Indonesia’s Coal Mining Royalty Increase: Effects in Brief

The Government of Indonesia’s (GoI) plan to increase all coal miners’ royalty rates to 13.5% of net sales in 2014 will likely result in a supply response from IUP licence holders. The current proposal aims to increase IUP mining licence royalty rates from the current 3-7% to 13.5%, in line with the royalties applied to the older Contract of Work (CoW) and Kuasa Pertambangan (KP) mining licences.

The move contradicts the GoI’s 2009 mining law, which stipulated that as CoW and KP licences expired, they would be transferred to IUP licences. However, the higher royalty rate currently applied to CoW miners now looks likely to be implemented on IUPs.

The proposed royalty increase comes at a time when IUP miners’ share of total Indonesian production is already falling due to low international coal prices. IUP coal production in 2013 to the end of May has already shown a 4.1% decrease in the share of total Indonesian coal production, falling from 29.9% in 2012 to 25.8% in 2013 thus far. IUP absolute production has also decreased 4.3% y-o-y to 53.3 Mt in 2013 thus far, annualising to 130.3 Mt, a y-o-y decrease of 5.9 Mt. The decrease in IUP production has occurred as a large number of IUP-holders operate relatively small mines, which lack the economies of scale of the larger Coal Contract of Work (CCoW) operations (such as Adaro’s Tutupan mine or Bumi PLC’s Berau Lati mine) and operate on lower margins.

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An example of this effect is coal production in of Jambi, where it is estimated that over 40 IUPs have ceased operations over the past year, leaving just one operating coal mine remaining in the province.

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The effect of the royalty change will be most pronounced for IUP producers of low rank coal (LRC), as current IUP royalty rates differ depending on the quality of coal produced. The current royalty rates for IUP producers are given in the table below.

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With these royalty increases, coal producers selling 5,000 kcal/kg coal for US$62.60/t (the price of 5,000 kcal/kg Envirocoal in May’s HBA coal price marker) will need to reduce production costs by up to 10.8% to avoid financial losses.

The proposed royalty increase is especially poor-timed for Indonesian LRC producers, who are still awaiting a final decision from the Chinese Government of China’s proposed LRC import ban. Such a ban would displace approximately 50 Mt of Indonesian coal, putting tremendous downward pressure on the price of low rank Indonesian coal.

With these recent developments, the future looks difficult for Indonesia’s IUP low rank coal producers. For further information and data on Indonesia’s coal industry or to enquire about a subscription to The Salva Report Indonesia, please visit our products page.