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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, 20 September 11
MTD INAUGURATES ITS COAL TERMINAL IN JAVA ISLAND
Press Release – MTD Group of Malaysia, one of prominent key players in the development of infrastructure in Malaysia, today inaugurated their ...
Tuesday, 20 September 11
DRY BULK MARKET LOSING ITS EDGE, RETREATING AT THE START OF THE WEEK - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
After a surge during the past couple of weeks, which saw Capesize earnings boosted and the BDI (Baltic Dry Index) reaching levels of year high and c ...
Monday, 19 September 11
CHINA IMPORTS MORE THAN 10 MMT INDO COAL IN AUGUST 2011
COALspot.com - Indonesian coal exports dropped 1.642 million tons in August compared to July exports. Indonesia exports 29.662 million tons of coal ...
Monday, 19 September 11
INDOMOBIL ENTERING INTO COAL MINING BUSINESS
COALspot.Com- PT Indomobil Sukses Internasional Tbk, part of, one of Indonesia's largest conglomerates, to enter into mining industry ac ...
Sunday, 18 September 11
THE COAL IMPORTS TO INDIA, OUT OF INDONESIA LIKELY TO PICK UP - CAPT. REDDY
COALspot.com - The freight market continued the upward trend until midweek almost touching 2,000 points, however towards second half of the week the ...
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- MS Steel International - UAE
- AsiaOL BioFuels Corp., Philippines
- Bhatia International Limited - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Indian Oil Corporation Limited
- Malabar Cements Ltd - India
- Deloitte Consulting - India
- IEA Clean Coal Centre - UK
- Cigading International Bulk Terminal - Indonesia
- SMC Global Power, Philippines
- Lanco Infratech Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- Mjunction Services Limited - India
- Grasim Industreis Ltd - India
- Global Coal Blending Company Limited - Australia
- Price Waterhouse Coopers - Russia
- Sinarmas Energy and Mining - Indonesia
- Xindia Steels Limited - India
- Minerals Council of Australia
- OPG Power Generation Pvt Ltd - India
- Vedanta Resources Plc - India
- Merrill Lynch Commodities Europe
- Romanian Commodities Exchange
- Makarim & Taira - Indonesia
- Central Electricity Authority - India
- Ceylon Electricity Board - Sri Lanka
- Manunggal Multi Energi - Indonesia
- McConnell Dowell - Australia
- CIMB Investment Bank - Malaysia
- Ind-Barath Power Infra Limited - India
- Carbofer General Trading SA - India
- Star Paper Mills Limited - India
- Eastern Coal Council - USA
- Indogreen Group - Indonesia
- PTC India Limited - India
- Holcim Trading Pte Ltd - Singapore
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Bukit Makmur.PT - Indonesia
- Meenaskhi Energy Private Limited - India
- Simpson Spence & Young - Indonesia
- Bharathi Cement Corporation - India
- The Treasury - Australian Government
- GVK Power & Infra Limited - India
- Intertek Mineral Services - Indonesia
- Binh Thuan Hamico - Vietnam
- Semirara Mining and Power Corporation, Philippines
- Global Business Power Corporation, Philippines
- LBH Netherlands Bv - Netherlands
- PowerSource Philippines DevCo
- Savvy Resources Ltd - HongKong
- Pipit Mutiara Jaya. PT, Indonesia
- Altura Mining Limited, Indonesia
- Timah Investasi Mineral - Indoneisa
- Karbindo Abesyapradhi - Indoneisa
- Madhucon Powers Ltd - India
- Meralco Power Generation, Philippines
- Renaissance Capital - South Africa
- Rio Tinto Coal - Australia
- GMR Energy Limited - India
- Sindya Power Generating Company Private Ltd
- Alfred C Toepfer International GmbH - Germany
- Latin American Coal - Colombia
- Petron Corporation, Philippines
- Mercuria Energy - Indonesia
- GAC Shipping (India) Pvt Ltd
- Toyota Tsusho Corporation, Japan
- Rashtriya Ispat Nigam Limited - India
- ICICI Bank Limited - India
- Medco Energi Mining Internasional
- Iligan Light & Power Inc, Philippines
- CNBM International Corporation - China
- Salva Resources Pvt Ltd - India
- India Bulls Power Limited - India
- Banpu Public Company Limited - Thailand
- ASAPP Information Group - India
- Sical Logistics Limited - India
- Asmin Koalindo Tuhup - Indonesia
- Kepco SPC Power Corporation, Philippines
- Bukit Asam (Persero) Tbk - Indonesia
- Metalloyd Limited - United Kingdom
- Videocon Industries ltd - India
- Power Finance Corporation Ltd., India
- Agrawal Coal Company - India
- Bangladesh Power Developement Board
- Anglo American - United Kingdom
- Planning Commission, India
- Economic Council, Georgia
- Gujarat Mineral Development Corp Ltd - India
- Barasentosa Lestari - Indonesia
- Energy Development Corp, Philippines
- Kideco Jaya Agung - Indonesia
- Uttam Galva Steels Limited - India
- London Commodity Brokers - England
- VISA Power Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Kohat Cement Company Ltd. - Pakistan
- Posco Energy - South Korea
- Jaiprakash Power Ventures ltd
- Edison Trading Spa - Italy
- Thai Mozambique Logistica
- Mercator Lines Limited - India
- Australian Commodity Traders Exchange
- TeaM Sual Corporation - Philippines
- Ministry of Mines - Canada
- Pendopo Energi Batubara - Indonesia
- Central Java Power - Indonesia
- IHS Mccloskey Coal Group - USA
- Larsen & Toubro Limited - India
- The University of Queensland
- Attock Cement Pakistan Limited
- Mintek Dendrill Indonesia
- Siam City Cement - Thailand
- Directorate General of MIneral and Coal - Indonesia
- Oldendorff Carriers - Singapore
- Kartika Selabumi Mining - Indonesia
- European Bulk Services B.V. - Netherlands
- Maheswari Brothers Coal Limited - India
- Bukit Baiduri Energy - Indonesia
- Australian Coal Association
- Heidelberg Cement - Germany
- Trasteel International SA, Italy
- Georgia Ports Authority, United States
- Bulk Trading Sa - Switzerland
- Coastal Gujarat Power Limited - India
- Sree Jayajothi Cements Limited - India
- Essar Steel Hazira Ltd - India
- Semirara Mining Corp, Philippines
- Karaikal Port Pvt Ltd - India
- Neyveli Lignite Corporation Ltd, - India
- Commonwealth Bank - Australia
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- Bhoruka Overseas - Indonesia
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- Standard Chartered Bank - UAE
- Riau Bara Harum - Indonesia
- Indo Tambangraya Megah - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Tata Chemicals Ltd - India
- Sojitz Corporation - Japan
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Formosa Plastics Group - Taiwan
- Sarangani Energy Corporation, Philippines
- The State Trading Corporation of India Ltd
- Directorate Of Revenue Intelligence - India
- Electricity Generating Authority of Thailand
- International Coal Ventures Pvt Ltd - India
- Gujarat Sidhee Cement - India
- Chamber of Mines of South Africa
- Miang Besar Coal Terminal - Indonesia
- TNB Fuel Sdn Bhd - Malaysia
- Samtan Co., Ltd - South Korea
- Petrochimia International Co. Ltd.- Taiwan
- Chettinad Cement Corporation Ltd - India
- Interocean Group of Companies - India
- Bahari Cakrawala Sebuku - Indonesia
- Antam Resourcindo - Indonesia
- Wilmar Investment Holdings
- Port Waratah Coal Services - Australia
- South Luzon Thermal Energy Corporation
- Borneo Indobara - Indonesia
- Coalindo Energy - Indonesia
- Ministry of Transport, Egypt
- Globalindo Alam Lestari - Indonesia
- San Jose City I Power Corp, Philippines
- Eastern Energy - Thailand
- Kobexindo Tractors - Indoneisa
- Indian Energy Exchange, India
- Independent Power Producers Association of India
- Siam City Cement PLC, Thailand
- Energy Link Ltd, New Zealand
- Vijayanagar Sugar Pvt Ltd - India
- New Zealand Coal & Carbon
- Orica Mining Services - Indonesia
- SMG Consultants - Indonesia
- White Energy Company Limited
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Aditya Birla Group - India
- Thiess Contractors Indonesia
- Kumho Petrochemical, South Korea
- Billiton Holdings Pty Ltd - Australia
- Ambuja Cements Ltd - India
- Jindal Steel & Power Ltd - India
- Dalmia Cement Bharat India
- Kapuas Tunggal Persada - Indonesia
- SN Aboitiz Power Inc, Philippines
- Tamil Nadu electricity Board
- Gujarat Electricity Regulatory Commission - India
- Parliament of New Zealand
- PNOC Exploration Corporation - Philippines
- Indonesian Coal Mining Association
- Coal and Oil Company - UAE
- Sakthi Sugars Limited - India
- Kalimantan Lumbung Energi - Indonesia
- Bhushan Steel Limited - India
- Cement Manufacturers Association - India
- Kaltim Prima Coal - Indonesia
- Parry Sugars Refinery, India
- Vizag Seaport Private Limited - India
- Straits Asia Resources Limited - Singapore
- Offshore Bulk Terminal Pte Ltd, Singapore
- Indika Energy - Indonesia
- Bayan Resources Tbk. - Indonesia
- Baramulti Group, Indonesia
- Orica Australia Pty. Ltd.
- Ministry of Finance - Indonesia
- Africa Commodities Group - South Africa
- Wood Mackenzie - Singapore
- Global Green Power PLC Corporation, Philippines
- Singapore Mercantile Exchange
- Goldman Sachs - Singapore
- Marubeni Corporation - India
- Therma Luzon, Inc, Philippines
- Krishnapatnam Port Company Ltd. - India
- Aboitiz Power Corporation - Philippines
- Electricity Authority, New Zealand
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