Regulatory Uncertainty Plagues Indonesia’s Mining Sector Again
One of the weak points of Indonesia, one that seriously hurts the country’s investment climate as well as foreign confidence, is regulatory uncertainty. In 2009 the government of Indonesia introduced Law No. 4/2009 on Mineral and Coal Mining (New Mining Law) which caused a shock in Indonesia’s natural resources sector as it includes several new policies that make investors think twice before investing in Indonesia as the consequences of these new policies are far-reaching. However, a possible new amendment to the law causes new concern.
One important new policy included in the 2009 New Mining Law is the accelerated share divestment requirement meaning that foreign shareholders in local mining companies (holding an IUP permit) are required to divest their shares within ten years from the start of commercial production in order to achieve majority Indonesian ownership in the mining company. This rule makes investing in Indonesia’s mining sector considerably less lucrative.
Secondly, the New Mining Law includes the ban of exports of unprocessed minerals, instead requiring mining companies to process and refine their mining output domestically (before export is allowed). Although the mineral ore export ban has been in effect since January 2014, the Indonesian government has given some exemptions to certain companies (under strict conditions) as domestic smelting capacity was not sufficient thus significantly disturbing the mining sector and weakening Indonesia’s export performance.
Reluctantly, miners such as Freeport Indonesia and Newmont Nusa Tenggara had to face the new reality and started to make plans for the construction of smelting facilities. At that stage Indonesian authorities had not set requirements concerning the exact location of these smelting facilities. The new law required miners to refine mineral output domestically i.e. in Indonesia. However, a new bill, an amendment to the Mining Law, set for deliberation by Indonesia’s House of Representatives (DPR) will require these smelting facilities to be established in the proximity of the mine from which mineral ore is extracted, thus not allowing separate locations for the mine and smelter (hence integrating the upstream and downstream branches). Through this amendment the DPR aims to boost economic development in mining regions and curtail the dominance of Java regarding the location of smelting facilities (due to better infrastructure miners tend to select Java as location for smelters).
The Case of Freeport Indonesia
We have received no information at this point whether this new bill would be retroactive if approved. But it is interesting to take a look at one specific case.
Freeport Indonesia, controlled by US-based Freeport-McMoRan Copper & Gold, is the world's largest gold mine and third-largest copper mine. Since 1967 the company has been operating the vast Grasberg on the island of Papua based on the long standing “Contract of Work” system. Reluctantly Freeport Indonesia finally agreed to renegotiations with the Indonesian government in order to make its contract in accordance with the New Mining law.
These renegotiations also led to Freeport Indonesia’s commitment to establish domestic smelting facilities. The company selected East Java, located far away from its mine on Papua, as the location of the smelter due to a number of reasons (this USD $2 billion smelter is a joint venture with Newmont Nusa Tenggara).
Firstly, infrastructure in Papua is inadequate. If the company would build a smelter in Papua it would also need to invest in a costly power plant to meet electricity demand for the smelter as well as a local port (including dredging as the coastal seawater is too shallow for the big ships). Secondly, construction costs are much higher in Papua compared to Java. For example, a bag of cement is three times more expensive in Papua than in Java due to the country’s high logistics costs. Thirdly, in East Java there are cement and chemical companies that want to absorb waste material from the smelter. In Papua these companies are not present. Lastly, Freeport Indonesia has not received confirmation that its contract, which expires in 2021, will be extended by the government and therefore costly investment is risky.
New developments regarding the House’s deliberations on this bill will be reported on our website
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