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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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Thursday, 15 September 11
BOTSWANA COAL AND ENERGY CONFERENCE 2011
Press Release - Botswana Coal and Energy Conference 2011 | 29-30 November 2011 | Gaborone. Botswana represents Africa’s exciting new coal and ...
Thursday, 15 September 11
DRY BULK MARKET EDGING FURTHER UP THE SCALE, CLOSING IN ON 2,000 POINTS - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market was up once again yesterday, reaching 1,927 points, or 1.375 higher on the day. Thus, it has kept its rising trend established d ...
Wednesday, 14 September 11
INDO STRAITS BAGS 2.4 MILLION TON COAL TRANSPORTATION CONTRACT FROM ARUTMIN
COALspot.com - PT Indo Straits Tbk (PTIS) bagged a contract to tranship about 2.40 million tons of coal over an initial period of 6 months fro ...
Wednesday, 14 September 11
DUTA PERTIWI DISCOVERS COAL RESERVE - INSIDER STORIES
Insider Stories reported that, PT Duta Pertiwi Nusantara Tbk (DPNS) yesterday steeply jumped 24.56% to Rp710 a share after the company discove ...
Wednesday, 14 September 11
GOVT SETS SEPTEMBER COAL REFERENCE PRICE AT $116.26 PER TON
COALspot.com - Ministry of Energy and Mineral Resources of Indonesia has set the September 2011 coal reference price at US$ 116.26 per ton slightly ...
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- Bharathi Cement Corporation - India
- Bayan Resources Tbk. - Indonesia
- Indogreen Group - Indonesia
- PNOC Exploration Corporation - Philippines
- Salva Resources Pvt Ltd - India
- The State Trading Corporation of India Ltd
- Marubeni Corporation - India
- GAC Shipping (India) Pvt Ltd
- Medco Energi Mining Internasional
- Wilmar Investment Holdings
- Bahari Cakrawala Sebuku - Indonesia
- Siam City Cement - Thailand
- Jindal Steel & Power Ltd - India
- OPG Power Generation Pvt Ltd - India
- Simpson Spence & Young - Indonesia
- Directorate Of Revenue Intelligence - India
- SMC Global Power, Philippines
- Mercator Lines Limited - India
- Latin American Coal - Colombia
- Port Waratah Coal Services - Australia
- Meralco Power Generation, Philippines
- Global Business Power Corporation, Philippines
- Edison Trading Spa - Italy
- Miang Besar Coal Terminal - Indonesia
- Ind-Barath Power Infra Limited - India
- Larsen & Toubro Limited - India
- Electricity Authority, New Zealand
- CIMB Investment Bank - Malaysia
- Singapore Mercantile Exchange
- Videocon Industries ltd - India
- European Bulk Services B.V. - Netherlands
- Uttam Galva Steels Limited - India
- Gujarat Mineral Development Corp Ltd - India
- GN Power Mariveles Coal Plant, Philippines
- CNBM International Corporation - China
- Australian Commodity Traders Exchange
- Essar Steel Hazira Ltd - India
- GVK Power & Infra Limited - India
- Maheswari Brothers Coal Limited - India
- Petrochimia International Co. Ltd.- Taiwan
- Mercuria Energy - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- MS Steel International - UAE
- Billiton Holdings Pty Ltd - Australia
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Kalimantan Lumbung Energi - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- Eastern Energy - Thailand
- Kumho Petrochemical, South Korea
- New Zealand Coal & Carbon
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- LBH Netherlands Bv - Netherlands
- Sical Logistics Limited - India
- Heidelberg Cement - Germany
- Riau Bara Harum - Indonesia
- TeaM Sual Corporation - Philippines
- Anglo American - United Kingdom
- Rashtriya Ispat Nigam Limited - India
- Oldendorff Carriers - Singapore
- Sinarmas Energy and Mining - Indonesia
- Bangladesh Power Developement Board
- Coalindo Energy - Indonesia
- International Coal Ventures Pvt Ltd - India
- Ministry of Finance - Indonesia
- Indo Tambangraya Megah - Indonesia
- Africa Commodities Group - South Africa
- Energy Development Corp, Philippines
- Sakthi Sugars Limited - India
- Vizag Seaport Private Limited - India
- Star Paper Mills Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Gujarat Electricity Regulatory Commission - India
- Tata Chemicals Ltd - India
- Romanian Commodities Exchange
- Indian Oil Corporation Limited
- Central Java Power - Indonesia
- Mintek Dendrill Indonesia
- Manunggal Multi Energi - Indonesia
- Minerals Council of Australia
- Price Waterhouse Coopers - Russia
- Offshore Bulk Terminal Pte Ltd, Singapore
- Interocean Group of Companies - India
- Madhucon Powers Ltd - India
- Borneo Indobara - Indonesia
- Thiess Contractors Indonesia
- Chamber of Mines of South Africa
- Toyota Tsusho Corporation, Japan
- Coal and Oil Company - UAE
- Central Electricity Authority - India
- Ceylon Electricity Board - Sri Lanka
- SN Aboitiz Power Inc, Philippines
- White Energy Company Limited
- Power Finance Corporation Ltd., India
- Baramulti Group, Indonesia
- Bhushan Steel Limited - India
- South Luzon Thermal Energy Corporation
- Malabar Cements Ltd - India
- Bukit Makmur.PT - Indonesia
- Orica Australia Pty. Ltd.
- Meenaskhi Energy Private Limited - India
- Coastal Gujarat Power Limited - India
- Electricity Generating Authority of Thailand
- Directorate General of MIneral and Coal - Indonesia
- Renaissance Capital - South Africa
- Orica Mining Services - Indonesia
- Deloitte Consulting - India
- Semirara Mining and Power Corporation, Philippines
- Global Coal Blending Company Limited - Australia
- Samtan Co., Ltd - South Korea
- Kobexindo Tractors - Indoneisa
- Planning Commission, India
- Energy Link Ltd, New Zealand
- Bukit Baiduri Energy - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Kohat Cement Company Ltd. - Pakistan
- ASAPP Information Group - India
- SMG Consultants - Indonesia
- Attock Cement Pakistan Limited
- IHS Mccloskey Coal Group - USA
- Jaiprakash Power Ventures ltd
- Formosa Plastics Group - Taiwan
- Makarim & Taira - Indonesia
- GMR Energy Limited - India
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Australian Coal Association
- Globalindo Alam Lestari - Indonesia
- Straits Asia Resources Limited - Singapore
- San Jose City I Power Corp, Philippines
- Dalmia Cement Bharat India
- Kapuas Tunggal Persada - Indonesia
- PTC India Limited - India
- Ambuja Cements Ltd - India
- Karaikal Port Pvt Ltd - India
- Petron Corporation, Philippines
- PetroVietnam Power Coal Import and Supply Company
- Parliament of New Zealand
- TNB Fuel Sdn Bhd - Malaysia
- Standard Chartered Bank - UAE
- Sojitz Corporation - Japan
- Bulk Trading Sa - Switzerland
- ICICI Bank Limited - India
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Binh Thuan Hamico - Vietnam
- Semirara Mining Corp, Philippines
- Sarangani Energy Corporation, Philippines
- Trasteel International SA, Italy
- Chettinad Cement Corporation Ltd - India
- Bukit Asam (Persero) Tbk - Indonesia
- Kartika Selabumi Mining - Indonesia
- Sindya Power Generating Company Private Ltd
- Xindia Steels Limited - India
- Antam Resourcindo - Indonesia
- Tamil Nadu electricity Board
- Merrill Lynch Commodities Europe
- Georgia Ports Authority, United States
- Commonwealth Bank - Australia
- Carbofer General Trading SA - India
- Kideco Jaya Agung - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Alfred C Toepfer International GmbH - Germany
- Rio Tinto Coal - Australia
- Parry Sugars Refinery, India
- London Commodity Brokers - England
- Intertek Mineral Services - Indonesia
- Lanco Infratech Ltd - India
- The Treasury - Australian Government
- Aboitiz Power Corporation - Philippines
- Wood Mackenzie - Singapore
- Vijayanagar Sugar Pvt Ltd - India
- Bhatia International Limited - India
- Siam City Cement PLC, Thailand
- Banpu Public Company Limited - Thailand
- India Bulls Power Limited - India
- Krishnapatnam Port Company Ltd. - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Posco Energy - South Korea
- PowerSource Philippines DevCo
- Indonesian Coal Mining Association
- Cigading International Bulk Terminal - Indonesia
- Independent Power Producers Association of India
- Kaltim Prima Coal - Indonesia
- Ministry of Transport, Egypt
- McConnell Dowell - Australia
- Aditya Birla Group - India
- Goldman Sachs - Singapore
- Gujarat Sidhee Cement - India
- Cement Manufacturers Association - India
- Barasentosa Lestari - Indonesia
- Thai Mozambique Logistica
- Leighton Contractors Pty Ltd - Australia
- Metalloyd Limited - United Kingdom
- Savvy Resources Ltd - HongKong
- Kepco SPC Power Corporation, Philippines
- IEA Clean Coal Centre - UK
- Asmin Koalindo Tuhup - Indonesia
- Economic Council, Georgia
- Therma Luzon, Inc, Philippines
- Agrawal Coal Company - India
- Vedanta Resources Plc - India
- Mjunction Services Limited - India
- Pipit Mutiara Jaya. PT, Indonesia
- VISA Power Limited - India
- Holcim Trading Pte Ltd - Singapore
- Grasim Industreis Ltd - India
- Iligan Light & Power Inc, Philippines
- Altura Mining Limited, Indonesia
- Bhoruka Overseas - Indonesia
- The University of Queensland
- Indika Energy - Indonesia
- Sree Jayajothi Cements Limited - India
- Jorong Barutama Greston.PT - Indonesia
- Timah Investasi Mineral - Indoneisa
- Eastern Coal Council - USA
- Ministry of Mines - Canada
- Indian Energy Exchange, India
- Pendopo Energi Batubara - Indonesia
- Global Green Power PLC Corporation, Philippines
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