Indonesia Climbs Down on Ore Ban

Although an attempt by the Indonesian government to ban unsmelted mineral exports has ended in an embarrassing climb-down at the 11th hour, it isn’t going to go away. A requirement that ores be smelted domestically has been put off until 2017, by which time a new government will have succeeded that of President Susilo Bambang Yudhoyono.

Political observers in Jakarta say that the three-year delay is a reprieve, hardly a pardon. With economic nationalism growing in the country, whoever is president will probably push for some form of a ban. There is rough agreement among all candidates and potential candidates on a more nationalist direction in resource extraction policy.

The ore ban, which was widely popular as an idea, was so poorly implemented that it held the potential for disaster and undermined investor confidence. The country has been the focus of investor concerns since the current mining law was passed in 2009, as various regulations have sought to restrict the operations of multinationals, particularly in extractive industries such as oil and gas and minerals. As a result, companies say, tens of billions of dollars in potential new investment has been stalled over issues such as the ore ban, forced divestiture and terms of renewal for contracts and concessions.

Both Freeport McMoRan Copper & Gold and Newmont Mining Corp., two US-based multinationals and the biggest mining operators in Indonesia, face continued pressure on their contracts of work and negotiations over ongoing operations. But they are not alone. The country’s multinational oil and gas sector faces similar government bulldozing. The sector is dominated by several multinational giants including Chevron, BP, ConocoPhillips, ExxonMobil, and Total. China’s state-owned companies PetroChina and China National Offshore Oil Corporation also have a considerable presence.

“I think this had a lot to do with short-term weakness in the economy and a last-ditch effort to fix a badly implemented law," said one analyst. “Longer term, the nationalist direction on resources will likely continue regardless of who the next president is.”

The two leading candidates for the presidency in elections later this year are Jakarta Governor Joko “Jokowi” Widodo, who has yet to declare, and former Lt. Gen. Prabowo Subianto, who trails the governor by a wide margin in opinion polls.

Neither is a stranger to international commerce. Jokowi was a successful furniture exporter and traveled widely before he went into politics. He is presumed to be realistic on business issues. Although Prabowo is considered a nationalist, he also grew up abroad and is closely aligned with his businessman brother, who has considerable international commercial interests.

With both foreign and local miners long warning that the ban, implemented under the 2009 mining law, would be disastrous for the economy and virtually impossible for mining companies to cope with, the government had little choice but to water down the regulations, which were signed by Yudhoyono just a hour before the ban was to go into effect.

A total ban would have aggravated a trade deficit and potentially led some major investors to abandon the country at a time when growth has slowed and the rupiah has weakened dramatically.

The new softer regulations appear to have been largely driven by the Ministry of Trade, not mining, perhaps because Minister of Mining and Energy Jero Wacik, who pushed for the ban, is under suspicion in an unrelated oil import scandal.

Backing down is an embarrassment for Yudhoyono, whose government insisted the ban was necessary for Indonesia to take control of its natural resources and to build a domestic smelting industry. The mining industry, both local and foreign, argued that in many cases there was 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, was a matter of contention. Subsequent regulations called for mandatory smelting of virtually all minerals, while miners argued that they are already “processing” ore into exportable concentrate.

A proposed regulation that would require foreign investors to build smelters and then divest their interests within 10 years was also criticized as being uneconomical and discriminatory against foreign companies. The mining interests said that in most cases there was no economic justification for smelters.

Multinational companies have complained in recent years that they are under pressure across a wide range of sectors in Indonesia. In April, the United States, Japan, Australia, Canada, Korea, the European Union and New Zealand all expressed concerns to the WTO over the country’s restrictions on imports of food products.

While Indonesian tariffs have been brought down from 20 percent to 5 percent in recent years and import monopolies and licensing have been largely abolished, corruption in the food export quota system remain debilitating and domestic food prices are among the highest in Asia. As the WTO complaint notes, inspection and licensing procedures have resulted in de facto trade violations.

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.