The economic slowdown and uncertain global environment have obstructed Indonesia's policy to push the country's mining sector to invest in metal smelters and downstream industries. Falling exports and the depreciation of the Indonesian rupiah during the past few years raise questions over the timing of the government's move to ban shipments of unprocessed metal minerals. Moreover, global commodity prices are hovering near six-year lows, which puts financial strain on mining companies and hampers their ability to come up with the billions of dollars needed to build processing facilities and supporting infrastructure.
Given these developments and in view of the current administration's demonstrated willingness to reform business regulations, some investors may be hoping to see Indonesia's mining rules altered in their favour. Relaxing or postponing export restrictions could provide a quick boost to Indonesia's current account and buttress the rupiah at a time the national currency needs all the help it can get.
A country blessed with an abundance of mineral resources, Indonesia has long relied on the shipment of copper, nickel, tin, bauxite and other metals to foreign markets for a good chunk of its export earnings. Finding buyers in the fast-growing region of Southeast Asia was not hard, and strong demand from China, in particular, lent support to global commodity prices for most of the past decade. But Indonesia's metal exports dropped abruptly when new regulations took effect in January 2014 to ban the shipment of such minerals in unprocessed form, albeit with temporary exceptions. The idea behind the regulations is to export metals at a higher state of refinement, which not only adds value before shipping them abroad but also fosters the growth of domestic downstream industries, which in turn will help the country satisfy rising domestic demand for metals.
The ban is based on Law No. 4 of 2009 on Mineral and Coal Mining (often called the Mining Law). It was subsequently softened by government regulations for a number of metals to reduce the degree of purity that needs to be achieved before minerals can be shipped overseas – for a period of three years. Also, exports of ores and concentrates were allowed under strict conditions for mining firms that can show that they are taking steps towards refining or smelting their output. In a bid to nevertheless encourage domestic processing, Ministry of Finance Regulation No. 6 of 2014 makes shipments of insufficiently refined minerals subject to export duties that will accelerate progressively to 60% before the full-scale export ban on metal concentrates takes hold in 2017.
Mining company executives have levelled harsh criticism at the Indonesian government for the policy's unrealistic time frame and for failing to take into account their concerns about its implementation. On the other hand, mining companies, by and large, were slow to act upon the 2009 law, failing to build smelters or other facilities, which is not their core business. By January 2014, domestic processing capacity had made little headway, which is why the ban directly took its toll on metal exports. Partly this was due to the backlog in processing permits for continued ore exports based on the temporary exemptions.
Irrespective of the policy’s details, there is no doubt that President Joko Widodo, who assumed office in October 2014, remains intent on enforcing onshore processing of metal minerals across the board. While it is conceivable that macroeconomic circumstances force the administration to soften or postpone certain aspects of the policy, there is no meaningful political support – neither within the ruling coalition nor among opposition parties – to change course (See Metal Mining in Indonesia: Time to Face the Facts). Mining companies wishing to do long-term business in Indonesia will have to come to terms with the new requirements to refine their mineral ores and concentrates by building refineries and smelters or by teaming up with firms that already operate or want to jointly build such facilities.
Numerous smelter projects have been announced, but few have actually broken ground. Citing ministry data, Bloomberg reported in December 2014 that investors were planning to build six alumina refineries and 30 nickel smelters through 2017. But half a year later, in July 2015, the chairman of the Indonesian Nickel Association told Reuters that he expected only five or six nickel smelters to be completed in 2015, less than half the number the government had earlier anticipated for that year. And even that turned out to be unrealistic as projects were delayed or put on hold due to the unfavourable global market conditions.
Unsurprisingly, state-owned enterprises (SOEs) are among the first to heed the government's call to boost metal refining. State-owned aluminium maker PT Indonesia Asahan Aluminium (Inalum) announced plans to build a refinery in West Kalimantan in a joint venture with another SOE, diversified mining company PT Aneka Tambang (Antam). The plant will process bauxite into smelter-grade alumina for Inalum's aluminium smelter, which is the only one in the country – and slated for expansion. The two SOEs were looking for an experienced global company as a strategic partner in the project, Antam announced in October 2015, with potential partners including, “amongst others, candidates from China, Russia and the United Arab Emirates.” The companies expected the refinery to commence operations in 2019, much later than the target mentioned in earlier media reports.
Meanwhile, state-owned tin producer PT Timah is venturing into rare earth metals. After the successful launch of a pilot project to process rare earth minerals, the company plans to build a large-scale plant with a view to commencing operations in 2017, The Jakarta Post reported in October 2015.
Aside from SOEs, Chinese companies appear to be the keenest to invest. China's Marconing Group launched the construction of a three-smelter nickel plant in Central Sulawesi in June 2015 in a joint venture with Indonesia's PT Central Omega Resources. The paper also reported on another Indonesian-Chinese joint venture for a nickel smelter in South Sulawesi between Shanghai Huadi Industrial Co and PT Duta Nikel Sulawesi. Both projects were expected to be completed in 2017 and would export most of their products to China.
A report in June 2015 showed that PT Megah Surya Pertiwi, a subsidiary of Indonesia's Harita Group, broke ground on a nickel smelter in North Maluku with a view to complete the project in June 2017, later than initially planned. China's Xinxing Ductile Iron Pipes, according to the report, would have an 80% stake in the smelter. With a planned capacity of 190,000 tonnes of ferro-nickel per year, the plant would process minerals from numerous mining companies. A month earlier, in May 2015, China's steelmaker Fujian Wugang Group reportedly launched a large nickel pig iron smelter in Maluku with Indonesia's PT Tekindo Mining Lestari in a joint venture called PT Teka Mining Resources.
While Chinese companies have taken the lead on the ground, other companies, including numerous examples from Russia and Australia's Gulf Manganese Corporation (GMC), are looking to make inroads into Indonesia's metal mineral processing industry. GMC is planning a manganese smelter in East Nusa Tenggara and recently announced in September that it successfully applied for tax relief and other support for investors.
Investors in Indonesia's burgeoning metal mineral processing industry are finding themselves in the right place at the wrong time. Indonesia is located in a dynamic and increasingly integrated region of the world with rising metal demand. Most importantly, domestic demand promises to rise strongly as the government nurtures the growth of downstream industries. The country's development roadmap foresees the creation of industrial clusters to foster vertical and horizontal integration in the metal industries, while rising spending on infrastructure aims to improve connectivity across the archipelago, both over land and at sea (See Indonesia's Maritime Ambitions Require Massive Upgrade of Seaports). All this should make Indonesia an attractive place for mineral refining and smelting and is good news for metal processing businesses further downstream.
It must, however, be evaluated against the backdrop of unfavourable capital markets: Insecurity on equity markets makes this a bad time for IPOs rights issues, the expectation of rising interest rates in the US has seen funds pulled out of emerging market bonds, and the weakness and volatility of the Indonesian rupiah increases risks for investors. One might say Indonesia has shot itself in the foot with its 2009 Mining Law, as the export restrictions make it hard for companies to earn the funds they would need to construct refineries, smelters and other mineral processing facilities. Yet one must also acknowledge that the government has issued a number of regulations since the law's enforcement in early 2014 to make life easier for companies committed to engaging with the new rules. Building metal processing facilities takes years. Now might just be the time to get a foot in the door and capitalise on Indonesia's long-term opportunities once market conditions have improved.
Global Business Guide Indonesia - 2016
Contribution to GDP: 11% (Q3 2015)
Oil & Gas Imports: $22.8 billion USD (Jan-Nov 2015)
Proven Oil Reserves: 3.7 billion barrels (2015)
Proven Gas Reserves: 101 trillion cubic feet (2015)
Proven Coal Reserves: 28 billion tonnes total reserves (2015)
Proven Potential in Geothermal Energy: 29 GW
Proven Potential in Hydropower: 75 GW
Other Energy Sources: Coal Bed Methane, Biomass, Waste, Ocean Current, Solar, Wind.
Current Energy Mix: Petroleum 41%, Coal 30%, Natural Gas 23%, Renewables 6% (2014).