Government of Indonesia Plans to Raise Royalties for Coal Miners

The two types of permits that are issued by the (local) government to coal miners are the Mining Business License (Ijin Usaha Pertambangan licenses, or IUPs) and Coal Contracts of Work (Perjanjian Karya Pengusahaan Pertambangan Batubara, PKP2B). The royalty for PKP2B is already set at 13.5 percent, while those for IUPs depends on the quality of the coal. IUP-holders with a coal quality of below 5.100 cal/gram pay 3 percent, between 5.100 and 6.100 cal/gram pay 5 percent and over 6.100 cal/gram pay 7 percent as royalty.

By giving this equal treatment to miners, the government aims to raise more revenue from Indonesia's mining sector. However, it also threatens profit margins of smaller companies. Producers of higher-quality coal may be more able to absorb the extra royalty costs.

Another negative impact of higher royalties is that it hollows regulatory certainty in Indonesia. In the past, the government provided this incentive (lower royalties) to miners to stimulate investments in (lower quality) coal mining. As a result miners purchased bank loans to finance their business expansion but are now facing significantly raised royalties and thus lower profit margins.

Indonesia is one of the world's largest producers and exporters of coal. A significant portion of this exported thermal coal consists of the medium-quality type (between 5,100 and 6,100 cal/gram) and the low-quality type (below 5,100 cal/gram). Click here for a detailed overview of Indonesia's coal mining sector.

Indonesia's Production, Export and Domestic Consumption of Coal 2008-2013:

	2008	2009	2010	2011	2012	2013	2014¹
Production	240	256	275	353	407	421	397
Export	191	198	208	273	304	293	324
Domestic	49	56	67	80	90	89	73

^{in million tons
¹ forecast
Source: Ministry of Energy and Mineral Resources}

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