Indonesian coal miners will now need to obtain a “registered exporter” status called Eksportir Terdaftar Batubara (ET Batubara) from the Ministry of Trade to export coal. The new rule applies to miners that hold Coal Contracts of Work (PKP2B) and Mining Business Permits (IUP). The implementation of the new export permit regime in Indonesia (as of 1 October 2014) is causing uncertainty under international coal sale contracts, with many suppliers not being able to secure their export licence amidst widespread confusion on the procedure for obtaining one.

Indonesia has only been exporting coal for a couple of decades, but is today rivaling Australia for the position as the world’s biggest exporter. In 2013, Indonesian coal exports reached 413 million tonnes. The country currently exports about 70% of its coal production, much of it to China and India. The Indonesian government has, however, in recent years attempted to regulate and reduce output due to rising domestic demand for power station fuel.

The 2009 Indonesian Mining Law had foreshadowed that Indonesia was going to impose a tighter grip on the activities of coal traders. The Mining Law had introduced the requirements of Mining Business Permits (IUP) in addition to the Coal Contracts of Work (PKP2B) regime, which had been previously introduced.

The new ET Batubara export requirement is the latest in a series of regulations, attempting to control Indonesia’s output and trade of thermal and metallurgical coal.

The New Export Regulation

On 15 July 2014, Indonesia’s Trade Minister issued regulation 39/M-DAG/PER/7/2014 (Regulation 39) pursuant to which an Indonesian coal exporter must secure a permit, an ET Batubara, from the Ministry of Trade in order to be entitled to export and sell coal overseas.

The mining industry had called for a postponement in the implementation of the regulation, expressing concern about the lack of clarity regarding the process of obtaining a licence. There are widespread fears that the sudden change in regime will result in long delays at loadports. Vessels will only obtain clearance to sail if the exporter has provided the required export permit to the local port authorities.

The regulation was originally due to take effect on 1 September 2014. However, to provide additional time for licence applications to be processed, Indonesia’s Trade Minister issued regulation No. 49/M-DAG/PER/8/2014 on 21 August 2014, which revised Regulation 39, requiring Indonesian based exporters to secure their licence before 1 October 2014.

However, there are concerns in the industry that this extension will still allow insufficient time for all legitimate coal exporters to obtain the licence. The principal reason for the delay in implementation is that additional time is needed to process the vast number of applications received. Many miners are facing delays in securing the ET Batubara and the procedure to obtain one is time consuming:

  1. First, suppliers need to obtain a recommendation from the Ministry of Energy and Mineral Resources as set out by Regulation of the Director General of Mineral and Coal No 714 K/30/DJB/2014 (Peraturan Dirjen Minerba No 714 K/30/DJB/2014). To obtain the recommendation, the miners are required to show documents that prove they have met tax and royalty payment obligations.
  2. Secondly, it is mandatory to have the clean and clear certificate (CnC) from the central government. This CnC certificate shows that the miner has no outstanding royalty and other tax debts, fulfilled exploration and environmental commitments, has no property delineation issues and obtained forestry permits.
  3. Finally, once the recommendation has been obtained, the suppliers can then apply for the ET Batubara certificate from the Ministry of Trade, which will be issued within five days of receipt of the application.

75 of the major Indonesian coal producers hold Coal Contracts of Work. These top tier miners already have CnC certification and should be able to receive their export licences on time.

However, Coal Contracts of Work holders are a minority amongst the thousands of miners who are entitled to produce and sell coal in Indonesia. The majority of producers hold a mining licence called an IUP and it is the IUP holders’ applications that are causing the current delay and uncertainty.

According to the 2013 figures of the Ministry of Energy and Mineral Resources, there are almost 4,000 IUP holders producing coal in Indonesia. These are mainly small and medium sized mines. Only half of them have to date secured a CnC certificate, which is a condition precedent to obtaining the required recommendation from the Ministry of Energy and Mineral Resources.

There are currently thousands of applications for ET Batubaras in the pipeline and only a fraction of IUP holders have obtained the certificate. There is still a long list of ET Batubara applications that need to be processed and this is causing concern in view of the fast approaching deadline of 1 October 2014. As a consequence of this backlog, major delays are expected throughout coal exporting ports in Indonesia from 1 October 2014 onwards.

Furthermore, from 1 October 2014, all exported coal will require examination by a surveyor appointed by the Ministry of Trade prior to loading and shipment. The examination process takes one day and leads to the issuance of a survey report (Laporan Survei or LS). The survey report and the ET Batubara are mandatory requirements for registration of a coal export notification called (Pemberitahuan Ekspor Barang or PEB). The survey report is issued for one shipment and one export notification number. If the suppliers’ documents are not in hand or fully compliant, the shipment will be prevented.

The delays in obtaining an ET Batubara have forced many suppliers to suspend offering their coal cargoes until their licence is secured. Many less scrupulous sellers, however, are entering into contract hoping that they will secure a licence by the time of their latest shipment dates under their contracts.

Comments

Uncertainty as to whether they will obtain licences by 1 October 2014, is leading some small and medium sized Indonesian coal suppliers to delay their September loading shipments indefinitely. Others have entered into contracts in the hoping of obtaining their licences before the Regulation is enforced on 1 October 2014.

It is expected that many Indonesian suppliers will be unable to ship their coal from 1 October 2014 onwards and will seek to rely on force majeure provisions under their supply contracts in an attempt to avoid heavy exposure. The specific force majeure provisions of underlying sale contracts may or may not justify delay or failure in performance.

Each case will need to be considered separately and require interpretation of the operative clause in the contract. Typically force majeure provisions may require performance to be prevented due to a defined event outside the party’s control. We have recently seen some Indonesian coal supply contracts listing “compliance with any law and governmental order” as an event triggering the force majeure clause.

Interpretation of force majeure clauses is not always straightforward and this inevitably leaves large scope for debate between the parties. Specialist legal advice is recommended.

In the meantime, traders may wish to enquire whether their trading partners in Indonesia have obtained an ET Batubara licence or are likely to obtain one by 1 October 2014 before entering into new deals with these partners. Traders should also take care to ensure that they are familiar with the force majeure provisions of their sale contracts and in particular check whether these provisions could entitle the suppliers to cancel the contract if the shipment is prevented by the failure to obtain an ET Batubara.