Govt Set to Increase Coal Output Target This Year

The Energy and Mineral Resources Ministry is planning to increase its coal output target this year as the government seeks to offset the ongoing decline in the commodity’s price.

Bambang Tjahjono, the director for coal at the Ministry’s directorate general for mineral and coal, said an increase in the output target would take this year’s production to 455 million tons, or close to last year’s output of 458 million tons.

The mineral and coal office initially targeted for coal output to reach only 425 million tons this year.

From last year’s total output of 458 million tons, the mineral and coal office managed to collect Rp 35.4 trillion in royalties from the holders of mineral and coal mining permits and contracts of work.

Under the revised state budget, the government is aiming to collect Rp 52.5 trillion from the mineral and coal sector this year. Relying only on royalty payments, which will be set at 7 percent for low-calorie coal, 9 percent for the medium-calorie type and 13.5 percent for high-calorie coal, will be unlikely to help the mineral and coal office meet the revenue target.

There’s one proposal to demand 13.5 percent in royalties across all the coal types. Given the ongoing decrease in coal prices, however, the government was confident that any increase would impact badly on producers, according to R. Sukhyar, the director general for mineral and coal.

There had been a proposal to increase the level of royalty payments from the range of 7 to 13.5 percent, an increase from the 3 percent, 5 percent and 7 percent levels as stipulated in a 2012 regulation.

However, the plan was rejected by industry players who claimed that the royalty level would be too burdensome to their businesses, which have been under pressure because of the decline in coal prices.

The Indonesian coal price reference (HBA), was set at US$62.92 per ton in February, lower than the $63.84 per ton set a month earlier.

“This is the hardest one. The solution, beside increasing production volumes and royalty payments, is to collect late payments from producers that have not been collected,” Bambang said.

The mineral and coal office has been working with the Corruption Eradication Commission (KPK) to ensure that all mining companies have carried out their obligations to the state, including paying their royalties. Last year, the KPK found that numerous miners have not paid their royalties.

The pressures on coal prices are expected to continue particularly because of slowing demand from China, a major consumer of coal.

Coal Mining Slump a Blessing in Disguise

The growth of the coal-mining industry, which has diminished in the last two years, is expected to slump even further this year following weakening demand for coal in the world market. This has been worsened by the more recent tumbling price of oil as the world’s main source of energy, which has discouraged the conversion of energy use from oil to coal.

The diminishing growth of the coal-mining sector has contributed to a decline in  government revenue over the last two years. Since coal has become Indonesia’s major export commodity, the weakening of coal exports has resulted in a declining trade performance of Indonesia’s non-oil and gas sector, and in turn, contributed to an overall trade deficit in the past three years.

However, the diminishing shine of the coal industry has its bright side. This is because the increasing amount of coal-mining activity in the past decade has not only resulted in serious environmental degradation, but also enhanced the proliferation of corrupt and clientelistic practices in the regions.

The previous rapid growth in coal demand  not only benefited large coal-mining firms, but also increased the escalation and dispersion of small-scale coal mining activities, particularly after the decentralization of the coal sector in 2009. Law No.4/2009 on mineral and coal mining grants the province and district governments new authorities for issuing coal mining licenses for Indonesian companies, cooperatives or individuals, which covers an area of less than 50,000 hectares.

Since then, the magnitude of small-scale coal mining activities has increased tremendously. The Energy and Mineral Resources Ministry records that 9,662 permits were issued for small-scale coal mining by regencies as of 2011. Of these permits, only 3,778 were supported with the necessary documents without any outstanding legal issues.

Local governments have benefited from these mining operations through accepting large royalty payments from miners. In some coal-rich regencies, the revenues generated from coal royalties can be worth several times more than the contributions made by land and building taxes. The high profitability of small-scale coal mining has encouraged many regencies to allow these mining operations to operate without considering their detrimental impacts on the environment and the surrounding communities.

Many of these small open-pit coal mines are near residential areas, polluting rice fields and fish ponds and triggering landslides and floods.

Besides being an important source of local government revenue, coal has also become a source of funds for certain political groups close to local governments. Those who can obtain small-scale mining licenses in the regions are usually those who have some special or familial relationship with local government leaders, or are in some way connected to certain powerful local councilors.

Due to the high-cost politics associated with the direct elections of local government leaders since 2005, the money generated from small-scale coal mining activities has become an important source of political funding for government and political leaders participating in elections. An incumbent from a ruling political party can generate funds for a political campaign by developing a coal-mining business or issuing coal-mining licenses.

Apart from its high profitability, local politicians’ attraction to coal mining businesses is also due to the  quick returns on investment compared to other booming commodities, such as palm oil. The quick returns generated by coal mining is very important for local politicians, who need to mobilize assets in anticipation of the local elections conducted every five years.

This high-cost politics and the local government’s lack of accountability have also provided a favorable environment for business actors and brokers to take advantage of the situation. Businessmen in the coal industry have often provided financial backing for the candidates for local government and legislative leaders who they think have a high chance of winning in the local elections, known as pilkada.

In exchange for financial backing, businessmen expect to gain rewards in the form of projects or certain policies in favor of their coal-mining business from the candidates they support, should they win the election.

Although the 2009 mining regulation has given greater opportunity for locals to obtain a mining permit, many have been reluctant to apply for a permit due to complications and bureaucratic red-tape in the processing of mining licenses. As a result, many  locals choose to engage in illegal mining activities, frequently also supported by business actors, who serve as the financial backers and collectors of the coal extracted by local people.

These illegal activities have resulted in the extraction of millions of tons of coal per annum during its peak period.

Considering the serious problems resulting from the escalation and dispersion of coal-mining operations in the regions, the industry’s current downturn is a blessing in disguise. Weakening of coal demand has forced many coal-mining firms, particularly the illegal ones and the small- and medium-sized ones, to cease their operations.

This substantial reduction of coal-mining has reduced the frantic pace of exploitation and slowed environmental degradation in the last few years, which usually involves corrupt and clientelistic cooperation between businesses, government and political actors.

Nevertheless, if the government shows little concern for accountability and does not strengthen monitoring mechanisms overseeing the implementation of coal-sector decentralization, corrupt and clientelistic practices that have triggered rapid and careless coal exploitation will likely re-flourish once the demand for the commodity recovers. And undoubtedly, this condition is not only applicable to coal mining, but also to any other lucrative industry in Indonesia. – See more at:

Indonesia Plans to Raise Coal Royalties by End of First Quarter

(Bloomberg) — Indonesia plans to raise coal royalties by the end of the first quarter to boost mining revenue amid shrinking  incomes from oil and gas, according to an official at the Energy and Mineral Resources ministry.

Parliament has asked the government to increase non-tax revenue from coal and metals mining to 52.2 trillion rupiah ($4.1 billion) this year from 35 trillion rupiah in 2014, Sujatmiko, the ministry’s director of mineral and coal program supervision, said in an interview Thursday in Jakarta. It will be the first change in coal royalties in three years.

“We’re revising a 2012 regulation on mining-royalty tariffs,” said Sujatmiko, who goes by one name. “We target to impose new tariffs not later than April so that there will be plenty of time to meet higher revenue target.”

A royalty increase would add to costs for miners amid declining coal prices and weak demand for the power-station fuel. Indonesia this week cut its benchmark price for an eighth month, pegging coal with a gross heating value of 6,322 kilocalories a kilogram at $62.92 a metric ton for February. That’s the lowest level since May 2009.

Coal with less than 5,100 kilocalories heating value on an air-dried basis will be subject to royalties of 7 percent, up from 3 percent currently under the January 2012 regulation, Sujatmiko said. Medium grade cargoes of 5,100 to 6,100 kilocalories will pay 9 percent, up from 5 percent. High-quality shipments of more than 6,100 kilocalories will pay 13.5 percent, up from 7 percent, he said.

Coal Output

The new rates will apply to companies holding a Mining Business License, known as IUP, which accounts for 25 percent of Indonesia’s total coal production forecast at 425 million tons this year, according to Sujatmiko. Miners with so-called contracts of works pay a fixed 13.5 percent royalty. These include PT Kaltim Prima Coal, a unit of PT Bumi Resources, Indonesia’s largest coal miner, and PT Adaro Indonesia, a unit of PT Adaro Energy.

The government will also push for construction of new metal smelters to obtain more revenue from metal exports, Sujatmiko
said. One lead smelter and 11 nickel smelters will start construction this year, he said.

Coal accounts for about 80 percent of Indonesia’s mining revenue, Sujatmiko said. Oil and gas sales income is estimated at between $6.6 billion and $14.9 billion this year, down from $28 billion in 2014, Amien Sunaryadi, the head of SKK Migas, the upstream oil and gas regulator, said on Jan. 19.

Revenue Target from Coal & Mineral Sector Raised

The government expects an increase in state revenues from the coal and mineral sector this year to offset the projected decline in revenues from the oil and gas sector.

In the proposed revision of the 2015 State Budget, the government raised state revenues from the mining sector by 28.5 percent to Rp 52.2 trillion (US$4.13 billion) from Rp 40.6 trillion in the original budget, or about 50 percent higher than Rp 35.4 trillion last year.

“The income will mostly come from the coal sector, but the mineral sector is also expected to give a higher contribution,” the Energy and Mineral Resources Ministry’s mineral and coal director general R. Sukhyar said on Wednesday.

He added that royalties for coal would be set at 7 percent of total sales for low-rank coal, 9 percent for mid-rank coal and 13.5 percent for high-rank coal.

The mineral and coal directorate general is also upbeat about its state income target since the involvement of the Corruption Eradication Commission (KPK) in monitoring works would encourage miners to report their sales correctly. 

Last year, with the KPK observing mining firms in 12 provinces, the ministry obtained trillions of rupiah from a number of mining firms that previously did not pay their full royalty payments.

The KPK is now moving to widen the monitoring coverage to 19 provinces in Indonesia, according to Dian Patria, who directs the KPK’s supervision of the mineral and coal sector.

Last year’s Rp 35.4 trillion came mostly from coal mining companies as the contribution from the mineral sector dropped following the government’s ban on mineral ore exports in January 2014, which severely affected mining firms’ incomes. Despite the ban, a number of miners that have shown serious commitment to building smelters, as requested by the mining law, are still allowed to export their semi-finished mineral products.

“We will speed up the development of smelters. With the value-added products priced higher, the contribution to the state will also be higher,” said SuJatmiko, a director at the mineral and coal directorate general.

Higher contributions from the mineral and coal sector are expected to compensate the decline in state revenues from the oil and gas sector, which is also supervised by the Energy and Mineral Resources Ministry. The sector, which has long been a major contributor to the state, is currently under pressure from the sharp decline in crude oil prices in the world market. In 2014, the government received $28 billion in income from the oil and gas sector. 

Under the proposed revision of the state budget, the government’s take from the oil and gas sector will decline to $14.9 billion this year, around half of last year’s takings, Upstream Oil and Gas Regulatory Special Task Force (SKKMigas) finance deputy Budi Agustyono said.

The government’s proposed income from the oil and gas sector was actually lower, but the House of Representative’s budget commission asked SKKMigas to maintain the figure as stated in the original budget, but lower the amount of cost recovery paid to contractors to $14.09 billion from previously around $18.9 billion.

SKKMigas spokesman Rudianto Rimbono said the regulator would likely try to defer some cost recovery for several years to push down this year’s amount. “We will likely negotiate to defer the payment for asset depreciation because lowering opex will mean reduction in activity, which we don’t want to see,” he said.