COAL TRADING- PART 2: Synopsis of Regulation 17/2010- Determination of Reference Price of Minerals and Coal Sales from Ministry

of Energy and Mineral Resources MEMR Indonesia issued on 23rd September, 2010 and its Applicability on Coal Trading.
1. Obligation to Reference Price Regulation states that IUP holders sell minerals and coal based on the reference price including: - Domestic and export sales. - Third parties or affiliates. * The regulation imposes sanctions on mine owners for non-compliance, implying that sales shall be made not less than the relevant reference price. The regulation is not clear on its applicability on the traders, implying that traders are free to re-sell the coal without regards to the new regulations requirements. For a reference, note that mine owners must have production operation IUPs whereas traders must have special IUPs production operation for transport and sale. The coal is categorized as metallurgical coal, thermal coal, and low rank coal. MEMR refers to the low rank coal as any coal with a gross calorific value (adb basis) less than 5100 kCal/kg. Further, MEMR monthly reference price calculations have provided reference prices for range of GCV values down to 3000 kCal/kg. The reference price formulae providing FOB mother vessel prices are to be further determined by the Director General of Minerals, Coal and Geothermal. However as on date, the Directorate has been publishing reference prices based on following indices which also provide for the relevant formulae: Indonesia Coal Index. GlobalNEWC. Platts. Newcastle Export Index.

As stated in the regulation, coal sales can be conducted in the following form: 1. Free on Board (FOB) mother vessel. 2. FOB barge. 3. Inside an island to an end user. 4. On Cost, Insurance and Freight (CIF) or Cost and Freight (C&F) basis. The reference prices are issued on FOB mother vessel basis. For FOB barge basis, the regulation has floated adjustment price as approved by the Directorate General and to be subtracted from the reference price. The adjustment price includes: - Barging transportation costs. - Surveyor costs. - Transshipment costs. - Insurance costs.

2. Obligations to Use Domestic Services The coal mining company must use Indonesian flagged vessels, use services of domestic or national insurance companies when the sales are by the way of CIF and engage surveyors appointed by the Director General of Minerals, Coal and Geothermal.

3. Calculation of Royalties

The regulation states that when a sale is affected on FOB mother vessel basis, the royalty calculation will be based on higher price between the sale price and the reference price. The production royalty for coal IUP companies ranging between 3-7% will be imposed to include coal costs, barge transportation cost and transshipment costs unlike earlier regulation 45/2003 wherein coal mining companies were permitted to deduct certain expenses from the calculation of coal production royalties. For FOB barge basis, the production royalties will be calculated using the following: - Where the contracted sales price FOB barge basis is higher than coal reference price FOB mother vessel basis, the adjustment price will be subtracted from the contracted sales price and then the royalty will be collected on the derived price. - Where the contracted sales price FOB barge basis is lower than the reference price FOB mother vessel basis, the adjustment price will be subtracted from the reference price and then the royalty will be collected on the derived price. - Note that the royalty calculations are based purely on the higher of the sales contract price and the reference price, not on any net price applicable under a separate hedge instruments or use of hedge instruments with a strike price lower than the applicable reference price.

4. Post-sale Reporting The post-sale reporting requirements consists of the following: -Monthly report of all coal/ minerals sold. -Setting out prices. -Volume of sale. -Points of sale. -Details of buyers. -Bill of lading. -Quality reports. -Barging costs.

5. Sales Contracts Prior to the price being concluded in the contract, it shall be submitted to MEMR for approval. This is applicable to spot contracts (considered as contracts with a term less than 12 months) and term contracts (considered as contracts with term of 12 months or longer). The contract price for spot contract shall be based on the reference price for the month when the coal is being delivered. The contract price for term contracts shall be based on the average coal reference price in the last 3 months prior to the month in which the coal supply contract is signed.

6. Special Rules for Coal Sales Contracts Once the contract price is notified to MEMR, the contract shall be sign within 1 month. First delivery under the term contract shall commence within 2 months and completed within 12 months. The mining company shall consider reference price for the next year if the coal delivery is extended beyond 12 months. The inference from this regulation indicates that the mining company must adjust the coal price for term contracts every 12 months.

7. Coal Price not within the Reference Price Coal in category of fine coal, reject coal, coal with certain high impurities, coal for individual needs and coal for building underdeveloped areas for domestic purpose may be sold below the reference prices with prior approval of MEMR. The Director General will issue separate regulations in this regard. The regulation of permitting coal sales of certain category below the reference prices only applies to the domestic utilization and not for captive foreign owners of Indonesia coal mines who seek to export poor/

low rank/ quality coal outside Indonesia. In an event a poor/ low rank/ quality coal is intended to be sold outside the Indonesian market, the coal reference price regulation shall apply. 8. Sanctions Non-compliance to regulation shall lead to sanctions in the following manner: 1. Three written warnings. 2. Non compliance to step 1 then leads to maximum 3 months suspensions of exports. 3. Non Compliance to step 2 then leads to revocation of the IUP.

9. Existing Concessions and Contracts The regulation applies to IUPs, Contracts of Work and Coal Contracts of Work. Existing spot sales contracts had to abide to the new regulation. The cutoff date was set as 23rd March, 2011 when the regulation was issued. The existing term sales contracts also had to abide to the new regulation. The cutoff date was set as 23rd September, 2011 when the regulation was issued. With an exception of existing sales contract already renegotiated based on past directives from MEMR at that time.

10. Outstanding Issues As mentioned earlier, there is no clarity on applicability of regulation on holders of special production and operation IUPs for transport and sale (traders). There is no mention of other delivery terms of coal sales for instance, Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP) or Free Alongside Ship (FAS). There is no mention of selling coal to trader on ex-mine basis, selling coal to another mine owner for blending at stockpile.

Compiled by: Divyanshu Dayal BE Mech, MBA, Procurement. Dated 20th September, 2013. dayal1005@gmail.com