Indonesia Now Demands Fines from Miners Over Smelting Decision

After agreeing temporarily to back away earlier this week from requiring mining companies to construct smelters domestically to process ore, delaying the requirement to 2017, the Indonesian government now will demand that the mining concerns pay punishing taxes if they don’t build the smelters.

The target is companies that promise to build smelters so they can continue exporting raw minerals, but then don’t, or that attempt to take advantage of any loopholes in the law, according to the American Chamber of Commerce in Indonesia, or Amcham, in a bulletin on its Jakarta website. It quoted the Indonesian Finance Minister, Chatib Basri, as saying the fines are a “form of punishment for companies that do not have mineral-processing smelters in the archipelago.”

Local media reported Finance Minister Chatib Basri as saying. Companies exporting copper concentrate face a 25 percent tax this year, starting to rise incrementally in 2015, every six months until the rate hits 60 percent in 2017. The aim, Chatib was quoted as saying, is to make firms process raw ore domestically as it would be economic suicide to continue exporting.

Sixty percent export tax is high. Most companies don’t have a 60 percent profit margin,” Chatib reportedly said.

The move to implement the taxes is regarded as aimed at the US-based mining giants Freeport-McMoran Copper & Gold Inc. and Newmont Mining Corp., the two biggest mining operations in Indonesia, which have been operating in the country for decades under steadily tightening regulations. Some 97 percent of Indonesia’s copper output comes from the two firms.

The tax is being imposed gradually, Chatib said, to give the mining companies time to build domestic smelters. The export of ore such as nickel, bauxite, chromium, gold, silver and tin has been totally banned, others such as copper concentrate, iron sands, iron ore, manganese, zinc and lead can still be exported.

Critics said that despite the fct that the mining law was passed five years ago, in 2009, the ore ban was so poorly implemented that it holds the potential for disaster and is undermining investor confidence, There were concerns that full implementation could lead to a US$5 billion shortfall in the country’s balance of payments.

Tens of billions of dollars in potential new investment has been stalled over issues such as the ore ban, forced divestiture of resource processing interests and terms of renewal for contracts and concessions.

Although the country’s multinational oil and gas sector continues to face similar government bulldozing, restrictions on other multinational segments are spreading. For two years, multinationals including Chevron, BP, ConocoPhillips, ExxonMobil, and Total and China’s state-owned companies PetroChina and China National Offshore Oil Corporation also have faced growing trouble, including occasional arrests of top officials on charges that appear to have been manufactured to intimidate the companies.

In the case of the smelting law, the mining companies view it as impractical at best because smelting takes huge amounts of power, which the Indonesian government is unable to supply anywhere near the mine sites.

With both foreign and local miners long warning that the ban would be disastrous for the economy and virtually impossible for mining companies to cope with, they had been breathing a sigh of relief only to be hit now with the threat of the fines.

It remains to be seen where the affair will go now. The fines are so big that they would nearly put the mining companies out of business if they don’t comply.

The mining industry, both domestic and foreign, continue to argue that in many cases there is insufficient demand to justify the expense of investing in local smelters. In many areas where smelters would presumably be needed, the power infrastructure couldn’t support energy-intensive mineral smelters.

In addition, the wording of the law, which calls for ore to be “processed” not smelted, is a matter of contention. Subsequent regulations called for mandatory smelting of virtually all minerals, while miners argue that they are already “processing” ore into exportable concentrate.

In recent months, officials have drafted new trade and industry laws that have concerned American and European multinationals operating in the country because of fears they will constrict investment and cut further into market access in a country increasingly in the grip of economic nationalists.