Liga Asuransi – Dear readers, how are you? Hopefully, your business will be more advanced this year.
This time, our discussion is about risk management and insurance in the mining sector, especially nickel ore mining.
Nickel is now the favorite of the Indonesian mining industry because nickel products are the primary raw material of electric vehicles. The future of the world’s transportation.
Indonesia is the largest nickel-producing country in the world, with nickel production in 2021 reaching 1 million metric tons or 37.04% of the world. Nickel reserves in Indonesia are estimated at 21 million metric tons.
For your information, 43 nickel smelter plants started producing in 2023. Later in 2025, it will be in a total of 136 smelter plants.
The success of nickel downstream is also evidenced by the increasing consumption of domestic nickel ore. This year nickel ore consumption in Indonesia is estimated to reach 145 million tons of nickel ore. By 2025, domestic consumption of nickel ore is expected to skyrocket to 400 million tons per year.
We all know that electric vehicles are expected to replace fossil fuels and engine-based cars to reduce world pollution in the next few years.
For such a vast nickel business potential, to provide maximum benefit for all parties, the Indonesian government, through the Ministry of Energy and Mineral Resources (ESDM), on 12 December 2022, has issued Circular Number: 3. E / MB.01 / DJB / 2022 concerning the Obligation to Carry out Nickel Ore Sales and Purchase Transactions on a Free On Board (FOB) Basis.
As an insurance broker that is also heavily involved in nickel industry activities, we will discuss the impact of this Circular from the point of view of risk management and insurance.
We hope that this paper can be helpful for nickel mining industry players. If you are interested in this article, please share it with your colleagues so that they also understand like you.
To understand the contents of Circular Letter Number: 3.E / MB.01 / DJB / 2022 concerning the Obligation to Carry Out Nickel Ore Sales and Purchase Transactions on a Free on Board (FOB) Basis.
Before we discuss risk management and insurance related to this circular, let’s first understand the essential points of this circular. We extracted information from nikel.co.id (please see the link below).
- Nickel Mineral Benchmark Price (HPM) in 2017 and 2018.
The provisions of HPM have been set since a few years ago. HPM is based on fairness because it pays attention to and considers the advantages of all parties involved.
HPM is enforced by issuing the Ministry’s Regulation Number 11 of 2020. This regulation regulates the fair prices of nickel ore sales and purchase transactions.
- Why use Free on Board (FOB)?
With prices based on FOB, it is expected that all ports or points in Indonesia, be it in North Maluku, Southeast Sulawesi, South Sulawesi, Sulawesi, and throughout Indonesia, they price the same.
Prices no longer blend with ship rental costs and insurance costs.
Because it is at that point that the government implements or takes the royalty levy as a source of state revenue.
- Nickel is a non-renewable material.
Nickel is a non-renewable resource. When a nickel mine is dug, miners’ opportunity to get the same goods is almost impossible. Because nickel is non-renewable, it must be careful in managing nickel ore and be utilized optimally.
- Reducing Environmental Impact
The negative impact of nickel mining and processing activities is quite significant to the environment. Therefore, any nickel ore mined must be able to cover the costs of improving the environment in the mining area.
Considering the above, the Ministry of Energy and Mineral Resources by issuing SE: 3.E / MB.01 / DJB / 2022, would like to emphasize that all existing provisions regarding HPM can be fully implemented starting in 2023.
In addition, ESDM considered input from the Ministry of Maritime Coordination and Investment Task Force, emphasizing that nickel ore purchase price should no longer be below HPM. HPM is the same as FOB the price.
The Impact of SE: 3.E/MB.01/DJB/2022 on Nickel Industry Players
The issuance of this circular has significantly impacted key mining industry players. Here we write down some of the most significant pacts:
- IUP holders must conduct a FOB basis in selling nickel ore, including sales to their affiliates referring to HPM.
- Non-Tax State Revenue (PNBP) actors, the Directorate General of Mineral and Coal, and all parties related to e-PNBP. If a transaction is not in the form of a FOB, then the transaction should not be processed further.
- Parties who refine nickel ore and its raw materials derived from IUP holders are also required to purchase nickel ore on a FOB basis and refer to transactions based on Nickel HPM.
- All nickel ore sales and purchase transactions must be settled using FOB. Both regarding prices, as well as the process of obligations to the state in the form of PNBP and so on.
- The Implementing Surveyor Company for Verification of Mineral Quantity and Quality of Sales is also tasked with verifying nickel ore buying and selling transactions carried out on a FOB basis.
- If the transaction is not FOB-based, the surveyors are prohibited from issuing a Verification Result Report (LHV).
- The sales process must be inputted into the Mineral Online Monitoring System (MOMS), which was created to supervise mineral and coal commodities’ production and sales activities.
- Reporting, evaluation, or recapitulation is still done manually. MOMS, then a reduction in the amount of production in the Work Plan and Cost Budget (RKAB) is a document that must be prepared by mining companies every year and submitted for approval by the Ministry of Energy and Mineral Resources (ESDM).
- If approved, a Sales Verification Module (MVP) will be issued, a system created for coal sales activities through tiered verification from upstream to downstream. MVP, and if the company has not paid its obligations, the surveyor will not issue a Verification Result Report (LHV).
- ESDM appeals to nickel mining players so that when conducting the negotiation process with buyers, it must be conveyed that this point is essential. The tomb cannot be sent to the nickel ore processing plant if it is not followed.
- Independent surveyors must reject sales transactions that are not FOB-based. If the surveyor still issues LHV, the surveyor will be subject to sanctions, ranging from administrative sanctions to the revocation of the Decree on the Appointment of Quantity and Quality Verification Implementers.
FOB vs. CIF
To complete our understanding of 3.E/MB.01/DJB/2022, let’s review this transaction in the form of FOB again.
Definition of FOB
Free on board, or FOB is one of the terms often used in international and national trade activities and one of the terms in Incoterms.
This term refers to a contract, the way of transaction, and the delivery of a good or service.
In the FOB, the seller is fully responsible for procuring and delivering goods (nickel) to the agreed port, taking care of export taxes and customs, and transporting/loading goods onto the ship.
The seller’s task is completed if the goods are already on the ship.
Furthermore, all risks that can occur and costs incurred are the buyer’s responsibility.
From the point of view of risk management and insurance, the risk borne by the seller is from the time the nickel is at the mine site (stockpile) until it is loaded onto the ship.
The prevailing price of goods (nickel) is the cost of goods (HPM) plus the cost of transporting nickel until it is loaded onto the ship.
CIF stands for Cost, Insurance, and Freight. CIF is one of the international and national trade payment methods.
In CIF, the offer price includes the price of goods, shipping costs (ship/plane), and insurance premiums.
If the seller uses the CIF method, it will pay the freight and the insurance premium for the goods until they arrive at the destination port.
Thus, purchasing and delivering goods using CIF is considered more practical and accessible, although if using this method, the goods’ price falls more.
The Impact of SE: 3.E/MB.01/DJB/2022 On Freight Insurance Guarantee
It should be noted that, in the eyes of risk management, nickel transportation is included in the group with high risk. As a result, only a few insurance companies are interested in guaranteeing the risk.
This is because nickel transportation accidents often cause losses in the form of total losses that cause significant losses on nickel loads, which are also on the ship’s frame.
Therefore, special insurance arrangements are needed to obtain maximum coverage with reasonable premium costs.
One way is to combine all nickel transportation carriers in one insurance package. Thus, a “large number” condition will be achieved so that the insurer can see the potential for receiving large amounts of premiums while they can study the risk characteristics.
With this circular, most of the risks come from buyers who buy directly and through traders.
Previously, the risk of shipping nickel may have been partly on the seller’s side, and some may be on the buyer’s side. It depends on their trade deal.
But now, with SE 3. E / MB.01 / DJB / 2022, all risks are on the buyer’s side.
What should the buyer do for insurance?
Perhaps for some buyers, FOB transactions are a new thing. However, obtaining an insurance policy is almost the same as other processes.
The buyer must ensure that the insurance coverage for the purchased goods is in place—evidenced by the issuance of an insurance policy or cover note by the insurance company.
If the insurance coverage for nickel shipments has yet to exist, it is best to postpone the delivery first because the risk is too significant. For example, if a ship capsizes and sinks and loses all cargo, you incur a loss worth purchasing that nickel.
For buyers who are used to making transactions by CIF, insurance arrangements will be more accessible because they follow the existing process. It would be best if you made sure that the insurance coverage that exists so far is maximized.
Whether the insurance company used is secured from (financial security), the claim submitted will be paid in case of an accident. Then is the premium tariff efficient enough?
How to get nickel cargo insurance coverage in Indonesia?
As we have described above, the risk of transportation nickel is high, so it takes effort to get the best insurance coverage with extensive guarantees, competitive premiums, and guarantees by healthy insurance companies.
It is best to use the services of an insurance broker company. An insurance broker is an insurance expert who is on your side.
Insurance brokers design insurance programs according to your needs, negotiating with some of the best insurance companies in Indonesia and abroad to get extensive guarantees and competitive premium rates.
The duties of the insurance broker are most important when an accident occurs and take care of claims. The insurance broker will help you from the day of the incident to the realization of the payment.
The insurance broker also acts as your advocate to take care of claims. Insurance brokers are experts in understanding the contents of insurance policies to avoid requirements and information that can affect the outcome of claims.
One insurance broker with extensive nickel transportation experience is L&G Insurance Broker. They have successfully guaranteed hundreds of nickel shipments from various locations in Indonesia.
For all your insurance coverage needs, contact L&G insurance broker now!
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