It may sound like a cracked record, but the ongoing uncertainty surrounding Indonesia’s mining industry is not doing anyone any favours and, is putting further development of mineral resources at risk. There are still some successful mining ventures as evidenced in the pages of this edition, but operators are demonstrating tremendous perseverance as mining policy changes mean that they constantly have to alter tack mid-stream.
In the past few years mining giants Rio Tinto and BHP Billiton have reduced their exposure to Indonesia and majors such as Newmont, Freeport-McMoRan and Newcrest are going down a similar path. If large companies find it too hard to do business, what must it be like for the many smaller companies trying to negotiate their way through the mining minefield?
Indonesia-based lawyer and mining expert Bill Sullivan says one of the main problems for the industry in recent years has been the lack of consistency in government policy with the government changing its mind regularly and unexpectedly.
The latest U-turn on exports of minerals has sparked fresh turmoil, providing new headaches for companies striving to operate in the resource-rich archipelago. In January the government relaxed a 2014 ban on exports of raw mineral ores which was designed to encourage domestic processing of raw materials but led to mine closures, job losses and a decline in government revenues. Under the changes miners will be able to export nickel ore and bauxite as well as concentrates of other minerals under certain conditions, instead of having to process them in Indonesia.
There have been some smelters developed and others in the pipeline, which is good for Indonesia, but the intention of the original ban has not had the full intended effect and has led to the turnaround. Relaxing the ban has benefitted some but has infuriated companies that have invested large amounts in processing. Indonesia’s smelter industry association says that those who have invested millions in processing can now only pray that the government will revoke the legislation.
The government has added to the uncertainty by asking companies to sign new contracts, which include increased divestment of Indonesian operations resulting in less protection for foreign investors. Then there is also ongoing permitting uncertainty, exacerbated by the involvement of provincial government in the process.
The latest policy overhaul has sparked a potentially damaging impasse with US-based company Freeport-McMoRan, which operates Grasberg in the country’s east, one of the world’s largest copper and gold mines. This led to the company winding back production, halting exports, standing down workers and threatening to sue the government. While there has been some progress in resolving the stand-off, there is still a long way to go and the future for Grasberg is not looking as rosy as it should.
The regulatory changes have caused jitters among all miners with some foreign companies choosing to exit the country rather than deal with unpredictability. Last June Newmont sold its interest in a large mine to local investors after more than 30 years in the country and cited onerous regulations as a factor in its decision while Rio Tinto is said to be considering divesting its Grasberg stake owing to the current impasse. BHP Billiton has decreased its involvement in the coal industry while Newcrest has done the same in gold.
While economic nationalists say that putting stricter conditions on foreign investment will allow the country to gain greater profits from mining, industry analysts fear the changes could backfire by deterring investors at a time when the government must reignite slowing economic growth.
The government must give serious consideration to creating a stable mining policy that looks after the interests of all citizens, that protects the environment, that encourages mining companies to efficiently and effectively exploit the resources, and that attracts foreign investment that can support this process.