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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, 13 September 11
CAPITAL COSTS OF INDIAN COAL MINING PROJECT - AN ANALYST VIEW
By Mr Dipesh Dipu, Director - Consulting (Mining), Deloitte Touche Tohmatsu India Private Limited
The coal mining sector that has been opened par ...
Tuesday, 13 September 11
INDONESIAS COAL SECTOR EYES 2012 BOOM - JG
The Jakarta Globe, Indonesian English language News paper reported that, Coal production is set to surge next year as coal miners bolster their busi ...
Tuesday, 13 September 11
DRY BULK RALLY MAINTAINS MOMENTUM AT START OF THE WEEK - NIKOS ROUSSANOGLOU, HELLENIC SHIPPING
The dry bulk market kept its upward momentum at the start of the week, as the industry’s benchmark, the Baltic Dry Index (BDI) was up by 2.07% ...
Monday, 12 September 11
INDONESIAN GOVERNMENT HAS ALLOCATED MORE COAL FOR 2012
COALspot.com - Indonesian government has increased the domestic market obligation allocation to 82.07 million tons of coal for 2012, which is 4 perc ...
Saturday, 10 September 11
THE FREIGHT MARKET LIKELY TO BE FIRM NEXT WEEK - CAPT. REDDY
COALspot.com - The freight market continued the upward trend during last week with BDI crossing 1,800 points and closing at 1,838 points up by 5.63 ...
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- Merrill Lynch Commodities Europe
- South Luzon Thermal Energy Corporation
- Timah Investasi Mineral - Indoneisa
- Karbindo Abesyapradhi - Indoneisa
- Energy Link Ltd, New Zealand
- SN Aboitiz Power Inc, Philippines
- Metalloyd Limited - United Kingdom
- Marubeni Corporation - India
- Wilmar Investment Holdings
- Goldman Sachs - Singapore
- Kaltim Prima Coal - Indonesia
- Kepco SPC Power Corporation, Philippines
- Star Paper Mills Limited - India
- Savvy Resources Ltd - HongKong
- Sarangani Energy Corporation, Philippines
- Australian Coal Association
- Borneo Indobara - Indonesia
- Lanco Infratech Ltd - India
- Coastal Gujarat Power Limited - India
- Bhatia International Limited - India
- Bhoruka Overseas - Indonesia
- Salva Resources Pvt Ltd - India
- Sinarmas Energy and Mining - Indonesia
- Pipit Mutiara Jaya. PT, Indonesia
- Thiess Contractors Indonesia
- Global Business Power Corporation, Philippines
- New Zealand Coal & Carbon
- Eastern Energy - Thailand
- Antam Resourcindo - Indonesia
- Gujarat Mineral Development Corp Ltd - India
- Bahari Cakrawala Sebuku - Indonesia
- Altura Mining Limited, Indonesia
- Electricity Generating Authority of Thailand
- Sree Jayajothi Cements Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- White Energy Company Limited
- Rio Tinto Coal - Australia
- Aboitiz Power Corporation - Philippines
- Riau Bara Harum - Indonesia
- European Bulk Services B.V. - Netherlands
- Kapuas Tunggal Persada - Indonesia
- Standard Chartered Bank - UAE
- PNOC Exploration Corporation - Philippines
- Meralco Power Generation, Philippines
- Cement Manufacturers Association - India
- Toyota Tsusho Corporation, Japan
- Singapore Mercantile Exchange
- Central Java Power - Indonesia
- Bhushan Steel Limited - India
- The State Trading Corporation of India Ltd
- Indian Oil Corporation Limited
- Mintek Dendrill Indonesia
- Petron Corporation, Philippines
- Maheswari Brothers Coal Limited - India
- Bukit Baiduri Energy - Indonesia
- McConnell Dowell - Australia
- Georgia Ports Authority, United States
- Medco Energi Mining Internasional
- Vizag Seaport Private Limited - India
- Bukit Makmur.PT - Indonesia
- Thai Mozambique Logistica
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- London Commodity Brokers - England
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Orica Australia Pty. Ltd.
- MS Steel International - UAE
- Jindal Steel & Power Ltd - India
- Sojitz Corporation - Japan
- Therma Luzon, Inc, Philippines
- IEA Clean Coal Centre - UK
- Global Green Power PLC Corporation, Philippines
- Binh Thuan Hamico - Vietnam
- Formosa Plastics Group - Taiwan
- Vijayanagar Sugar Pvt Ltd - India
- Indian Energy Exchange, India
- Siam City Cement - Thailand
- Offshore Bulk Terminal Pte Ltd, Singapore
- Minerals Council of Australia
- Asmin Koalindo Tuhup - Indonesia
- Australian Commodity Traders Exchange
- IHS Mccloskey Coal Group - USA
- Gujarat Sidhee Cement - India
- GN Power Mariveles Coal Plant, Philippines
- Carbofer General Trading SA - India
- Africa Commodities Group - South Africa
- Kalimantan Lumbung Energi - Indonesia
- OPG Power Generation Pvt Ltd - India
- ASAPP Information Group - India
- Jorong Barutama Greston.PT - Indonesia
- Neyveli Lignite Corporation Ltd, - India
- Billiton Holdings Pty Ltd - Australia
- Rashtriya Ispat Nigam Limited - India
- Economic Council, Georgia
- Mjunction Services Limited - India
- Intertek Mineral Services - Indonesia
- San Jose City I Power Corp, Philippines
- Chamber of Mines of South Africa
- Manunggal Multi Energi - Indonesia
- Electricity Authority, New Zealand
- GMR Energy Limited - India
- India Bulls Power Limited - India
- Ambuja Cements Ltd - India
- Price Waterhouse Coopers - Russia
- Coalindo Energy - Indonesia
- Grasim Industreis Ltd - India
- Bank of Tokyo Mitsubishi UFJ Ltd
- Madhucon Powers Ltd - India
- Sindya Power Generating Company Private Ltd
- Tamil Nadu electricity Board
- Bharathi Cement Corporation - India
- Indo Tambangraya Megah - Indonesia
- Mercator Lines Limited - India
- Kumho Petrochemical, South Korea
- The University of Queensland
- The Treasury - Australian Government
- Simpson Spence & Young - Indonesia
- Directorate General of MIneral and Coal - Indonesia
- VISA Power Limited - India
- Krishnapatnam Port Company Ltd. - India
- Posco Energy - South Korea
- CNBM International Corporation - China
- GAC Shipping (India) Pvt Ltd
- Ministry of Finance - Indonesia
- AsiaOL BioFuels Corp., Philippines
- Planning Commission, India
- Directorate Of Revenue Intelligence - India
- Semirara Mining Corp, Philippines
- Dalmia Cement Bharat India
- Energy Development Corp, Philippines
- Ministry of Mines - Canada
- Parliament of New Zealand
- Indogreen Group - Indonesia
- Eastern Coal Council - USA
- Alfred C Toepfer International GmbH - Germany
- ICICI Bank Limited - India
- Interocean Group of Companies - India
- Kideco Jaya Agung - Indonesia
- Indonesian Coal Mining Association
- Wood Mackenzie - Singapore
- Kohat Cement Company Ltd. - Pakistan
- TNB Fuel Sdn Bhd - Malaysia
- Sakthi Sugars Limited - India
- Banpu Public Company Limited - Thailand
- Mercuria Energy - Indonesia
- Orica Mining Services - Indonesia
- CIMB Investment Bank - Malaysia
- Malabar Cements Ltd - India
- Kobexindo Tractors - Indoneisa
- Commonwealth Bank - Australia
- Karaikal Port Pvt Ltd - India
- Siam City Cement PLC, Thailand
- Uttam Galva Steels Limited - India
- Cigading International Bulk Terminal - Indonesia
- Gujarat Electricity Regulatory Commission - India
- Tata Chemicals Ltd - India
- Global Coal Blending Company Limited - Australia
- Baramulti Group, Indonesia
- SMG Consultants - Indonesia
- Bangladesh Power Developement Board
- Coal and Oil Company - UAE
- Bukit Asam (Persero) Tbk - Indonesia
- Videocon Industries ltd - India
- Meenaskhi Energy Private Limited - India
- Vedanta Resources Plc - India
- Parry Sugars Refinery, India
- PetroVietnam Power Coal Import and Supply Company
- Straits Asia Resources Limited - Singapore
- GVK Power & Infra Limited - India
- Jaiprakash Power Ventures ltd
- Port Waratah Coal Services - Australia
- Bulk Trading Sa - Switzerland
- Pendopo Energi Batubara - Indonesia
- Romanian Commodities Exchange
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Larsen & Toubro Limited - India
- Deloitte Consulting - India
- Holcim Trading Pte Ltd - Singapore
- Samtan Co., Ltd - South Korea
- Trasteel International SA, Italy
- Power Finance Corporation Ltd., India
- Makarim & Taira - Indonesia
- Maharashtra Electricity Regulatory Commission - India
- Bayan Resources Tbk. - Indonesia
- International Coal Ventures Pvt Ltd - India
- Independent Power Producers Association of India
- Oldendorff Carriers - Singapore
- Attock Cement Pakistan Limited
- Ceylon Electricity Board - Sri Lanka
- LBH Netherlands Bv - Netherlands
- Anglo American - United Kingdom
- PTC India Limited - India
- Xindia Steels Limited - India
- Latin American Coal - Colombia
- Renaissance Capital - South Africa
- Edison Trading Spa - Italy
- Ind-Barath Power Infra Limited - India
- Essar Steel Hazira Ltd - India
- Sical Logistics Limited - India
- Agrawal Coal Company - India
- Ministry of Transport, Egypt
- Kartika Selabumi Mining - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Iligan Light & Power Inc, Philippines
- Miang Besar Coal Terminal - Indonesia
- PowerSource Philippines DevCo
- Chettinad Cement Corporation Ltd - India
- Asia Pacific Energy Resources Ventures Inc, Philippines
- TeaM Sual Corporation - Philippines
- Central Electricity Authority - India
- Indika Energy - Indonesia
- Barasentosa Lestari - Indonesia
- SMC Global Power, Philippines
- Heidelberg Cement - Germany
- Leighton Contractors Pty Ltd - Australia
- Aditya Birla Group - India
- Semirara Mining and Power Corporation, Philippines
- Globalindo Alam Lestari - Indonesia
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