Regarding the Request for Relaxation of the Royalty Payment System

Regarding the Request for Relaxation of the Royalty Payment System

 

Indonesian Coal Mining Association (APBI-ICMA) has sent a letter to the Minister of Energy and Mineral Resources (MoEMR), asking for a government support in the form of the relaxation of the Royalty payment system for a temporary basis due to the impact of the Covid-19 Pandemic. This request has been made with the high expectation that the government would support coal miner’s  who have been struggling to cope with the weak demand. The association expects that such relaxation on the Royalty system payment could serve as the real incentives support needed from the industry in order to survive in the Pandemic.

 

Gloomy Outlook

Despite the Pandemic Covid-19 hit almost all industries, so far most coal miners are still operating normally with applying strict restrictions to comply with the health and safety protocol to avoid the Covid-19 outbreak. But with the decline in export and domestic demand marked by falling commodity prices, companies are struggling to manage their cash flow. The companies are in “the survival mode” to at least comply with their financial obligations to the state and strive not to downsizing their workers. As result, coal miner’s burden has been worsened by the disparities over the benchmark coal price (HPB) which is greater than the actual selling price. Meanwhile, miners pay the royalty to the state based on the HPB or whichever is higher.

As reflected in the May 2020 Reference Coal Price (HBA), the Covid-19 Pandemic impact was felt in the second quarter of 2020, where the May 2020 HBA was the average 4 index forming of the HBA in April 2020. The fall in commodity prices was due to oversupply market conditions where the condition has occurred practically since 2019. Amid the Covid-19 Pandemic situation, oversupply conditions mainly occurred due to the weak demand in China and India. The oversupply in China due to their coal stockpiles are already large enough so that imports begin to decrease significantly in April 2020 and expected to continue in the 2nd Q and 3rd Q of 2020.

Meanwhile, demand for coal in India has declined drastically due to the nationwide lockdown imposed by the Indian government to fight the outbreak. To cope with the weak energy demand, the Indian government instructed the local power plants to optimize their domestic coal capacity. The PM Modi Administration has also urged the use of solar power to fill in the country’s energy demand shortage. In addition to the drastic decrease in demand in China and India, demand from several other Indonesian coal importing countries such as Japan, Korea, Taiwan, The Philippines, etc. In fact, some analysts estimate that corrected global demand could reach more than 70 million tons from the initial projection of which the decline is mentioned as the largest in history.

 

Price downturn and competition

With the outlook for the global market still oversupply in the remaining quarter of 2020, it is difficult to expect prices to rebound like as the supply (production) remains strong especially among Indonesian producers. In the coming months. Factors that can encourage price recovery depend on the extent to which coal importing countries cope with the spread of Covid-19 which is expected to continue to haunt the world until the availability of vaccines that can be utilized globally. In addition there are still fears of a second wave of Covid-19 attacks (2nd wave) in the winter.

The price projections of the 4 index forming HBA are still worrying and do not reflect real market prices. HBA is estimated to be corrected at levels $ 50/ ton over the next few months where the price level is almost equal to the commodity price level in 2016. While the actual Selling Price of FoB coal is below the Coal Benchmark Price (HPB) so that companies pay PNBP Production fees are forced to cover the difference between HPB vs Actual Selling Price. This condition is expected to continue for the next few months or until conditions recover. In addition, coal miners are required to pay PNBP production fees before the shipment.

Amid oversupply market conditions, coal sales competition is also getting tougher, especially with other exporting countries, such as Australia, Russia, South Africa, and Colombia. Although our coal has advantage in terms of quality, which is generally at 4200 GAR Kcal - 4500 GAR Kcal levels with low sulfur and ash levels as well as advantages in terms of freight costs due to its strategic location, but with a weakening market outlook this condition has hit the profitability of national exporters. The high royalty rate, especially for CCoW holders of 13.5% which is quite high compared to applicable royalty tariff in Australia for instance.

In view of the above, APBI has proposed to the Minister of  Energy and Mineral Resources to review the Decree No. 1823 K/30/MEM/2018 concerning Guidelines for Imposing, Collecting, and Payment/Depositing Non-Tax Mineral and Coal State Revenues as part of incentives for miners impacted by the Covid-19 Pandemic.  The association proposed the revision of the Ministerial Decree in the usage of actual selling price in accordance with the agreement in the calculation of final royalty fees or DHPB. The second item proposed is the payment of royalty/DHPB could be made after the shipment. The industry association sought the incentive for a temporary basis at least for 6 months.

In this difficult condition of course the coal royalty rate especially for PKP2B holders of 13.5% would certainly be felt very heavy, especially if we talk about the competitiveness of our coal FOB selling price compared to other countries such as Australia for example. However, on the other hand the contribution of PNBP in the coal mining sub-sector, which so far ranges from 75% -80% of the total PNBP in the mineral and coal mining sector, is still very important. So that the proposed reduction in royalty rates and delay in payment of royalties, even though proposed a temporary period, will further burden state revenues that are in difficult circumstances.

 

A reasonable proposal

Therefore, the proposed temporary change in the royalty payment system as proposed above seems reasonable because the profitability of mining companies will eventually affect state revenue. However, it is also possible, if the market outlook and future prices are far worse than projected, the government may consider proposals to reduce royalty tariffs and / or temporarily delay the payment of royalties so that companies can survive. The survival of the coal mining company is very important to maintain exports of state revenue and the economy in some areas. In addition, the continuity of the work of the employees and the company's support for the development and empowerment of communities around the mine are also important.

Unfortunately, the government did not grant such incentive that the coal miners expect. The Directorate General of Mineral and Coal has rejected the proposal. The government views that allowing miners to pay the royalties using the FoB actual price may give rise to the issue of transfer pricing. The authority suspects some CCoW and IUP holders intercompany transactions or commercial transaction with affiliated coal trader may subject to transfer pricing practices. Therefore the reference price used as the basis for royalty payment is whichever higher between the HPB vs the actual FoB selling price. The response from the government has vaguely addressed this concern as the fact clearly show that the FoB selling price higher than the HPB. Some coal miners have claimed suffering from the disparity which could reach to US$ 5/MT.

In this circumstance, coal miners are facing very tough challenge to survive as the trend of the commodity price downturn likely to prolonge for the next quarter. This is exacerbated by the widening of the oversupply condition in the global thermal coal market as the production particularly from Indonesia remains strong. To cope with unfortunate situation, production cut measure among the coal producers might be needed to balance the market to defend the further fall of the price. If this condition is prolonged then not only the coal miners that will be suffering but the state will feel the heat. Therefore, the government may need to review its policy with regard to the system of the royalty payment for coal miners. Giving a temporary relaxation for the struggling miners would be seen as the part of the government’s commitment to provide incentives for the industry.

 

(*) Executive director of Indonesian Coal Mining Association (APBI-ICMA), member of the Energy and Mineral Resources Committee of the Indonesian Employers Association (APINDO), vice chairman and co-founder of Indonesian Mining Association, member of the Board of PERHAPI. The opinions expressed are his personal view.

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