Coal Industry Indonesia: Confusion about Letter of Credit & Royalties

The introduction of mandatory letters of credit is not only confined to coal exports from Southeast Asia’s largest economy but also applies to other key commodities such as palm oil, oil & gas and minerals. Per 1 April 2015, the Indonesian government requires these Indonesian exporters to use letters of credit for their exports. Indonesian Trade Minister Rachmat Gobel stated at the start of the year that this new rule would increase the country’s export earnings and enhance monitoring sales of natural resources. Indonesia has been plagued by illegal coal shipments. It is estimated that per year between 50 and 75 million metric tons of coal are mined illegally in Indonesia, reflecting weak law enforcement and monitoring in the industry.

However, this new requirement immediately led to confusion over whether existing contracts that have been signed earlier this year should also use these letters of credit. Reportedly, the Indonesian Coal Mining Association (APBI) discussed this issue with the Indonesian Ministry of Trade a week ago but the government is yet to clarify this matter. Coal miners have requested for an exemption from the new regulation for existing contracts. This confusion may disturb coal shipments from Indonesia. For some miners the new requirement is problematic as their buyers prefer to pay through telegraphic transfers.

Corporate Earnings Listed Indonesian Coal Miners:

Company	Net Profit – (Loss) 12 months 2014	Growth      yoy	Revenues 12 months 2014	Growth      yoy
ABM Investama	(USD 114 million)		USD 724 million	-6.8%
Adaro Energy	USD 178.2 million	-23.9%	USD 3.32 billion	+1.2%
Baramulti Suksessarana	USD 2.5 million	-47%	USD 217 million	+30%
Bumi Resources
Golden Energy Mines	IDR 133.4 billion	-41.1%	IDR 5.19 trillion	+17.1%
Harum Energy	USD 410,792	-99%
Indo Tambangraya Megah	USD 200.2 million	-2.3%	USD 1.94 billion	-10.6%
Samindo Resources
Tambang Batubara Bukit A.	IDR 2.02 trillion	+9%	IDR 13.08 trillion	+16.7%
Toba Bara Sejahtera	USD 18.3 million	-1.1%	USD 499.9 million	+18.5%

^{Various sources}

The table above shows that most Indonesian coal miners listed on the Indonesia Stock Exchange have recorded weaker net profit over 2014 compared to the previous year. The only exception is state-controlled Tambang Batubara Bukit Asam which posted a 9 percentage point growth (y/y) in net profit due to a number of successful strategies aimed at reducing the company's production costs.

Higher Coal Royalties

Besides the mandatory letter of credit, the government also plans to impose higher royalties for coal miners per 1 April 2015. These higher royalties only apply to IUP-holders, not the older Contracts of Work-holders. Pandu Sjahrir, Deputy Chairman of the APBI, requested the government to postpone the plan as Indonesian miners are already burdened by current low coal prices (and which are unlikely to rebound in the foreseeable future). The administration of Indonesian President Joko Widodo wants to raise coal royalties as it aims to increase non-tax revenue from coal and metals to IDR 52.2 trillion (USD $4 billion) in 2015 (from IDR 35 trillion in the preceding year).

Although both regulations - letters of credit for key commodity exports and higher royalties for IUP holders - are to be implemented per 1 April 2015, we have not received confirmation yet that the Indonesian government has upheld this deadline.

Indonesian Production, Export and Consumption of Coal:

	2007	2008	2009	2010	2011	2012	2013	2014
Production	217	240	256	275	353	383	421	435
Export	163	191	198	208	272	304	349	359
Domestic	61	49	56	67	80	79	72	76

^{in million tons
Source: Ministry of Energy and Mineral Resources}

Further Reading:

• Earnings Indonesian Coal Miners Down on Weak Global Coal Prices
• Coal Mining News: Indonesia Plans to Raise Coal Royalties in March
• 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

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