Coal news and updates

Despite the raw minerals export ban coming into effect on Jan. 12, 2014, a lot of questions remain. Mining lobbyists are still trying to persuade the government to reopen the export tap, yet the government stands firm. 

 

The hysteria surrounding the export ban has blinded most of us to the fact that a revolution is under way in the coal industry. 

 

Coal, as it is not one of the 14 metallic and eight non-metallic minerals listed in the Energy and Mineral Resources Ministerial Regulation No. 7/2012, is exempt from the pre-export processing requirement. 

 

Thus, the issues surrounding coal differ from those affecting minerals: The most important ones currently are unquestionably the royalty increase and the production quota. 

 

With total production reaching 421 million tons last year with the price range of between US$40 and $80 per ton, the coal industry has enormous economic potential. The royalty increase, which is paid to the government as a percentage of sales, will definitely be a welcome boost to the state’s income. 

 

However, that action is complicated by the fact that different royalty rates are applied for different mining permit holders and coal qualities. 

 

Companies with mining permits (IUP), which have been issued since 2009, pay a 3 to 7 percent royalty, depending on the coal quality sold in accordance with Government Regulation No. 9/2012. 

 

Meanwhile, companies with coal mining business permits (PKP2B) that predate the IUP must pay a 13.5 percent royalty. The government then plans to exert a single royalty rate (13.5 percent) to all existing coal companies.

 

Such an idea received strong opposition from mining players, who claimed the decreasing trend of the price of coal had slashed most of their profit and a further increase in royalties would affect their businesses. 

 

Recent reports mentioned that the government decided to re-asses their plan to increase coal royalties and involve mining players in the mapping and refining, as a win-win solution.

 

Getting a larger share of non-renewable resources is a classical problem faced by the government of any country. Countless combinations of different taxes (corporate tax, value-added tax, etc.) and royalty systems can be modelled to predict the optimum one. 

 

Nonetheless, the “Laffer-curve” rule must be taken into consideration: The Laffer-curve is a mountain-shaped curve that correlates the possible government income on its vertical axis to the taxation rate (0-100 percent) on its 

horizontal axis. 

 

The American economist, Arthur Laffer, argued that a government could force the taxation rate to be any level it wanted; however, the government’s income would start decreasing beyond a certain rate — due to such high taxation, which kills less competitive companies. 

 

People will also lose jobs as a consequence. An op-ed article in the Philippine newspaper, BusinessMirror, on March 6, discussed the importance of understanding the Laffer-curve, in relation to the Filipino government’s intention to increase the mining tax.

 

Regarding the production quota, the initial plan was to set the ceiling of national production to 397 million tons per annum, 6 percent lower than last year (The Jakarta Post, March 3), in accordance with the national energy security scheme, which planned to gradually increase the proportion of coal as a source of energy, from 15 percent in 2005 to 33 percent in 2025, by building more coal-fired power plants. 

 

Later, the cap was somehow relaxed to, at least, not exceeding last year’s figure. 

 

Since mining companies tends to boost production to maintain nominal profits when prices plunge, it is best for the government to announce what happens with the cap, including the penalty for producing more. 

 

The longer the wait, the more complex it will be for coal companies, especially if business plans must be suddenly changed near the end of the year. 

 

A few weeks ago, Reuters reported that the Jakarta Futures Exchange (JFX) had received the government’s approval to trade physical coal contracts. 

 

Among the benefits is that state electricity company PT Perusahaan Listrik Negara (PLN) will have access to coal suppliers offering fair market prices. This may eliminate the need for coal procurement tenders, the standard protocol used by PT PLN. 

 

On the other hand, Caroline Bain, in her book titled Guide to Commodities, which is part of The Economist Guide series, says that trading physical copper futures is not preferred by end users as larger traders can lock up stocks, create tightness and then inflate prices. 

 

Imagine if something similar happens to the growing domestic market, which requires coal for electricity, and only a limited amount of coal can be produced. 

 

Obviously, trading strategic commodities such as coal in a bourse needs to be viewed with caution and carefully regulated so that it will not put the national interest at risk.

 

 

Source: http://www.thejakartapost.com/