W

ith the government planning to increase royalty demands imposed on miners under mining permits (IUPs) to 13.5 percent of net sales next year, industry players deem the proposal '€œuntimely'€ given the declining coal prices.

Supriatna Suhala, executive director of the Indonesian Coal Mining Association (APBI), said small mining companies would suffer from the policy, although the rationale behind the scheme was '€œperfectly understandable.

'€œBasically, the government wants to equate the royalties of every single coal miner in the country. We get that. However, if the government wants to implement that in the near future, it will harm small miners,'€ he said in an interview over the weekend.

Many small mining firms have shut down their businesses, while others are struggling to work under their contracts amid the declining coal prices, low demand and rising supply.

Prices of power-station fuel at the Australian port of Newcastle, the Asian benchmark grade, may trade between US$80 and $90 a metric ton for the rest of the year, according to UBS AG as reported by
Bloomberg.

Meanwhile, Bank of America Corp. forecast an average $86 a ton this year, down from an earlier estimate of $92. IHS McCloskey data shows that coal dropped 7.5 percent to $81.20 a ton in the second quarter, the biggest fall since the three months ending June 2012.

'€œIn Jambi, for example, the only coal producer left is the Sinar Mas Group [through its subsidiary, publicly listed PT Golden Energy Mines]. The rest of the miners have shut down,'€ said Supriatna.

At least 40 coal miners previously were known to be operating in Jambi.

PT Golden Energy Mines is working in thermal coal mining with a range of calorific values between 5,200 and 6,100 kilocalories per kilogram (kCal/kg).

Currently, smaller or newer miners holding IUPs are obliged to pay royalties of 5 to 7 percent. The IUPs were issued by local administrations after the introduction of the 2009 Mining Law.

These smaller and younger mining companies paid their royalties based on the calorific value of the coal they produced '€” the better the coal'€™s quality, the more royalties had to be paid.

The royalty rate for coal with calorific content of less than 5,100 kCal/kg, for example, is set at 3 percent of net sales. A royalty rate of 5
percent of net sales is set for coal with a calorific value of between 5,100 kCal/kg and 6,100 kCal/kg, while 7 percent is demanded for coal with a calorific value of more than 6,100 kCal/kg.

Large firms and some multinationals holding contracts of work (CoW) and smaller miners working with legal mining licenses (PKP2B) are exempt from the planned royalty increase as they have already paid royalties set at 13.5 percent for the coal '€” both low-grade and high-grade '€” they produce.

Both CoW and PKP2B were issued by the central government before the introduction of the 2009 Mining Law.

In a bid to increase state revenue from the sector, the government aims to increase the royalties paid by IUP holders to around 13.5 percent, namely the same figure as those firms operating under the CoW and PKP2B licenses.

Last year, Indonesia produced 386 million tons of thermal coal, up 9 percent from its initial target of 353 million tons and 4 percent higher than the 370 million tons it produced a year earlier, Energy and Mineral Resources Ministry data shows.

Despite the higher output, the Indonesian government last year received Rp 20.8 trillion ($208 billion) in non revenue '€” including royalties '€” from the mining sector (both coal and minerals), down by 14 percent from the Rp 24.2 trillion of non-tax revenue the government received in 2011.

'€œWith that, the government will submit a recommendation on coal royalty increases to around 10-13 percent in the 2014 state budget,'€ Deputy Energy and Mineral Resources Minister Susilo Siswoutomo said in a separate interview.

One senior ministry official, however, acknowledged that the government was still evaluating the plan amid the current market situation, adding that '€œthe ministry is still discussing the scheme internally'€.

Separately, Prakash Sharma, a senior coal analyst with the Wood Mackenzie Group, a global mining think tank, said that while the government'€™s plan to increase coal mining royalties was expected, it could put some miners under pressure once implemented.

'€œIt is unfortunate that a revision in royalty rates is being implemented when seaborne coal prices are low and the market may not be able to absorb additional costs because of oversupply,'€ the Singapore-based Sharma said in a telephone interview.

He added, however, that the think tank did not expect Indonesia to produce less coal in 2013 than it did last year despite the situation, adding that '€œif some mines close down operations, other producers may be willing to increase production'€.

This year, Indonesia aims to produce 391 million tons of thermal coal and expects to receive Rp 29.9 trillion in non-tax revenue. The country produced 99 million tons of coal in the first three months of this year, according to government data.