Indonesia Plan for Higher Coal Royalties to Hurt Low Rank Miners

Indonesia, the world’s biggest exporter of thermal coal, proposed doubling royalties for some miners next year, threatening margins at companies that produce about 20 percent of the nation’s supplies.

The plan to raise charges to between 10 percent and 13 percent will apply to coal producers with permits issued by local authorities known as Ijin Usaha Pertambangan licenses, or IUPs, Susilo Siswoutomo, the deputy energy minister, told reporters yesterday. The proposal was first made last year.

Indonesia wants to raise revenue from mining after a slide in commodity prices led to a near-record trade deficit in April. The country’s biggest producers such as PT Bumi Resources (BUMI) and PT Adaro Energy (ADRO), which hold longer-term licenses signed with the central government, already pay a 13.5 percent royalty and higher taxes than IUP holders.

“The idea by government is to make equal treatment for miners,” Supriatna Suhala, the executive director of the Indonesian Coal Mining Association, said by phone today. “The problem is it is not the right time.”

Asia’s benchmark coal prices have fallen by more than half since a peak in mid-2008 amid slowing Chinese imports and rising output. Thermal coal at the Australian port of Newcastle was at $86.40 a metric ton as of June 7, according to data from IHS McCloskey. Prices are 4.7 percent lower this year after losing 19 percent in 2012. They were as high as $192.50 in July 2008.

“Right now it’s break even or low margins, so very difficult for smaller players,” Suhala said, adding this could hurt production. “Some may simply stop.”

Indonesia coal swaps for July were at $62.65 a ton yesterday, according to Ginga Petroleum Singapore Pte.

Chinese Ban

A proposed Chinese ban on imports of lower-quality coal also threatens lower-rank Indonesian miners, affecting as much as 10 percent of output, according to the coal mining association. The country produces cheaper grades that have lower calorific value than Australia, the world’s second-largest exporter.

Indonesia may supply about 390 million tons of coal this year, compared with a forecast of 400 million made in February, Bob Kamandanu, the chairman of the association, said last month.

IUP holders, which include PT Tambang Batubara Bukit Asam (PTBA), typically pay royalties of between 5 percent and 7 percent, depending on the quality of the coal. Shares in state-owned Bukit Asam, which is targeting 23 million tons of coal sales this year, or almost 6 percent of Indonesia’s total output, fell as much as 3.4 percent today.

Budget Deficit

“If we assume a 10 percent royalty, with a recent royalty of 6 percent paid by Bukit Asam, it will experience more than a 50 percent increase in royalty expense,” Gifar Indra Sakti, an equity analyst at PT Sucorinvest Central Gani in Jakarta, said in an e-mail today. “It adds bad sentiment to the Indonesia coal industry.”

Producers of higher-value coal may be better able to absorb the extra royalty costs, Suhala said. He said IUP license holders account for as much as 90 million tons of annual coal output.

The Indonesian government plans to lift revenues from mining to 33.1 trillion rupiah ($3.3 billion) this year in a revised draft budget, up from earlier plans for 32.6 trillion rupiah, Siswoutomo said in a meeting with parliament yesterday.

Indonesia’s trade deficit was $1.6 billion in April, compared with a revised $138 million surplus in March, according to the Statistics Department in Jakarta .

To contact the reporter on this story: Neil Chatterjee in Singapore at nchatterjee1@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net

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