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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, 23 September 11
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PT United Tractors Tbk is targeting a 7 million tons of coal production next year, a 55.55% increase from 4.5 millions targeted this year, said Pres ...
Friday, 23 September 11
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Wednesday, 21 September 11
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Wednesday, 21 September 11
2ND ANNUAL SHALE GAS SUMMIT
2nd Annual Shale Gas Summit 31 October – 3 November 2011 JW Marriott Hotel, Hong Kong
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- Videocon Industries ltd - India
- Jaiprakash Power Ventures ltd
- Mintek Dendrill Indonesia
- Sindya Power Generating Company Private Ltd
- Ministry of Mines - Canada
- Altura Mining Limited, Indonesia
- Directorate Of Revenue Intelligence - India
- Independent Power Producers Association of India
- Deloitte Consulting - India
- Borneo Indobara - Indonesia
- Commonwealth Bank - Australia
- Port Waratah Coal Services - Australia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Ministry of Finance - Indonesia
- European Bulk Services B.V. - Netherlands
- Intertek Mineral Services - Indonesia
- SMC Global Power, Philippines
- McConnell Dowell - Australia
- Standard Chartered Bank - UAE
- Kartika Selabumi Mining - Indonesia
- Goldman Sachs - Singapore
- Rashtriya Ispat Nigam Limited - India
- Indian Oil Corporation Limited
- Iligan Light & Power Inc, Philippines
- Maharashtra Electricity Regulatory Commission - India
- Carbofer General Trading SA - India
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- IEA Clean Coal Centre - UK
- Global Business Power Corporation, Philippines
- Uttam Galva Steels Limited - India
- Essar Steel Hazira Ltd - India
- Eastern Energy - Thailand
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- Orica Australia Pty. Ltd.
- Sakthi Sugars Limited - India
- Power Finance Corporation Ltd., India
- Therma Luzon, Inc, Philippines
- Bukit Makmur.PT - Indonesia
- Maheswari Brothers Coal Limited - India
- Kobexindo Tractors - Indoneisa
- Singapore Mercantile Exchange
- Africa Commodities Group - South Africa
- Global Coal Blending Company Limited - Australia
- Ministry of Transport, Egypt
- CNBM International Corporation - China
- Pendopo Energi Batubara - Indonesia
- Kaltim Prima Coal - Indonesia
- Eastern Coal Council - USA
- San Jose City I Power Corp, Philippines
- SN Aboitiz Power Inc, Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Kapuas Tunggal Persada - Indonesia
- LBH Netherlands Bv - Netherlands
- White Energy Company Limited
- New Zealand Coal & Carbon
- Miang Besar Coal Terminal - Indonesia
- Parliament of New Zealand
- Kepco SPC Power Corporation, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Alfred C Toepfer International GmbH - Germany
- GMR Energy Limited - India
- Antam Resourcindo - Indonesia
- Indika Energy - Indonesia
- Star Paper Mills Limited - India
- Sinarmas Energy and Mining - Indonesia
- Central Electricity Authority - India
- Gujarat Electricity Regulatory Commission - India
- Merrill Lynch Commodities Europe
- Mercator Lines Limited - India
- London Commodity Brokers - England
- Sojitz Corporation - Japan
- Price Waterhouse Coopers - Russia
- South Luzon Thermal Energy Corporation
- Aditya Birla Group - India
- Electricity Generating Authority of Thailand
- OPG Power Generation Pvt Ltd - India
- Romanian Commodities Exchange
- Bhoruka Overseas - Indonesia
- Latin American Coal - Colombia
- Coastal Gujarat Power Limited - India
- Energy Development Corp, Philippines
- Banpu Public Company Limited - Thailand
- Billiton Holdings Pty Ltd - Australia
- Chettinad Cement Corporation Ltd - India
- Karbindo Abesyapradhi - Indoneisa
- Timah Investasi Mineral - Indoneisa
- Renaissance Capital - South Africa
- Cement Manufacturers Association - India
- Asmin Koalindo Tuhup - Indonesia
- ICICI Bank Limited - India
- Straits Asia Resources Limited - Singapore
- Anglo American - United Kingdom
- Siam City Cement - Thailand
- Leighton Contractors Pty Ltd - Australia
- VISA Power Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Interocean Group of Companies - India
- Thiess Contractors Indonesia
- Makarim & Taira - Indonesia
- Trasteel International SA, Italy
- PowerSource Philippines DevCo
- Chamber of Mines of South Africa
- Indonesian Coal Mining Association
- CIMB Investment Bank - Malaysia
- Australian Coal Association
- Thai Mozambique Logistica
- Tata Chemicals Ltd - India
- Mercuria Energy - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Planning Commission, India
- Meenaskhi Energy Private Limited - India
- AsiaOL BioFuels Corp., Philippines
- Dalmia Cement Bharat India
- Wilmar Investment Holdings
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- Xindia Steels Limited - India
- Neyveli Lignite Corporation Ltd, - India
- India Bulls Power Limited - India
- SMG Consultants - Indonesia
- Indo Tambangraya Megah - Indonesia
- Aboitiz Power Corporation - Philippines
- Central Java Power - Indonesia
- International Coal Ventures Pvt Ltd - India
- Metalloyd Limited - United Kingdom
- Riau Bara Harum - Indonesia
- Orica Mining Services - Indonesia
- PTC India Limited - India
- Coalindo Energy - Indonesia
- Oldendorff Carriers - Singapore
- GVK Power & Infra Limited - India
- Rio Tinto Coal - Australia
- Grasim Industreis Ltd - India
- Electricity Authority, New Zealand
- Bulk Trading Sa - Switzerland
- Ambuja Cements Ltd - India
- Samtan Co., Ltd - South Korea
- Coal and Oil Company - UAE
- Offshore Bulk Terminal Pte Ltd, Singapore
- Posco Energy - South Korea
- PNOC Exploration Corporation - Philippines
- Karaikal Port Pvt Ltd - India
- Economic Council, Georgia
- Globalindo Alam Lestari - Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Petrochimia International Co. Ltd.- Taiwan
- Pipit Mutiara Jaya. PT, Indonesia
- Bhushan Steel Limited - India
- Salva Resources Pvt Ltd - India
- Directorate General of MIneral and Coal - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Bayan Resources Tbk. - Indonesia
- Global Green Power PLC Corporation, Philippines
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- Gujarat Mineral Development Corp Ltd - India
- Semirara Mining Corp, Philippines
- Ceylon Electricity Board - Sri Lanka
- TeaM Sual Corporation - Philippines
- Cigading International Bulk Terminal - Indonesia
- Malabar Cements Ltd - India
- Bhatia International Limited - India
- Bukit Asam (Persero) Tbk - Indonesia
- Australian Commodity Traders Exchange
- Medco Energi Mining Internasional
- Bank of Tokyo Mitsubishi UFJ Ltd
- IHS Mccloskey Coal Group - USA
- Parry Sugars Refinery, India
- Mjunction Services Limited - India
- Formosa Plastics Group - Taiwan
- Barasentosa Lestari - Indonesia
- Indogreen Group - Indonesia
- ASAPP Information Group - India
- Indian Energy Exchange, India
- Simpson Spence & Young - Indonesia
- Kumho Petrochemical, South Korea
- GN Power Mariveles Coal Plant, Philippines
- Marubeni Corporation - India
- Georgia Ports Authority, United States
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Sical Logistics Limited - India
- Energy Link Ltd, New Zealand
- Sarangani Energy Corporation, Philippines
- Agrawal Coal Company - India
- Jindal Steel & Power Ltd - India
- Gujarat Sidhee Cement - India
- Lanco Infratech Ltd - India
- Minerals Council of Australia
- Holcim Trading Pte Ltd - Singapore
- Krishnapatnam Port Company Ltd. - India
- Petron Corporation, Philippines
- Vedanta Resources Plc - India
- Savvy Resources Ltd - HongKong
- GAC Shipping (India) Pvt Ltd
- Binh Thuan Hamico - Vietnam
- Siam City Cement PLC, Thailand
- Sree Jayajothi Cements Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Edison Trading Spa - Italy
- MS Steel International - UAE
- The State Trading Corporation of India Ltd
- Toyota Tsusho Corporation, Japan
- Meralco Power Generation, Philippines
- Semirara Mining and Power Corporation, Philippines
- Heidelberg Cement - Germany
- Wood Mackenzie - Singapore
- Kalimantan Lumbung Energi - Indonesia
- Larsen & Toubro Limited - India
- Ind-Barath Power Infra Limited - India
- Madhucon Powers Ltd - India
- Bukit Baiduri Energy - Indonesia
- The Treasury - Australian Government
- Baramulti Group, Indonesia
- Tamil Nadu electricity Board
- Kideco Jaya Agung - Indonesia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Bangladesh Power Developement Board
- Attock Cement Pakistan Limited
- The University of Queensland
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