrawal Coal Company - India
- Central Java Power - Indonesia
- VISA Power Limited - India
- Semirara Mining and Power Corporation, Philippines
- Marubeni Corporation - India
- Orica Australia Pty. Ltd.
- SMC Global Power, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Price Waterhouse Coopers - Russia
- Kartika Selabumi Mining - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bukit Makmur.PT - Indonesia
- PTC India Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Trasteel International SA, Italy
- Videocon Industries ltd - India
- PNOC Exploration Corporation - Philippines
- Indian Oil Corporation Limited
- Mjunction Services Limited - India
- Kohat Cement Company Ltd. - Pakistan
- India Bulls Power Limited - India
- ICICI Bank Limited - India
- Pendopo Energi Batubara - Indonesia
- LBH Netherlands Bv - Netherlands
- Posco Energy - South Korea
- Economic Council, Georgia
- Chettinad Cement Corporation Ltd - India
- Coalindo Energy - Indonesia
- Heidelberg Cement - Germany
- GN Power Mariveles Coal Plant, Philippines
- Interocean Group of Companies - India
- European Bulk Services B.V. - Netherlands
- Metalloyd Limited - United Kingdom
- Samtan Co., Ltd - South Korea
- Jaiprakash Power Ventures ltd
- Kepco SPC Power Corporation, Philippines
- Minerals Council of Australia
- Kumho Petrochemical, South Korea
- Australian Commodity Traders Exchange
- Goldman Sachs - Singapore
- Holcim Trading Pte Ltd - Singapore
- Makarim & Taira - Indonesia
- Miang Besar Coal Terminal - Indonesia
- Essar Steel Hazira Ltd - India
- SN Aboitiz Power Inc, Philippines
- Energy Link Ltd, New Zealand
- Petron Corporation, Philippines
- Meenaskhi Energy Private Limited - India
- Electricity Generating Authority of Thailand
- TNB Fuel Sdn Bhd - Malaysia
- Baramulti Group, Indonesia
- Bangladesh Power Developement Board
- Neyveli Lignite Corporation Ltd, - India
- Jorong Barutama Greston.PT - Indonesia
- Parliament of New Zealand
- Carbofer General Trading SA - India
- Ministry of Mines - Canada
- White Energy Company Limited
- Ambuja Cements Ltd - India
- Renaissance Capital - South Africa
- Standard Chartered Bank - UAE
- Thiess Contractors Indonesia
- Dalmia Cement Bharat India
- Leighton Contractors Pty Ltd - Australia
- Globalindo Alam Lestari - Indonesia
- Maheswari Brothers Coal Limited - India
- New Zealand Coal & Carbon
- Vizag Seaport Private Limited - India
- Sree Jayajothi Cements Limited - India
- Banpu Public Company Limited - Thailand
- Bulk Trading Sa - Switzerland
- Power Finance Corporation Ltd., India
- Meralco Power Generation, Philippines
- Asmin Koalindo Tuhup - Indonesia
- Oldendorff Carriers - Singapore
- Singapore Mercantile Exchange
- ASAPP Information Group - India
- Central Electricity Authority - India
- GAC Shipping (India) Pvt Ltd
- Coastal Gujarat Power Limited - India
- Eastern Energy - Thailand
- Sinarmas Energy and Mining - Indonesia
- Aboitiz Power Corporation - Philippines
- Indonesian Coal Mining Association
- Orica Mining Services - Indonesia
- Directorate Of Revenue Intelligence - India
- Billiton Holdings Pty Ltd - Australia
- Africa Commodities Group - South Africa
- Bayan Resources Tbk. - Indonesia
- Kaltim Prima Coal - Indonesia
- Bhatia International Limited - India
- The State Trading Corporation of India Ltd
- IHS Mccloskey Coal Group - USA
- Wood Mackenzie - Singapore
- Indogreen Group - Indonesia
- Ministry of Finance - Indonesia
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