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19 October 2020 (closed)
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Bad news for Indonesian coal miners as the government of Indonesia plans to raise coal royalties in March 2015 in a bid to increase revenue from the natural resources sector. Apart from raising royalties, the government will also implement measures to enhance monitoring in the coal mining sector (as illegal coal shipments and tax avoidance are a major problem). The plan to nearly double coal royalties are particularly expected to impact negatively on smaller miners and new firms that focus on the production of low-quality coal.
For Indonesian coal miners these higher royalties come at unpleasant times (although the plan still awaits approval from Indonesia’s Finance and Economic Ministries) as global coal prices have more-or-less halved since 2011, limiting coal mining companies’ profitability. In an effort to support the country’s mining firms, the Indonesian Coal Mining Association (ICMA) requested the government to delay implementing higher royalties until coal prices have exceeded USD $80 per ton (from around USD $72 currently). The ICMI elaborated that many firms entered Indonesia’s coal mining industry in 2010-2011 when the outlook for the coal mining industry was highly lucrative (and coal prices were high). These companies then borrowed capital to invest in their coal business. However, amid the sluggish global economy (triggering declining coal prices) these companies, particularly the smaller ones, have difficulty to repay debt after their coal production started. Coal prices are expected to need at least two years to recover. However, the government will not provide special assistance to these companies.
Indonesian Coal Royalties:
|Coal Type||Current Royalties||Proposed Royalties|
|< 5,100 cal/gr||3%||7%|
|5,100 - 6,100 cal/gr||5%||9%|
|> 6,100 cal/gr||7%||13.5%|
R. Sukhyar, Director General for Coal and Minerals at the Indonesian Ministry of Energy and Mineral Resources, said that the impact of looming higher royalties will be particularly felt by companies producing low-calorie coal. Coal in Indonesia, the world’s largest thermal coal exporter, mainly involves the low-calorie type. It is estimated that 30 percent of the country’s total coal production consists of the low-calorie type of coal. Total coal production is expected to reach 425 million metric tons in 2015.
From the government’s perspective, adjustments to the domestic coal sector are necessary to enhance supervision and revenues. Increased revenue streams are needed as the President Joko Widodo administration needs funds to boost economic and social development in order to push the economic growth rate back to seven percent (y/y). In 2014, GDP growth slowed to 5.02 percent (y/y), the slowest pace in five years. Moreover, the central government intends to increase monitoring (currently the mining sector is largely governed by local administrations) as it misses out on tax and royalties income due to illegal shipments and corruption. Late last year, Sukhyar said that per year about 30-40 million tons (with a combined value of over USD $1 billion) of coal is illegally shipped from coal-rich regions in Kalimantan and Sumatra. Moreover, about 10-15 percent of the country’s coal miners are believed to breach tax and royalty payment rules.
The higher royalties will apply to Mining Business Permit (IUP)-holders, while the (larger) older coal companies, which still work under Contracts of Work (PKP2B) will be unaffected. These older generation companies include Bumi Resources and Berau Coal Energy. The government expects that non-tax revenue from the coal and minerals sector will increase to IDR 52.2 trillion in 2015, from IDR 35.4 trillion last year.
Amid weak coal prices (and little signs of recovery) ICMA advised the Indonesian government to limit both coal export and output in Indonesia in an attempt to boost prices, while safeguarding future coal supplies for domestic power generation. Last year, the government tried to cap coal production at 400 million tons. However, as domestic players try to offset low prices by producing more coal (thus putting more downward pressure on coal prices) this target was not achieved.
Indonesian Production, Export and Consumption of Coal:
in million tons
Source: Ministry of Energy and Mineral Resources
• News from Indonesia’s Coal Mining Industry: Production & Export
• Coal Mining Industry Indonesia: Higher Royalties for IUP-Holders
• Illegal Coal Shipments from Indonesia Form a Persistent Problem
• Coal Mining in Indonesia: Safeguarding Future Energy Sources
• Indonesia Coal Update: Export, Production and New License System
• Overview of the Coal Mining Industry in Indonesia