Indonesia’s four-year-old plan to ban the export of raw mineral ore in an effort to foster a domestic processing industry comes into effect on Jan. 12 with little preparation, to the frustration of the mining companies that control the export of gold, bauxite and other raw materials.
Meetings last week with lawmakers failed to produce a compromise, although the smelting industry is woefully inadequate, there is not enough power near mining sites to do the smelting and smelting companies appear to have stalled out in their plans. Giants like the US-owned PT Freeport Indonesia and PT Newmont Nusa Tenggara may have to close temporarily, mining sources said.
The thinking behind the ban was to encourage companies to add value to their products by developing the downstream industry and process the minerals locally, giving Indonesia a stronger position in the international marketplace, and boosting profits.
But, said a long-term country risk analyst in Jakarta, “A lot of people believe this thing is basically designed not to smelt ore or add value but to change the ownership structure of the mining industry. It is fueled by nationalism and despite some reasonable arguments for it, it has been presented in such a way that chaos is inevitable.”
The move has attracted widespread criticism for its short time span for the development of a downstream industry, with many observers pointing out the difficulty of developing international standard smelters overnight. Long term, it was felt, the plan made some sense for some minerals.
In the short term, it has the potential to be catastrophic for mining companies. Only 28 smelters have been clared to break ground out of 177 proposals submitted by companies, and only a handful have been commissioned, one of which is a smelter belonging to state miner Aneka Tambang in Tayan, West Kalimantan, which processes bauxite into chemical grade alumina.
It is not even clear that the ban is legal. It is not in the mining law, it is an implementing regulation and it violates the Contracts of Work for the big Western companies, which is why Indonesia may be vulnerable to international arbitration if it comes to that.
This hasn’t deterred Natsir Mansyur, a prominent businessman and former long-time politician with the Golkar party, who set up PT Indosmelt in 2010, and has been developing a $1.5 billion smelter and refinery project ever since. Natsir's mission is to tap the potential business, and boost investment in the sector in preparation for 2014.
Natsir is now working on wrapping up the financial side of the project. However, construction isn’t expected to begin before February, and commercial operations aren’t expected before 2017 or 2018 at the earliest. Natsir said Indosmelt is expected to source 70 percent of the financing for investment from a syndicated bank loan, and many Japanese lenders have expressed interest. He said Bank of Tokyo-Mitsubishi UFJ and Japan Bank for International Cooperation (JBIC) are among those that have expressed an interest in helping to finance the project.
In 2010, Natsir, a deputy chairman at the Indonesian Chamber of Commerce and Industry (Kadin), contacted two US copper and gold giants: Freeport and Newmont to secure a concentrate supply for Indosmelt’s planned refinery.
He also contacted both the Industry Ministry and the Energy and Mineral Resources Ministry about his plan, securing a license from the government which led to him convincing Freeport and Newmont to sign a memorandum of understanding in 2012 to supply Indosmelt. On Dec. 5, 2012, Indosmelt announced that Newmont had signed a conditional sales and purchase agreement (CSPA) to supply it with copper concentrate.
The smelter and refinery are scheduled to have the capacity to process up to 500,000 tonnes of copper and gold concentrate into added value products. Planned output includes up to 120,000 tons of copper cathode, 300,000 tons of slag, 200,000 tons of anode slag and 20 tons of gold. Copper cathode is one of the raw materials used in the production of continuous cast copper rods, which are used in the wire and cable industry. Slag is a key raw material in the manufacture of cement, while anode slag is used as part of the gold refining process.
The US$1.5 billion project involves the construction of a furnace building, anode casting facilities, a coppery refinery and copper electrorefining facilities. They will powered by 100 megawatts of electricity from state energy company PT Perusahaan Listrik Negara, and supported by a jetty and dock that can accommodate ships with 5,000-20,000 dead weight ton capacity. The technical design and technology will be provided by PT Outotec, a local unit of Finnish company Outotec, a global minerals and metals processing technology firm.
“Once we settle the financial closing, I don’t rule out the possibility of selling a stake [in Indosmelt] to other investors, we even plan to make it a listed company, so that there is transparency in running this company,” he said. He declined to name Indosmelt's current investors, but confirmed he owns most of the shares.
“It may be a capital intensive project, but did you know the margin is not that big? Operationally, the refinery will consume much energy. Providing smelter and refinery services is like being a tailor, we get the fabric from someone else and sew it into garments. What do we get? The fees from the service,” he said.
For that reason, Natsir said Indosmelt is looking at other revenue streams, including how to sell the waste products from the smelting and refining, adding that slag from refining is greatly needed by cement makers.
In a meeting on Dec. 5 between Energy and Mineral Resources Minister Jero Wacik and members of Commission VII of the House of Representatives (DPR), it was confirmed that the DPR had decided to implement the Jan. 12, 2014 deadline for the ban of raw mineral exports.
Lawmakers rejected a proposal from Jero to allow miners to sell raw minerals if they submit proper plans to build smelters in the country. Following the meeting, Susilo Siswoutomo, the Deputy Energy and Mineral Resources Minister, said the central government will halt all exports of mineral ores and consider any exports of the material as “illegal.”
Susilo added that the government will punish any miners breaching this policy, with sanctions including revoking contract permits, and the police and the Corruption Eradication Commission (KPK) will be assigned to investigate any violations across the country.
“Well, as part of Kadin, I support the ban, but also look at the conditions," Natsir said. "How many smelters are ready? I am calling for an adjustment in the policy, I don’t know what will happen to the miners if they must wait for the smelter projects to be completed. Keep mining but stockpile the output?”
Simple mathematics show that Indosmelt’s refinery and smelter, scheduled for commissioning in 2017 at the earliest, cannot support the downstream industry if the ban comes into play in 2014. Courtesy Joyo News
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