Regulation No.7/2012 issued by the Ministry of Energy and Mineral Resources on 6 February 2012 will prohibit the export of unprocessed raw materials or ore by IUP holders. At this point, there appears to be confusion as to the commencement date of the prohibition, with some government officials saying May 2012, while others have indicated 2014.
Mineral raw materials will have to be processed in Indonesia, rather than being exported in a raw state. This regulation is intended to develop the country’s downstream mining industry, increase domestic revenues, and ensure availability of refined products for domestic use. Sanctions for failure to comply include suspension of activities and/or permit revocation. The above prohibitions do not include coal.
The practical implications of the in-country processing requirement are challenging. At present Indonesia does not have sufficient smelters to process raw materials in-country, nor is it likely to have sufficient capacity by 2014. Constructing smelters is time-consuming and capital-intensive: on average, it takes around 7-8 years from inception to operation, and costs can be in the region of US$800m-US$1bn or more. Mining companies appear reluctant to diverge into processing. Newmont, for example, indicated in February 2011 that its feasibility studies indicated that setting up gold and copper smelters would be uneconomical.
One of the companies in Indonesia committed to building new smelters at present is state-owned PT Aneka Tambang, which is raising finance for a US$1.6bn ferronickel smelter in East Halmahera. Construction commenced at the close of 2011, with the plant due to become operational towards the end of 2014. Production capacity will be in the region of 27,000 tonnes per year. The company is also planning to build three other processing plants in Kalimantan and Sulawesi, but these projects are some years away from development.
The government is lobbying hard to attract investment for the development of new smelters, and recently it issued a series of statements announcing new smelter projects. According to the government, 19 metal processing and refining facilities are currently under construction or undergoing feasibility studies as part of the country’s response to the prohibition on ore exports. Of the 19 facilities, seven are now in the construction phase, six are having their feasibility assessed, and the remaining six have just obtained construction permits; Krakatau Steel, South Korea’s POSCO, Japanese companies Showa Denko and Marubeni Corporation, China’s Ning Xia Hengshun Group, Dubai’s MEC Holdings and India’s NALCO are all reportedly investing in the development of new smelters in Indonesia. However, market commentators appear united in their view that whether or not these proposed projects come to fruition, Indonesia is unlikely to have sufficient processing capacity available to comply with the regulatory requirements by 2014.
With respect to coal, Indonesia’s government has also indicated its intention to ban low-calorific coal exports from 2014. The Minister of Energy and Mineral Resources circulated a draft regulation regarding “value added upgrading of minerals and coal through processing and refining activities” (the “Draft Regulation”). Under the Draft Regulation, coal with a calorific value of 5700 kcal/kg or below on an air-dried basis will be banned from being exported from January 2014. This threshold has oscillated between 5100 and 5700 kcal/kg; a 5700 kcal/kg threshold would of course have a more serious impact than would a 5100 kcal/kg threshold. However, given that the Draft Regulation has already been revised several times, some analysts do not expect it to be implemented by 2014. The Indonesian Coal Mining Association (ICMA) believes that the plan to ban low-calorific coal exports is not viable, even if the technology to upgrade the calorific value of coal is available.
With such uncertainty about when (or indeed whether) the Draft Regulation will be implemented, it is important that investors who are considering entering Indonesia’s low-calorific coal market should be aware of the latest developments with regard to the Draft Regulation. Norton Rose and Susandarini & Partners have been guiding organisations on investments in the Indonesian coal market and continue to update investors on changes in the market.