Ill-chosen move to block unprocessed mineral ores doesn’t give enough time for smelter construction
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
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