Indonesia Wins Gamble Over Ore Export Ban

Indonesia appears to have won its gamble to force multinationals to raise the domestic value of their operations after a complete ban on raw mineral ore exports until the multinationals agreed to process their exports domestically.

The Denver, Colorado-based Newmont Mining Corp., parent of PT Newmont Nusa Tenggara, said in a printed statement earlier this week that it was withdrawing its suit at the International Center for Settlement of Disputes “based on encouraging developments.” But it didn’t say what those encouraging developments were, other than “commitments from senior government officials to open formal negotiations to conclude a memorandum of understanding.”

Exports of ores vital to industries in other countries, particularly China, have been stopped since the first of the year as the multinationals attempted to face down the government in Jakarta. The mining sector comprises the second-biggest multinational investment in the country. Both PT Freeport Indonesia, a subsidiary of the US-owned Freeport McMorRan and Newmont have announced they were withdrawing their claims over the export restrictions, with Newmont the latest on Aug. 26.

Both Indonesia and the mining companies had begun to suffer from the game of chicken, with the Mining and Technology trade publication’s website estimating the cost for the first year of the ban at US$890 million in Indonesian royalties, while the mining companies have also faced massive losses of revenues. Newmont announced in June that it would lay off 6,000 employees from its Batu Hijau mine, located on the island of Sumbawa, 1,500 km east of Jakarta.

The ban, which went into effect at the first of the year, has also caused major disruptions in Japan and especially China, which had prepared for it with a six-month stockpile of nickel. That stockpile has been run down, however, leaving manufacturers having to scramble unsuccessfully to find substitutes. Other ores and minerals include bauxite and copper. Although Japan has been hit by the ban, it is the Chinese pig iron industry that has been hit hardest. Philippine nickel ore is too low-grade to provide an economic alternative and African alternatives, while high quality, are too far from the coast to be transported to shipping sites economically.

The Indonesian government has demanded that the multinationals build domestic refineries such as smelters or contract with local entrepreneurs in Indonesia to refine products they export, raising the value of the exports and providing jobs.

The ban on exports had been on the cards since 2009, when the Indonesian parliament passed a law to force the mining companies to construct the refining facilities and create downstream industries or risk being unable to export ore. The government gave the mining companies five years to get their act together, but given the inability of the government to provide the infrastructure for the refining operations, the multinationals thought Jakarta would back down. Smelters require enormous amounts of power that the Indonesian government has been unable or unwilling to provide.

But Jakarta didn’t back down. In fact, after agreeing temporarily to back away in January from requiring mining companies to construct smelters domestically to process ore and delaying the requirement to 2017, the government raised the ante shortly after that by demanding that the mining concerns pay punishing taxes if they didn’t build the smelters.

The mining companies have faced a multitude of problems. Domestic entrepreneurs for the most part have stalled in their plans to provide refining capacity to the mining companies. Only 28 smelters had been cleared to break ground of 177 proposals submitted by companies by the end of 2013, and only a handful have been commissioned, one of which is a smelter belonging to state-owned mining concern Aneka Tambang in Tayan, West Kalimantan, which processes bauxite into chemical grade alumina. Most of those on the books won’t be ready for production until 2017.

Although the government of outgoing President Susilo Bambang Yudhoyono has concluded memorandums of understanding with a number of mining companies, the incoming government headed by Joko Widodo, which takes power in October, is expected to handle the bulk of them. While Jokowi as the president is known, has made vague commitments to accommodating multinational companies in Indonesia, it is far too early to tell which way he will go. The outgoing economics czar, Hatta Rajasa, was a committed economic nationalist who engineered the tightening of the screws on a wide range of multinationals beyond just the extractive industries.

The fact that the smelters are to be built locally raises the threat of additional corruption in a country where corruption has been a way of life for decades. Joko Widodo is being closely watched to see if he can rein in the excesses.

The government and the mining companies must now negotiate new contracts of work, which have been in effect since the early days when Indonesia was first becoming an export powerhouse for mineral extraction. They were designed to provide assurance and stability to encourage significant, long-term investment. They detail the mining companies’ obligations and rights while also spelling out the taxes and duties the companies are expected to pay. Despite changes in various laws and regulations over the years, the obligations and rights have continued to govern operation of the mines.

Newmont, in its press release, said it has a memorandum of understanding to participate in a process with Freeport which is designed to lead towards the development of a smelting operation. It also has negotiated concentrate supply agreements with two Indonesian companies that have publicly announced plans to build their domestic copper smelters in the country.