Friday, April 6, 2012

Uncertainty the Only Certainty In Indonesia’s Mining Policies

You’ve got to love Indonesia with its almost weekly announcements of major policy changes that have virtually no chance of being implemented as initially proposed. The latest statement that a mining export tax of 25 percent is planned for this year, jumping to 50 percent in 2013 is the latest in a series of proposed measures that have foreign investors in the resource-rich nation tearing their hair out.

The only thing that can be said with certainty about Indonesia’s policies on resources is that there is no certainty whatsoever. But there are a few key factors to note.

Firstly, virtually everything boils down in some way to domestic political manoeuvres, especially with a presidential election scheduled in 2014. And secondly, making policy on the run is standard operating procedure in Indonesia, as is the prolonged negotiating give-and-take aimed at reaching a compromise. And lastly, foreign investors will continue to be able to do business here, but they will have to be cognizant of the trend toward increased resource nationalism and the aim of the authorities to ensure domestic supplies and adding value to commodities before export.

The announcement of the 25 percent export tax on coal and base metals was made by Anshari Bukhari, the secretary general of the Industry Ministry. The logic given was that the tax will prevent a deluge of exports ahead of a ban on the export of some unprocessed metals, due to take effect in 2014 .

It’s all part of a policy to extract more value from the mining sector, which accounts for 11 percent of Indonesia’s gross domestic product. The government aims to force the beneficiation of minerals, hoping to boost the value of exports as well as employment. Whether this is a good idea is another debate, as Australia’s experience suggests that adding downstream industries, such as aluminium smelting, often doesn’t bring the hoped-for benefits.

Nonetheless, the trend is clear. Indonesia wants to extract more from its resource base and this will affect investment in the world’s largest exporter of thermal coal.

Indonesia also plans to change its policies on coal mining and exports, announcing a raft of measures. These include reserving coal for the domestic market, new taxation and export duties, the use of a government benchmark price and a requirement that foreign-owned companies divest 51 percent of their mines within 10 years of initial production.

Most of the measures proposed for coal and minerals have yet to be finalized, let alone implemented, but they do add to the uncertainty surrounding investing in Indonesia. To a foreign investor, such as an Indian coal-mining company, it all seems rather bizarre and in some ways self-defeating for the Indonesians. If Indonesia raises the cost of investing in mines, hinders the export of the output and wraps everything in a cloak of legal uncertainty, it would seem to be harming itself.

But that ignores the fact that most of the policies around resources have their roots in domestic political considerations, with solid, long-term policies that allow for the sustainable development of the sector very much a secondary consideration. If the recent history of Indonesia is any guide, radical policy shifts announced in the run-up to elections are often watered down in their final versions.

A recent example is the backflip over reducing fuel subsidies, which are the most generous in Asia. An initial proposal to strip back subsidies that would have led to a 33 percent rise in gasoline prices was changed to allowing price moves only if crude oil prices vary by more than 15 percent from the government’s forecast. The net effect is that gasoline prices won’t rise in the short term and may not rise at all this year if crude remains around current levels. This sort of flip-flopping will be more than likely the case for the latest export tax proposal, but that doesn’t mean it will disappear altogether.

Ultimately Indonesia’s rulers are well aware that countries like India need coal and will be forced to accept Jakarta’s terms in the end. If you want coal in Asia, it comes down to taking the risk of investing in Indonesia, dealing with the expense and regulation of going to Australia, developing costly greenfield ventures in places like Mozambique or buying from distant suppliers such as the United States. Indonesia used to be an easier option for many mining companies, but this is no longer the case.

Clyde Russell is a Reuters market analyst.

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