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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 $1 billion spent each year before the Asian financial crisis in the late 1990s.
Wiranto pointed out that Indonesia's resource riches are simply not matched by investment conditions in the commodity sector. He referred to a survey of international mining companies by the Fraser Institute that found that the "perceived lack of transparency in the legal process and the risk of regulatory duplication and inconsistencies continue to act as deterrents to more substantial investment".
Indonesia's production-to-reserves ratio for coal and copper is half that of its competitors (Australia, Chile and China), according to the World Bank. A poor investment environment could mean that the country's proven mineral resources are actually vastly underestimated.
So, it would be a pity if regulatory uncertainty and onerous obligations again prevent Indonesia from fully exploiting the benefits of its natural riches. Especially, given the laws were introduced to spur growth not cripple an industry. (By Rupert Walker)
About Rupert Walker
Rupert Walker is a senior writer and has been a financial journalist based in Hong Kong for three years. Previously he was employed by Asiamoney, and has written for various magazines and newspapers on assignments in Central Europe, Russia and Africa. Rupert was also a fund manager in London – investing in emerging markets for Govett Investment, working in capital markets for SG Warburg and Goldman Sachs, and setting up a capital markets business in Singapore for NatWest. He has a BA/MA in Modern History from Keble College, Oxford University and an MA in Anthropology from SOAS, London University. He is also a CFA charterholder.
This story was first published in FinanceAsia
The views and opinions / conclusion expressed on this article is purely the writers’ own.
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Saturday, 17 September 11
GVK ACQUIRES HANCOCK COAL AND INFRASTRUCTURE FOR US$ 1.26 BILLION
COALspot.com - GVK group, India’s leading infrastructure developer,confirmed arrangements for the acquisition of a strategic part of large, hi ...
Saturday, 17 September 11
INDIA'S GVK ACQUIRES HANCOCK COAL AND INFRASTRUCTURE PROJECTS IN AUSTRALIA
COALspot.com - GVK group, India’s leading infrastructure developer, today confirmed arrangements for the acquisition of a strategic part of la ...
Friday, 16 September 11
DELTA DUNIA MAKMUR REMOVED 30.9 MILLION BCM OVERBURDEN IN AUGUST 2011
COALspot.com - PT. Delta Dunia Makmur Tbk has removed 30.9 million bcm (+13.2% YoY) overburden in August 2011 while coal production was at 2.9 ...
Thursday, 15 September 11
RUSSIAN COAL EXPORTS UP 10.9% IN JAN-AUG TO 71.50 MILLION TONS - PORT NEWS / HELLENIC SHIPPING
Port News reported that, Coal exports from Russia in January-August 2011 grew by 10.9% compared with the same period last year, to 71.50 million ton ...
Thursday, 15 September 11
INDIAN GOVT PLANS TO DEVELOP 9 NEW MAJOR PORTS BY 2016 - INVEST MONEY / HELLENIC SHIPPING
The government has announced to make a investment of more than Rs 22,000 crore (approximately US$ 4,623,791,331) to develop nine new major ...
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- South Luzon Thermal Energy Corporation
- Eastern Coal Council - USA
- Central Electricity Authority - India
- Krishnapatnam Port Company Ltd. - India
- Maharashtra Electricity Regulatory Commission - India
- Parry Sugars Refinery, India
- Mercator Lines Limited - India
- GMR Energy Limited - India
- Energy Development Corp, Philippines
- Sarangani Energy Corporation, Philippines
- Ministry of Mines - Canada
- International Coal Ventures Pvt Ltd - India
- Parliament of New Zealand
- Sindya Power Generating Company Private Ltd
- Asmin Koalindo Tuhup - Indonesia
- CNBM International Corporation - China
- Rashtriya Ispat Nigam Limited - India
- Ministry of Finance - Indonesia
- Global Green Power PLC Corporation, Philippines
- Standard Chartered Bank - UAE
- Wood Mackenzie - Singapore
- Latin American Coal - Colombia
- Indogreen Group - Indonesia
- Bulk Trading Sa - Switzerland
- Indo Tambangraya Megah - Indonesia
- Agrawal Coal Company - India
- Grasim Industreis Ltd - India
- Bhoruka Overseas - Indonesia
- Aditya Birla Group - India
- New Zealand Coal & Carbon
- Star Paper Mills Limited - India
- Toyota Tsusho Corporation, Japan
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Chamber of Mines of South Africa
- Tamil Nadu electricity Board
- Bukit Makmur.PT - Indonesia
- Metalloyd Limited - United Kingdom
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Edison Trading Spa - Italy
- Oldendorff Carriers - Singapore
- Trasteel International SA, Italy
- The Treasury - Australian Government
- Pipit Mutiara Jaya. PT, Indonesia
- Heidelberg Cement - Germany
- Medco Energi Mining Internasional
- Formosa Plastics Group - Taiwan
- Minerals Council of Australia
- Timah Investasi Mineral - Indoneisa
- Rio Tinto Coal - Australia
- Bukit Asam (Persero) Tbk - Indonesia
- Kaltim Prima Coal - Indonesia
- Thai Mozambique Logistica
- Maheswari Brothers Coal Limited - India
- Marubeni Corporation - India
- European Bulk Services B.V. - Netherlands
- Renaissance Capital - South Africa
- Wilmar Investment Holdings
- Borneo Indobara - Indonesia
- Globalindo Alam Lestari - Indonesia
- Energy Link Ltd, New Zealand
- Baramulti Group, Indonesia
- Kobexindo Tractors - Indoneisa
- IEA Clean Coal Centre - UK
- Orica Australia Pty. Ltd.
- IHS Mccloskey Coal Group - USA
- Barasentosa Lestari - Indonesia
- PTC India Limited - India
- Videocon Industries ltd - India
- Intertek Mineral Services - Indonesia
- Power Finance Corporation Ltd., India
- Bharathi Cement Corporation - India
- Australian Commodity Traders Exchange
- TNB Fuel Sdn Bhd - Malaysia
- VISA Power Limited - India
- San Jose City I Power Corp, Philippines
- Bahari Cakrawala Sebuku - Indonesia
- Savvy Resources Ltd - HongKong
- SN Aboitiz Power Inc, Philippines
- Simpson Spence & Young - Indonesia
- Leighton Contractors Pty Ltd - Australia
- Goldman Sachs - Singapore
- Carbofer General Trading SA - India
- Economic Council, Georgia
- Indonesian Coal Mining Association
- Jorong Barutama Greston.PT - Indonesia
- OPG Power Generation Pvt Ltd - India
- Mjunction Services Limited - India
- Therma Luzon, Inc, Philippines
- Bhushan Steel Limited - India
- Riau Bara Harum - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Sree Jayajothi Cements Limited - India
- Uttam Galva Steels Limited - India
- Pendopo Energi Batubara - Indonesia
- White Energy Company Limited
- Bangladesh Power Developement Board
- Coalindo Energy - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Kartika Selabumi Mining - Indonesia
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Australian Coal Association
- Interocean Group of Companies - India
- Samtan Co., Ltd - South Korea
- Romanian Commodities Exchange
- Bayan Resources Tbk. - Indonesia
- Global Business Power Corporation, Philippines
- Gujarat Sidhee Cement - India
- Coal and Oil Company - UAE
- McConnell Dowell - Australia
- Semirara Mining and Power Corporation, Philippines
- ICICI Bank Limited - India
- Altura Mining Limited, Indonesia
- Karaikal Port Pvt Ltd - India
- Dalmia Cement Bharat India
- Independent Power Producers Association of India
- Meenaskhi Energy Private Limited - India
- Makarim & Taira - Indonesia
- CIMB Investment Bank - Malaysia
- Semirara Mining Corp, Philippines
- Cement Manufacturers Association - India
- Aboitiz Power Corporation - Philippines
- Indian Oil Corporation Limited
- Offshore Bulk Terminal Pte Ltd, Singapore
- Orica Mining Services - Indonesia
- Straits Asia Resources Limited - Singapore
- Kideco Jaya Agung - Indonesia
- Larsen & Toubro Limited - India
- Sical Logistics Limited - India
- Mintek Dendrill Indonesia
- Mercuria Energy - Indonesia
- Manunggal Multi Energi - Indonesia
- Salva Resources Pvt Ltd - India
- Tata Chemicals Ltd - India
- Lanco Infratech Ltd - India
- Ceylon Electricity Board - Sri Lanka
- India Bulls Power Limited - India
- AsiaOL BioFuels Corp., Philippines
- Vizag Seaport Private Limited - India
- Singapore Mercantile Exchange
- Meralco Power Generation, Philippines
- Petron Corporation, Philippines
- Banpu Public Company Limited - Thailand
- Anglo American - United Kingdom
- Eastern Energy - Thailand
- London Commodity Brokers - England
- Planning Commission, India
- MS Steel International - UAE
- Neyveli Lignite Corporation Ltd, - India
- Essar Steel Hazira Ltd - India
- Ind-Barath Power Infra Limited - India
- Madhucon Powers Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Vedanta Resources Plc - India
- Attock Cement Pakistan Limited
- GN Power Mariveles Coal Plant, Philippines
- Kepco SPC Power Corporation, Philippines
- Merrill Lynch Commodities Europe
- Ministry of Transport, Egypt
- Chettinad Cement Corporation Ltd - India
- Holcim Trading Pte Ltd - Singapore
- TeaM Sual Corporation - Philippines
- Cigading International Bulk Terminal - Indonesia
- Commonwealth Bank - Australia
- Binh Thuan Hamico - Vietnam
- Bukit Baiduri Energy - Indonesia
- Deloitte Consulting - India
- GVK Power & Infra Limited - India
- Antam Resourcindo - Indonesia
- Iligan Light & Power Inc, Philippines
- Port Waratah Coal Services - Australia
- Indian Energy Exchange, India
- The University of Queensland
- Gujarat Mineral Development Corp Ltd - India
- Sakthi Sugars Limited - India
- Sojitz Corporation - Japan
- Bank of Tokyo Mitsubishi UFJ Ltd
- Bhatia International Limited - India
- Siam City Cement PLC, Thailand
- Siam City Cement - Thailand
- Malabar Cements Ltd - India
- The State Trading Corporation of India Ltd
- Jaiprakash Power Ventures ltd
- Alfred C Toepfer International GmbH - Germany
- Kapuas Tunggal Persada - Indonesia
- Indika Energy - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Coastal Gujarat Power Limited - India
- Gujarat Electricity Regulatory Commission - India
- SMC Global Power, Philippines
- Vijayanagar Sugar Pvt Ltd - India
- Directorate Of Revenue Intelligence - India
- GAC Shipping (India) Pvt Ltd
- Kumho Petrochemical, South Korea
- PowerSource Philippines DevCo
- Global Coal Blending Company Limited - Australia
- Price Waterhouse Coopers - Russia
- Georgia Ports Authority, United States
- Africa Commodities Group - South Africa
- Miang Besar Coal Terminal - Indonesia
- ASAPP Information Group - India
- Posco Energy - South Korea
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Thiess Contractors Indonesia
- Kohat Cement Company Ltd. - Pakistan
- Billiton Holdings Pty Ltd - Australia
- SMG Consultants - Indonesia
- Electricity Generating Authority of Thailand
- Central Java Power - Indonesia
- Ambuja Cements Ltd - India
- Petrochimia International Co. Ltd.- Taiwan
- Xindia Steels Limited - India
- Karbindo Abesyapradhi - Indoneisa
- LBH Netherlands Bv - Netherlands
- Electricity Authority, New Zealand
- PNOC Exploration Corporation - Philippines
- Jindal Steel & Power Ltd - India
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