Part 1: Introduction to Indonesian Coal Industry

PT. PALMCO INDONESIA

Contents:
1. Coal Mining Industry – Worldwide

2. Indonesian Coal Industry

A. Competitive Analysis
B. Market Overview
C. Indonesia’s Economy

3. Mining in Indonesia
A. PKP2B
B. IUP

4. Government Royalties:
A. Coal Price Benchmarking
B. Indonesian Coal Index & Harga Batubara Acuan (HBA)

5. Future Prospect of Indonesian Coal Industry

Coal Mining Industry
–
Worldwide
Reserve worldwide: Coal vs Oil & Gas

• Estimated over 820 billion tonnes of proven coal reserves worldwide

• At current rates of production (and if new reserves are not found),

global coal reserves are estimated to last for around 112 years. The
biggest reserves are found in the USA, Russia, China and India.

• In contrast, proven oil and gas reserves are equivalent to around 46

and 59 years at current production levels.

Source: Coal Statistics, World Coal Institute

 World’s Coal Reserve

Current Coal Proven Reserves in the World:

820,001,000,000 Metric Tons

Source: International Energy Statistics, Energy Information

Administration, Washington, DC
 World’s Coal Production

• Current Coal Production in the World:

6,781,173,808 Metric Tons

Source: International Energy Statistics, Energy Information

Administration, Washington, DC
• ¹ commercial solid fuels only, i.e. bituminous coal, anthracite (hard coal),
lignite and brown (sub-bituminous) coal
² million tons oil equivalent
Source: BP Statistical Review of World Energy 2015
 World’s Coal Consumption
• Current Coal Consumption in the World:
6,647,551,377.2 Metric Tons

Source: International Energy Statistics, Energy Information

Administration, Washington, DC
Indonesian Coal Industry
 Indonesia’s Coal Potential
• Indonesia is one of the world's largest producers and exporters of coal.
Since 2005, when it overtook Australia, the country is leading exporter in
thermal coal.

• According to information presented by the Indonesian Ministry of Energy,

Indonesian coal reserves are estimated to last around 83 years if the
current rate of production is to be continued.

• Regarding global coal reserves, Indonesia currently ranks 10th, containing

roughly 3.1 percent of total proven global coal reserves according to the
most recent BP Statistical Review of World Energy.

• Around 60 percent of Indonesia's total coal reserves consists of the sub-

bituminous coal that contains less than 6100 Kcal/Kg.
• Indonesia Coal resources estimated around 61.3 billion tons with mineable
reserve approximately 6.9 billion tons (15th rank of world coal reserve)

• There are numerous smaller pockets of coal reserves on the islands of

Sumatra, Java, Kalimantan, Sulawesi and Papua but the three largest
regions of Indonesian coal resources are South Sumatra, South
Kalimantan and East Kalimantan
 Indonesian Coal Quality
• Indonesia’s typical thermal coal are bituminous to sub-bituminous in
rank

• The bituminous and higher heat content sub-bituminous coals are

typically exported.

• The lower heat content sub-bituminous coals are supplied in varying

proportions to both export and domestic markets.

Source: World Coal Asia Special : www.worldcoal.com

 Coal Mining Industry – Indonesia

• The Indonesian coal industry is rather fragmented with only a few big
producers and many small players that own coal mines and coal mine
concessions (mainly in Sumatra and Kalimantan).

• Since the early 1990s, when the coal mining sector was reopened for
foreign investment, Indonesia witnessed a robust increase in coal
production, coal exports and domestic sales of coal. Domestic use of coal
remains relatively small. Indonesia’s coal exports account for between 70
and 80 percent of total coal production, the remainder is sold on the
domestic market
• Although domestic consumers currently consume less than 25% of
Indonesia’s total coal production, an ever increasing share of the
country’s total coal output is expected to be consumed domestically as
new coal-fired generating capacity is installed to meet growing energy
demands.

• Much of the increased production is expected to be from low-rank

lignite and sub-bituminous coal deposits with as received heat contents
of about 3700 to 4200 Kcal/kg (GAR).

• Although Indonesian low-rank coals are typically ultra low and low in
ash and sulphur, total moisture contents are generally greater than
40%.

• Significant low-rank coal deposits are located in south sumatera and in

all major producing areas of Kalimantan.

Source: World Coal Asia Special : www.worldcoal.com

What Drives this Increase in Indonesian Coal Production and Export?

• Coal is the dominating force in power generation. At least 27 percent of

the world's total energy output and more than 39 percent of all electricity
is produced by coal-fired power plants due to coal's abundance, its
relatively easy and low-cost extraction, and less expensive infrastructure
requirements compared to other energy resources.

• Indonesia contains abundant reserves in medium and low-quality coal.

These types of coal are competitively priced on the international market
(partly due to Indonesia's low labor wages).

• Indonesia's strategic geographical position towards the giant emerging

markets of China and India. Demand for low quality coal from these two
countries has skyrocketed as many new coal-fired power plants have been
built to supply electricity to their immense populations.

• The main export destination countries for Indonesian coal are China, India,
Japan and Korea. Coal has a clear importance for Indonesia's state revenue
as the commodity accounts for around 85 percent of mining revenue.
Logistical Challenge: Inland Transportation

• Limited coal operations capable of directly loading panamax size or larger

ocean-going vessels.

• Typically loaded into barges at either river or coastal-sited loading

facilities to an off-shore transfer point for loading onto ocean-going
vessels ;or

• barged to a deep water coal terminal, such as the Balikpapan Coal

Terminal, Indonesia Bulk Terminal or Arutmin’s North Pulau Laut Coal
Terminal.

• Moves primarily via a combination of trucking and barging; coal trucking

and barging operations are typically performed by contractors.

• However some inland coal transportation is by rail (Sumatera) and

conveyor.

Source: World Coal Asia Special : www.worldcoal.com

Logistical Challenge: Inland Transportation
• Coal is trucked directly to a coal processing / barge loading facility
located on tidewater or on a barge navigable river.

• Coal trucking distances for these direct haul operations typically vary
between 10 km and 35 km.

• Crushed coal is generally stockpiled and then loaded into barges and
transported offshore for transfer to ocean-going vessels.
(Transhipment)

• Coal destined for the Indonesian domestic market and also for some
nearby export destinations, such as Malaysia, is barged directly from
Kalimantan or Sumatera to the end-users.

• At several producers, the barging and transhipment operations are world

class, featuring floating cranes and a new floating loading facility that
together provide a ship loading capacity os 80,000 MT per day.
Source: World Coal Asia Special : www.worldcoal.com
Typicall Indonesian Coal Export Logistics
Indonesian Coal Industry:

A. Competitive Analysis
Indonesia vs Other Coal Producing Countries
Indonesia is more favorably located to Asian markets than Australia.
• Fundamental supply constraints in key producing countries are expected
to edge price higher in the longer term.

• SOUTH AFRICA: Coal export limited by supply chain problems.

Infrastructure overhaul will takes time.

• AUSTRALIA: Infrastructure capacity constraint; and

High production cost.

• INDONESIA:
Indonesian Coal Industry:

B. Market Overview
Source: National Thermal Power Corporation, US Energy Information Administration,
Nomura, Bloomberg
 Demand Exceeding Supply:
Insatiable Appetite of the Pacific
CHINA : Robust market driven by growing Asian economies
1. Thermal coal import was estimated at 122Mt in 2010 and expected to grow
to 169Mt this year.
2. Maintain import level to fuel 8% per annum growth in energy consumption.
3. Installed power capacity to increase by 60% to 1,500GW by 2020
China's Thermal Coal Import
200
169
Million Ton

150 142
122
100 75
58
37 44
50

0
2006 2007 2008 2009 2010F 2011F 2012F
Source: National Thermal Power Corporation, US Energy Information Administration,
Nomura, Bloomberg
INDIA
1. Import expected to go up to 80Mt this year and up to 90Mt by 2012.
.
2. Ambitious nation wide ultra mega PP project (16 x 4,000MW)
3. Poorer typical domestic coal quality (low GCV 4000 ADB & high ash) &
logistical issues (long distance between PP to mines and ports)

India's Thermal Coal Import

100 90
80
80 73

60
43
Million Ton

36 39
40 29
20

0
2006 2007 2008 2009 2010F 2011F 2012F

Source: Australian Bureau of Agricultural and Resource Economics,

Nomura, Reuters
 Tightening Export Supply:
Growing Domestic Needs & DMO
• Indonesia is the World’s Largest Thermal Coal Exporter

600
560
500

400 414
Million Ton

398
283 325
300 240 240
300*
221,1 250 260
190.5 230 265
200 184
191
144,94 158,6 148
100
60
45,54 62,5 49 53
0
2006 2007 2008 2009 2010 2015 2020 2025

Production Export Domestic

Source: Indonesian Coal Exports Development, APBI-ICMA

 PLN Consumption for Power Generation
INDONESIA

1. PLN coal consumption to double from 40.8Mt in 2010 to 78Mt by 2012.

2. Domestic Market Obligation (DMO) ensures local requirement is met.

Million Ton

Source: PLN, 16 Annual Asia Coal Trans

Indonesian Coal Industry:

C. Indonesia’s Economy
 Gross Domestic Product
• Indonesia is the largest national economy in Southeast Asia.
• Indonesia Gross Domestic Product is worth close to 707 billion dollars or
1.14% of the world economy, according to the World Bank.
 GDP Growth Rate

• The Gross Domestic Product (GDP) in Indonesia expanded 6.50 percent in

the fourth quarter of 2011 over the same quarter, previous year.
• Historically, from 2000 until 2011, Indonesia's average annual GDP Growth
was 5.27 percent
 Balance of Trade

• Indonesia reported a trade surplus equivalent to 923 Million USD in

January of 2012.
• Indonesia major exports are: plywood, textiles, rubber, tin, bauxite, silver,
copper, nickel, gold, and coal.
• Indonesia imports machinery and equipment; chemicals, fuels and food.
 Exports

• Indonesia exports were worth 15,493 Million USD in January of 2012.

• Indonesia major exports are: gas, plywood, textiles and rubberand
minerals. Indonesia is the world's largest tin market, and 3rd largest in
coal output for export markets.
 Industrial Production

• Industrial Production in Indonesia expanded 5.8 percent in December of

2011.
• Industrial production measures changes in output for the industrial sector
of the economy which includes manufacturing, mining, and utilities.
Mining in Indonesia
–
A. PKP2B (CCoW)
 Short History of PKP2B (CCoW)
• Coal mining at a significant scale did not begin until the late 1980s.

• GOI signed contracts known as Coal Contracts of Work with 10 mining

companies.

• Of these 10 CCOW, eight are still active and the holders of these contracts
accounted for around 75% of total production.

• The first CCOW are known as 1st Generation (Gen) CCOW.

• In 1994, the GOI offered a 2nd Gen CCOW for one year followed in 1997
by a 3rd Gen CCOW, which was discontinued in 2000.

• The CCOW will expire beginning with the 1st Gen CCOW between 2019-25
and ending with 3rd Gen CCOW between 2030 and 2035.

• With passage of Mining Law of 2009, new government authorizations are

in the form of mining licenses known as IUPs.
 Coal Contract of Work (CCoW)
• CCoWs were regulated under Minister of Energy and Mineral Resources
Decision Letter No. 1614/2004.

• CCoW is a comprehensive contract between the Government of

Indonesia and an Indonesian company.

• The company can be 100% foreign owned. However, if the company was
100% foreign-owned, it may have been subject to divestment
requirements at a later date.

• As a practical matter, most CCoWs have somelevel of Indonesian

ownership.

• The CCoW company has control, management and responsibility for all its
activities in all aspects.
• CCoW include:
Expenditure Obligations; import and export facilities; marketing; fiscal
obligations; reporting requirements; records, inspection and work
program; employment and training of Indonesian nationals; preference to
Indonesian suppliers; environmental management and protection;
regional cooperation in regard to infrastructure; provision for
infrastructure for the use of local population and local business
development.

• CCoW covers all tax, royalty, and other fiscal charges, including:
Dead rent in the contract area; production royalties; income tax payable
by the company; employees’ personal income tax; withholding taxes on
dividends, interest, rents, royalties, and similar payments; value added tax
(VAT); stamp duty; import duty; and land and buildings tax.
 License Terms

• The CCoW outlines a series of stages with defined terms:

 Fiscal Regime

• CCoWs are based on the taxation and other laws and regulations in place
at the time the agreements were signed. In many circumstances, the
regulations for CCoW differ from current regulations.

• The mining company is, in effect, entitled to 100% of the coal production

• Royalty of 13,5% of sales revenue is paid to the Indonesian Government

• The advantage of the CCOW is the taxation system that has been stated
in the contract will not be affected with the new taxation system until
the contract validity expires.
Mining in Indonesia
-
B. IUP
 Mining Regulatory Framework
• Mineral and Coal Mining No. 4/2009 dated 12 January 2009 (“Mining
Law”) replaces the predecessor Mining Law No 11/1967.

• CoW/CcoW framework for foreign investors and Mining Rights (“KP”)

framework for Indonesian investors, were replaced by single area based
licensing system based on specific mining areas.

• The Mining Law provides for three categories of mining licence,

depending upon the location and nature of the resource.
1. Izin Usaha Pertambangan (IUP” or Mining Business Licence);
2. Izin Usaha Pertambangan Khusus (“IUPK” or Special Mining Business
Licence); and
3. Izin Pertambangan Rakyat (“IPR” or People’s Mining License).

• Unlike the restriction on ownership of KP Licenses to Indonesian nationals,

the IUP based licenses are open to the both Indonesian nationals and
foreign investors who own Indonesian companies.
• The Mining Law relies heavily in various implementing regulations. To
date, 4 government Regulations have been issued in respect of :

1. Mining Area (GR22);

2. Mining Business Activities (GR23);
3. Mineral and Coal Mining Direction and Supervision (GR55); and
4. Reclamation and Mine Closure (GR78)

• Three Ministrial regulations have also been issued by the Minister is

Energy and Mineral Resources in respect of:

1. Mining Services (PerMen 28);

2. Domestic Market Obligation (“DMO”) (PerMen 34); and
3. Benchmark Price (PerMen 17)
 Mining Areas
• Mining can only be conducted in areas designated by the Central
Government as open for mining.

• As such, the Central Government is required to determine the mining

areas (Wilayah Pertambangan), categorized as:

1. Commercial mining business areas (Wilayah Usaha Pertambangan –

WUP), for larger scale mining;

2. State reserve areas (Wilayah Pencadangan Negara – WPN), for

national strategic interest;

3. People’s mining areas (Wilayah Pertambangan Rakyat – WPR) for

small scale local mining.
• Within those mining areas, mining licenses may be issued to one or more
parties as follows:

1. Mining Business License (IUP) is a general licence for conducting

mining business activities in a WUP area.

2. Special Mining Business Licence (IUPK) is a Licence for conducting

mining activities in a specific WPN area, in which mining business
activities can be carried out.

3. People’s Mining Licence (IPR) is a licence for conducting mining

business in a WPR area of limited size and investment. An IPR is not
available for foreign investors.
 Mining Licences Ownership
• An IUP may be issued to the following entities:
1. A business entity (established under the laws of Indonesia - PT);
2. A cooperative(Koperasi); or
3. An Indonesian individual (including a partnership - CV).

• The business entity must be an Indonesian legal entity, which includes

both Indonesian companies wholly owned by Indonesian nationals and
foreign-owned Indonesian companies (i.e. PMA companies).

• The mining law therefore removes most of the distinctions between

Indonesian and foreign investors under the previous Mining Law No.
11/1967, and allows 100 percent foreign investment in mining sector
(subject to the share divestment rules).
 Exploration & Production Licenses

• An IUP or IUPK is granted in two separate phases of mining activities, that

is, for Exploration and for Production Operations as follows:

1. An Exploration IUP/IUPK is granted for performing general survey,

exploration and feasibility studies within WUP/WPN area.

2. A Production Operations IUP/IUPK is granted for performing

construction, mining, processing, refining, hauling and selling within
the WUP/WPN area.
Authority to issue an IUP
License Terms & Extentions
 Domestic Market Obligation (“DMO”)
• The central government has the authority to control production and
export of each mining product to guarantee the supply for increasing
domestic demand, especially for coal.

• Details of the DMO procedures were issued in PerMen 34 on 31 December

2009.

• There’s no specific DMO percentage in the PerMen 34. The decision for a
particular year is to be made by the Minister.

• In 2010 & 2011, the Goivernment has determined minimum coal DMO
sales only for selected coal mining companies. (24.75% and 24.17% of
their annual production).

• DMO Coal sales will continue to increase due to the increasing domestic
coal demand.
 Divestment

• The Mining Law provides that foreign capital controlling shareholders

must divest part of their interest in a mining concession company by the
fifth year of production.

• GR23 provides that Indonesian Nationals must own a minimum of 20% of

the shares in an IUP holding company.

• Divestment is to be made to (in order of prefrence) the central

government , provincial government or regental/Municipal Government, a
state-owned company or a national private business entity.

• Importantly, the current Government regulations do not specify the basis

for calculating the price which must be paid to the divesting party.
 Transfer Restrictions

• The transfer of IUP/IUPK to another party is prohibited

• The Transfer of ownership and/or shares of an IUP/IUPK company in the

Indonesian stock exchange can only be done after the commencement of
a certain phase of the exploration activities.

• The transfer is subject to a notification to the relevant government

authority and it should not contravene the provisions of prevailing
legislation.

• However, it does not appear to regulate transfer of shares outside the

Indonesia stock exchange.
 Reclamation & Mine Closure Guarantees
• IUP-Exploration holder must include a reclamation plan in the exploration
work plan and budget and provide a reclamation guarantee in the form of
a time deposit placed at a state-owned bank

• An IUP-Production Operation holder must prepare :

1. Five year reclamation plan
2. Post mining plan
3. Reclamation guarantee (in the form of a joint account or time deposit
placed at astate-owned bank, a bank guarantee, or an accounting
provision (if eligible)
4. A Post-Mine guarantee in the form of a time deposit at a state-owned
bank.

• Does not release the IUP holder from the requirement to perform
reclamation and post-mine activities.

• May only be withdrawn upon approval from the Minister. The Governor,
the Regent or the Mayor, as applicable
Government Royalties:
 Government Royalties

• The rates will vary depending on the mining scale, production level, and
the commodity price.

• A range of percentages of sale proceeds applies for the different types of

coal mining.

• Holders of IUPK will be requires to pay an additional royalty of 10% of net

profit.
o 40% for the central Governmrnty, while the balance is to be shared
between the relevant province and regencies.
 Government Royalties:

A. Coal Price Benchmarking

 Coal Price Benchmarking
• GR23 and PerMen 17 authorises the Ministry of Energy and Mineral
Resources (“MoEMR”) to set the coal sales reference price.

• The Benchmark price is set at FOB vessel point of sale

• The benchmark price will serve as the floor price for the Government
Royalty calculation.

• The Benchmark price will be updated monthly and determined with

market prices (Global and Indonesian coal).

• A coal mining company is required to notify the Directorate General of

Mineral and Coal (“DGoMC”) of the proposed sales price before signing
long term sales agreements.
 Government Royalties:

B. Indonesian Coal Index

& Harga Batubara Acuan (HBA)
 Indonesian Coal Index ( I C I )

• ICI is a weekly price index for Indonesian steam coal

• Indicating representative prices of 5 major commodity grades
of Indonesian coal
• ICI is the driver for HBA (or known as ICPR)
• ICI now covers 5 different grades
 Harga Batubara Acuan (HBA)
• “HBA” stands for “Harga Batubara Acuan” (or known as ICPR) is a royalty
collecting tool, NOT an index that show where the market is today.

– CCOW royalty fee at 13.5% – KP/IUP royalty fee at 3-7%

Future Prospect of Indonesian
Coal Industry
• The profitable situation The commodities boom of the 2000s changed
with the outbreak of the global financial crisis in 2008 when commodity
prices went down fast.

• Indonesia was affected by these external factors as export of commodities

account for around 50 percent of total Indonesian exports, thus limiting
the country's GDP growth in 2009 to 4.6 percent (which still represents
an impressive number, largely supported by domestic consumption).

• Mid 2009 – Early 2011 a sharp rebound in global coal prices occurred.
However, reduced global economic activity has lessened demand for coal,
thus resulting in a downward trend of coal prices starting from early 2011.

• There’s also a severe supply glut that was exacerbated by coal miners'
eagerness in the years 2010-2013 to produce and sell as much coal as
possible - amid low global coal prices - in order to generate revenue and
profit by the coal mining companies were established in Indonesia and
raised investment to expand production capacity during the 2000s
commodities boom.
• Despite global awareness to reduce dependency on fossil fuels,
developments in renewable energy resources do not show an indication
that dependency on fossil fuels (especially coal) will be reduced
significantly in the foreseeable future, thus coal remains a vital energy
resource.

• Clean coal technologies in coal mining, however, will gain significance in

the future (partly due to commercial relevance). These clean coal
technologies focus on the reduction of emissions produced by coal-fired
power generation but lack sustained progress yet.

• Indonesian Government policy will affect the nation's coal mining industry.
To secure domestic supplies, the Indonesian Ministry of Energy and
Mineral Resources orders coal producers to reserve a specific amount of
their production for domestic consumption. Moreover, the government
can use export tax to discourage coal exports.

• The government aims for more domestic consumption of coal as it wants

coal to supply around 30 percent of the country's energy mix by 2025
• Another recent development is that the Indonesian government intends
to curb shipments of all raw materials (except for coal), instead requiring
the mining sector to add value to the products before export takes place.
Initially, the plan was to ban raw mineral exports from 2014 onward.

• Recently, however, the government has stated that it will be more flexible
towards this ban and expressed that some exports can continue under
certain conditions.

• Coal will not be affected by this ban according to government statements

made in 2012, thus can continue to be exported without being processed
first.

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