Indonesia May Drop Mining Export Ban

The Indonesian government appears about to relax or drop altogether provisions in a controversial law requiring mining companies to construct smelters to process ore domestically, officials said on Feb. 16 in Jakarta.

Sudirman Said, the Minister of Energy and Mineral Resources, told reporters that the government needs to review its mineral ore export ban policy as Indonesia's smelting capacity will still not be sufficient by 2017. Bambang Gatot, the director general of coal and minerals, said the government would also review the full ban for nickel ore and bauxite exports.

The law would need to be amended or rewritten to stop the ban. It is already on the legislative calendar in the House of Representatives, according to press reports.

The ban, which went into effect in January 2014, is part of the country's 2009 Mining Law and was aimed at boosting domestic processing facilities to reduce Indonesia’s dependence on raw commodity exports. It is largely seen as the leading edge of a national policy drive toward economic nationalism in many sectors.

Smelters demand halts the business

The demand for construction of smelters brought mining exports, one of the country’s biggest sources of revenue, to a temporary halt, causing major overseas chaos, with manufacturers in China and Japan scrambling to find nickel and bauxite from as far away as Africa at far greater cost. Both local and foreign miners have seen revenues squeezed by the ban, which has allowed partial exemptions if companies can "prove" they are building smelters.

That the order to force mining companies to build smelters regardless of business justifications was impractical quickly became apparent given that the facilities require huge amounts of electricity which the government was incapable of delivering to isolated areas where the mines themselves are sited. With equally inadequate transport infrastructure to move ores to areas where there was electricity, insufficient domestic smelting capacity implied huge revenue losses. In addition to the infrastructure and construction problems, low global commodity prices have made development of costly smelters uneconomical.

The full ban was delayed to allow concentrate exports such as copper, iron sands, iron ore, manganese, zinc and lead to resume until 2017 on condition that exporters provide evidence that they were committed to the development of the smelters. But the ban was so disastrous that it was partly rescinded. While nickel, bauxite, chromium, gold, silver and tin remained totally banned, there were concerns that full implementation could lead to a US$5 billion shortfall in the country’s balance of payments. The result has been confusion and a mining industry on the ropes.

The government also imposed massive export taxes, with companies exporting copper concentrate facing a 25 percent tax bite in 2015, starting to rise incrementally every six months until the rate was to hit 60 percent in 2017. The aim was to make firms process raw ore domestically as it would be economic suicide to continue exporting. The move was regarded as largely 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.

Freeport and Newmont now face disadvantages if the government does allow ore exports after 2017. The two companies have set out plans to develop smelters and it is unclear how the revision of the law might impact them. Neither company has actually built a smelter and Newmont is in the late stages of selling its local operations to an Indonesian consortium.

Privately, both companies say local smelters are impractical, costly and a waste of resources.

Another step toward reason

The decision to reverse or delay the ban represents another in a flurry of moves President Joko Widodo’s administration has made since September 2015 to ease structural impediments to foreign investment.

In the latest, on Feb. 11, Jokowi, as the president is known, rolled out what he called a “big bang” to roll back restrictions in nearly 50 sectors of the economy including e-commerce, tourism, health care and moviemaking. It is the most sweeping of a series of stimulus packages that the president has ordered since he shook up his cabinet in August 2015 to counter economic nationalists who push a closed, import substitution model on the economy.

Almost immediately after taking office in October 2014, Jokowi made a series of overseas trips to tell the world Indonesia was open to investment, only to have vested interests sabotage the message. In the last half of his 10 years in office, ex President Susilo Bambang Yudhoyono deepened numerous restrictions on multinational companies and foreigners in general including occasional arrests of top officials on charges that appeared to have been manufactured to intimidate the companies.

Numerous officials from the Yudhoyono government, including three cabinet ministers, are currently in prison on corruption charges.

Today, Jokowi seems to be serious about countering the murky nationalism that has eroded global confidence in Indonesia's economy. "Ease of doing business” is one of his major commitments as he has ordered cuts in red tape, deregulation and faster investment licensing, which in the past has been hobbled by rampant bribery and bureaucratic fiefdoms.

The president is also clearly pushing diversification away from the commodities sector for the future with most incentives geared toward manufacturing competitiveness. In the meantime, all that ore in the ground represents badly needed revenue.