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Indonesian government tightens regulatory screws in the coal industry

Indonesia’s mining industry has been increasingly regulated over the past few years. Discussions at the 20th Anniversary Coaltrans Asia conference suggested that there are further initiatives in the pipeline which will affect the coal producers.

Indonesia’s mining industry has been increasingly regulated over the past few years. Discussions at the 20th Anniversary Coaltrans Asia conference suggested that there are further initiatives in the pipeline which will affect the coal producers. These include revised coal quotas, increased coal royalties for IUPs, renegotiated contracts of work, and the setting up export ports to curb illegal mining. One of the primary targets proclaimed is illegal mining eradication which reportedly amounts to 50-80m tons per year, and given that there is no exact data available it might be distorting the market more than expected.

As coal is crucial for Indonesia’s sustainable economic development the government is concerned about low prices in the industry. With the industry not ready to cut production rates significantly to rebalance supply and demand, it seems to be focusing more on compliance issues.

“In 2009-2013 the revenue from energy and mineral resources increased by 3 times, and the contribution of coal was about 85% of mining income”, according to Edi Prasodjo, Coal Director at the Ministry of Energy and Mineral Resources of Indonesia.

At the moment the government looks set on keeping production at the current levels until the price recovers. Estimated exports from Indonesia last year are around 426m tons, while this year quotas aim at limiting production to 390-420 m tons, with potentially the same target for 2015. At the same time the government is prioritising the fulfillment of domestic obligations as the internal demand (currently at 20% of coal consumption) is on the rise: in 2013 domestic coal requirement reached 65m tons, and in 2014 this is expected to be 95.5m tons.

The Indonesian government plans to focus on energy security through ensuring supply security (prioritising domestic energy demand, utilising local energy) and community enhancement (encouraging private sector investment, increasing efficiency, promoting energy diversification). It also hopes to control energy pricing through a coal price formula.

Aiming to support the country’s economic growth, the government would like to encourage more investment into the mining sector, points out Ali Masykur Musa, member of the Indonesian Audit Board, but places great importance on producers’ regulatory compliance and environmental obligations. A resulting tightening of rules of the game seem to cause a lot of concern with the mining companies.

While attempted earlier and subsequently rejected, royalty evaluation is back in spite of the low prices, and tariffs are currently being discussed by the ministry to identify a level feasible for businesses. At the moment the rates for IUPs stand at 3% for<5100kcal coal, 5% for 5100-6100, 7% for >6100; for a CCoW the rate is at 13%, according to Gultom Guska, Deputy Director of Coal Production and Marketing at the Indonesian Directorate General of Mineral Resources. There is a government proposal of an up-front royalty payment requirement, to prevent losses, which might eventually put an extra pressure on producers’ working capital before coal market realisation.

According to Dr Sukhyra, Director General of Mineral Resources, Coal and Geothermal Affairs, Coal Contract of Work (CCoW) conditions are being renegotiated in the fields of total area of work, operation continuity, state revenue processing and purification, divestment obligations, obligation to use domestic goods and services. The new contracts have been accepted by 33 companies and the process of renegotiation is expected to be complete by the end of 2014.

New tender rules for granting new licenses will include prioritising state owned entities for special mining permits (IUPKs); ban on bids from foreign investors for mining areas less than 5000Ha or having mining experience of at least 3 years; A guarantee in cash equal to 10% of value of compensation and full tender payment is required within 5 business days of successful tender.

Divestment obligations require that 51% of production operation IUP shares must be divested within 10 years starting in year 5. The divestment process priority starts with the government, followed by state owned entities, then local government enterprises, and then Indonesian legal entities.

The Indonesian government estimates illegal coal mining at 50-80m tons per year. One of the suggested solutions to establish control over illegal operations, mentioned by Dr Sukhyra, is ports regulation, allowing only 7 approved export ports in Kalimantan and 7 ports in Sumatra.

The Coaltrans Asia audience polling returns revealed that the respondents (by 56% Indonesian) were split by roughly 50/50 on the efficiency of the proposed measures, while some 60% supported the limitations on mining area acquisition by foreigners. David Cardell, CEO of PT COAL pointed out, that resource nationalism is understandable but apart from the budget contributions, the broader social effect of the mining sector could help strengthen the entire economy and fiscal policies should be aligned with the profitability of the industry; Indonesia’s tough regulation, while officially aimed at increasing the efficiency in the coal industry could end up putting off investors for whom the country is hungry in order to maintain economic growth.
This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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