Market Against Coal Contract Renegotiation

The market is expected to respond negatively to Indonesia’s program renegotiating coal mining contracts, analysts say.

The contract renegotiation, which was supposed to be completed after Law Number 4 Year 2009 on Mineral and Coal Mining was enacted, will reduce coal mining areas and export market shares.

Reza Priyambada, Managing Research Head of PT Indosurya Asset Management, added that Coal Contracts of Work (PKP2B) holders sell most of their coal in the export market as demand from China and India far exceed domestic demand. China and India are aggressively setting up new power plants.

“There must be a win-win solution,“ Reza said.

China is currently the world’s largest coal importer with Indonesia as one of its major suppliers. The country in 2010, as Bloomberg reported, imported 165 million tons, while Indonesia met up to 55 million tons, or a third, of the total.

First Generation PKP2B Holders Disagree

Based on data from the Ministry of Energy and Mineral Resources, 67 PKP2B holders have agreed to adjust the clauses in their contract to Law Number 4 Year 2009, but the holders which endorsed their PKP2B contracts in 1981-1990 (or the first-generation PKP2B holders) say they are against it.

Seven of the nine first-generation PKP2B holders are PT Adaro Indonesia, (a unit of PT Adaro Energy Tbk /ADRO), PT Kideco Jaya Agung (a unit of PT Indika Energy Tbk /INDY), PT Arutmin Indonesia and PT Kaltim Prima Coal (units of PT Bumi Resources Tbk /BUMI), PT Tanito Harum (a unit of PT Harum Energy Tbk/ HRUM), PT Berau Coal (a unit of PT Berau Coal Energy Tbk /BRAU) and PT Indominco Mandiri (a unit of PT Indo Tambang Megahraya Tbk /ITMG).

Bambang Gatot Aryono, Director of Coal Business of the Ministry of Energy and Mineral Resources, said that the first-generation PKP2B holders did not agree on the revision of the six clauses. The clauses pertain to mining work areas, contract extensions, royalties paid to the State, the obligation to build a smelter facility, divestment obligation, and the obligation to use domestic materials and services.

Renegotiation Difficult to Achieve

Supriatna Suhala, Executive Director of the Indonesian Coal Mining Association, added that the first-generation PKP2B holders are subject to a 45 percent mining tax, compared to only 25 percent which other PKP2B holders must pay.

The association said that the government must first readjust their tax to 25 percent. Supriatna added that first-generation PKP2B holders must also pay a royalty of 13.5 percent, compared to just 5 percent which other PKP2B holders pay.

The association also says that clauses on providing value added and work area adjustments are difficult. There are no proven technologies that can upgrade the calorific value of coal. Moreover, adjusting their work areas to conform to Law Number 4 Year 2009 will only pull down the share price of coal producers, which will consequently make it harder for them to obtain loans as their assets would have declined.

“The ideal total work area is 70 thousand hectares, for explorations, production and CSR programs,” Supriatna said.

The IFT Research Department estimates that publicly-listed coal producers are faring better than other top sectors, including the banking sector.

Listed coal producers achieved a 45.29 percent first-half growth year-on-year (YOY). Combined operating and net profit climbed 120.59 and 157.79 percent YOY. The positive performance was attributable to the two-fold increase of average coal price, from US$ 60 to US$ 120 per ton.