New regulations for Indonesia’s mining sector lead to export standstill

Indonesia mine

Indonesia has placed an export ban on mined ore to encourage local processing. The regulatory changes have been met with resistance from international mining companies, and investor confidence in Indonesia’s mining sector has already suffered as a result.

The Indonesian government banned the export of mined ore on January 12th, as a way to entice miners into processing their ore locally and as a way to create more jobs. Since then, there has been no concentrate export.

Mining companies like Freeport-McMoRan Copper & Gold and Newmont Mining Corporation are in talks with the Indonesian government over these new rules. These two companies comprise a large part of the mining sector and are vital to Indonesia’s expanding mining sector; they produce 97% of Indonesia’s copper.

These two giants have openly opposed the new rules, stating that recent changes break their contract of work (CoWs) with the Indonesian government. They say their CoWs maintain that holders of said contracts are not subject to taxes, duties, or fees by the government, except those initially outlined in the contract.

There are reports that both companies have considered resorting to legal action but hope that talks with the government will lead to a resolution, rendering international arbitration unnecessary.

The new regulation also allows for continued export of copper, lead, iron ore, zinc, and manganese, though with different purity rules. Also under the new regulations, the export tax for concentrates of lead, iron, zinc, ilmenite, titanium and manganese is 20% for 2014, but will rise to 60% by the latter half of 2016.

The regulation has also affected other companies; Indo Lysaght, which exports zinc oxide to international companies such as Bridgestone and Dunlop, were surprised to discover that zinc oxide also fell under the new ban. They did not receive export permits from the Indonesian trade ministry.

Although in the long-term Indonesia’s profits from ore processing are expected to increase, there are fears of short-term damage to the sector, employment in the sector and to Indonesia’s economy. For example, the ban is expected to slash government revenue by $820 million this year, as predicted by the finance minister. The Support for Economic Analysis Development in Indonesia, part of USAID, predicted that the direct loss to the Indonesian economy will be $6.3 billion in 2014.

This is not surprising when examining the importance of the mining industry to Indonesia’s economy. Data shows that the nation exports on average $500 million of ore per month (as measured from January to October 2013). Indonesia is the world’s biggest exporter of nickel ore, thermal coal and refined tin.

The halting of shipments is not only damaging to Indonesia’s economy but also to its investment environment. This sudden change in regulation could damage investor confidence and highlight the economic volatility of this emerging market.

This shock to investor confidence was immediately clear, as J.P. Morgan downgraded Newmont Mining Corporation despite its strong fourth quarter results. Analysts at J.P. Morgan specified that the best performing gold companies had usually operated in more politically stable countries.

All in all, these are tumultuous times for the Indonesian mining sector but the government hopes that new regulations will stimulate job creation throughout the nation and lead to a more profitable mining sector. Talks between the government and international miners will continue in hopes of a resolution beneficial to all sides.

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Categories: Natural resources, Pacific Asia

Author:Margaux Schreurs

Margaux is a graduate from the London School of Economics and Political Science with an MSc China in Comparative Perspective with a focus on a comparison between North Korea and China. Having grown up in Singapore, she travels widely in Asia and has spent extended amounts of time in China and Vietnam, and speaks both Chinese and Vietnamese. She has a BA Development Studies and Economics from the School of Oriental and African Studies with a regional focus on East and Southeast Asia, and focuses mainly on these regions as a freelance writer. As a recipient of the Chinese Government Scholarship, she is studying Chinese at Beijing Language and Culture University, in preparation for further academic research in China.

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One Comment on “New regulations for Indonesia’s mining sector lead to export standstill”

  1. bruce abrams
    February 20, 2014 at 3:13 pm #

    Any idea how this will effect copper prices in the short term ?

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