RPT-UPDATE 2-Indonesia weighs mine export tax to curb output boom

Wed Apr 4, 2012 6:36pm EDT

* Indonesia proposes 25 pct tax on coal, base metals exports in 2012

* Top coal producer calls tax proposal speculative

* Some buyers to look for alternatives, others wait and see

By Reza Thaher and Rebekah Kebede

JAKARTA/PERTH, April 4 (Reuters) - Indonesia is considering a hefty tax on mining exports to stop miners from overexploiting resources to beat a 2014 ban on shipments of some unprocessed metals and lower grade coal, an official said on Wednesday, but the plan may backfire if foreign buyers turn elsewhere.

The proposal to impose a 25 percent export tax on coal and base metals - rising to 50 percent in 2013 - was greeted with a mix of confusion and scepticism as both producers and importers across Asia tried to assess its impact.

"Ever since we issued a mining law in 2009, miners have reacted by increasing their production multiple times, exploiting and exporting everything they've got," Thamrin Sihite, director general for coal and minerals at Indonesia's ministry of energy and minerals, told Reuters.

"This is dangerous and we need to curb that. We issued a ministerial regulation in February to ban unprocessed mineral ores and this new export tax regulation...We hope the tax will reduce the export rush further. But I can't tell you when it will be issued."

The latest tax proposal could join a raft of regulations aimed at increasing government revenues that have worried global mining companies operating in Indonesia, where the fast-growing mining sector makes up about 11 percent of GDP.

Indonesia exported $3.8 billion worth of copper in 2011 and $7.3 billion worth of metal ore. Mineral fuels exports, including coal, were valued at $27.4 billion.

The government says the new rules also aim at spurring downstream investment. Indonesia has the world's second-largest copper mine but only one copper smelter, and this smelting capacity shortage is mirrored for other metals.

The archipelago is the world's largest exporter of thermal coal and is expected to ship out about 300 million tonnes this year to customers across the region including in India, China, South Korea, Japan, and Taiwan.

Indonesian President Susilo Bambang Yudhoyono said on Wednesday he sees opportunities to increase state revenue from specific sectors of the mining industry but warned that a blanket tax on all sectors would be counter-productive.

"I see there is still opportunities to do it (increase revenue) in a good way. There are sources such as particular mining sectors. Not by pumping taxes from all sectors because that would probably be counter-productive," Yudhoyono told a cabinet meeting.

After a steady flow of regulatory proposals from Indonesia's mining officials, few of which have been implemented, many in the industry were sceptical.

Dileep Srivastava, a director at Indonesia's top coal miner Bumi Resources, said it was premature to comment and described the export tax proposal as a "speculative" subject.

A source in the mining ministry, who declined to be named because of the sensitivity of the issue, said it would prefer a clampdown on some firms' raw ore exports, allowed from May 6 by a February mining regulation, and was debating the issue with the industry ministry, which was keener on an export tax.

Others in the industry said the new proposal lacked clarity.

"We have signed a contract on working permits with the government which already set and specified rules and regulations including taxation...the tax regulation is still vague: 25 percent of what? Profit? Selling cost?" Ken Allan, director of Borneo Lumbung Energy, said, adding that he suspected the government was "testing the water" to gauge industry reaction with its current proposal.

Investment bank Goldman Sachs noted in a report on Wednesday that although the idea of an export tax had previously been raised, such a tax had never been finalised and a previous export tax on coal implemented in 2005 was cancelled by the Supreme Court after lobbying by coal producers.

But if it is implemented, the tax would hit the bottom line of both metals and coal producers and could push up prices of some commodities globally, industry experts said.

"If this were to occur, all metal mining companies under our coverage, Vale Indonesia, Aneka Tambang, and Timah, will be hurt by this, as most of their revenues are from exports. For coal, with recent coal price weakness, the export tax tariff of 25 percent, (if implemented), will further pressure our coal counters' margins," Jakarta-based brokerage Bahana Securities said in a note to clients.

"Although the export tax is one of the hottest topics in the industry currently, 50 percent is excessive in our view," Bahana said, adding that Bukit Asam, which sells 65 percent of its coal to the domestic market would probably be the least impacted by the new tax.

Freeport McMoRan Copper & Gold, which operates the massive Grasberg mine on Papua island, responded to the proposal with a statement that it was confident the Indonesian government would honour existing contracts.

HUNT FOR ALTERNATIVES

The proposed tax also has customers worried. India, Indonesia's largest coal customer, said on Tuesday it would raise concerns about the proposed tax with Jakarta.

The uncertainty about the regulations has some buyers looking for supplies elsewhere in the region.

Japan imports more than half its nickel ore supply from Indonesia and its top two ferro-nickel producers, Pacific Metal Mining and Sumitomo Metal Mining, are expected to take a major hit from the new law.

"We are worried. We are trying to cope by increasing supply from New Caledonia and the Philippines, but the situation is still fluid and we have not made a final decision yet," a spokesperson for Pacific Metals said.

In South Korea, one local utility said if the regulations pushed up prices it would look as far afield as the United States to replace Indonesian coal supply.

"If prices rise, then we cannot help diversifying supply sources more... we see lots of coal likely to come from the U.S. as U.S. domestic demand is slow. KEPCO and utilities are looking closely into U.S. coal as there seem lots of chances," a source at the South Korean utility said.

"If such infrastructure as ports and trains for exports to the Pacific Ocean from the U.S. inland mines are guaranteed, we expect term deals for U.S. coal to rise sharply, while reducing coal from Indonesia and Australia," the source said.

But some buyers said they were not overly concerned, after seeing many regulation proposals that have either never come to fruition or ended up being modified.

"We need to wait and see if this would be actually implemented and how long this would be sustainable, as we saw in the past that they said they would require a letter of credit for all the trading, which was scrapped shortly," another South Korean utility source said.

A coal market source in Singapore said most in the market were accustomed to coal regulation proposals not working out or being altered.

"Right now, I don't think there's any reason to be worried until it's firmed up," the source said.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article