The Support for Economic Analysis Development in Indonesia, part of USAID, published a study recently that projected the direct loss to the Indonesian economy will be $6.3 billion in 2014, and export earnings will fall by $6 billion per year. The study goes on to point out that “the net welfare effects of the ban will only become operational in 2020, but only after tens of billions of dollars of losses, and even then these total net welfare gains will be modest totaling just $832 million per year.”
American mining companies employ approximately 35,000 people in eastern Indonesia, according to another recent study conducted by the American Chamber of Commerce (AmCham) and the US Chamber of Commerce on US foreign direct investment in the country.
To put this in context — one of the largest US companies contributes up to 96.9 percent to regional gross domestic product in its operational area in eastern Indonesia, and that same company contributed 2.2 percent to national GDP in 2006-11. It also increased national household income by up to 1.7 percent in 2006-11 and regional household income by up to 96.2 percent in the same period.
A ban on mining exports puts the economy and tens of thousands of jobs in the most economically vulnerable areas of Indonesia at risk.
With so much at stake, who stands to gain by the recent mining standoff?
The conventional argument put forward by those who advocate that companies be banned from exporting minerals unless they commit to building smelters here, and pay a penalty export tax until they do, is that foreign companies have been for too long exploiting Indonesia’s minerals at the expense of Indonesia.
The argument follows the logic that Indonesia, by requiring mining companies to process minerals in Indonesia, will reap the economic benefits from the exportation of higher priced minerals and also move up the technological ladder from being a commodity based exporting country to a higher value exporter.
This argument ignores several basic facts.
Let’s take the exploitation argument first. The Indonesian mining industry was created and developed through multibillion dollar investments made by US mining companies. All of the capital and all of the risks associated with these investments were borne entirely by these companies, and their investments have been a boon to the Indonesian economy for decades.
The mining industry today contributes approximately 5 percent to the country’s GDP. According to the World Bank, the value of mining exports in 2012 exceeded $10 billion and accounted for 5 percent of the country’s total export revenue. US companies pay a tax rate to the government at a rate approximately 40 percent higher than the nationally mandated corporate tax as part of their existing Contracts of Work.
In the last five years alone, Freeport-McMoRan Copper & Gold has paid $7 billion in taxes, royalties and dividends to the government over a period of five years.
In short, up until the recent crisis, Indonesia has benefited handsomely from foreign mining investments, and the industry, thanks to the investments made by American companies, has been one of the country’s largest and most stable investors, taxpayers and employers.
Some will argue that there is economic value in the government’s stance to further process minerals, as this will increase the value of exports and revenues paid to the government.
At face value, it’s hard to take issue with Indonesia’s desire to move up the economic value added chain by requiring mining companies to process their raw minerals here in Indonesia.
But the levels at which Freeport and Newmont Mining already processed their copper in the form of concentrate, before the ban was implemented, commanded approximately 95 percent of the price of smelted, fully processed copper metal on the global market. The government’s requirement for them to build additional smelters to further process their cooper concentrate will provide no additional revenue to the government, and no added economic value to the companies or any potential investors in smelting operations.
Building a fully operational smelter requires a capital investment of anywhere from $1 billion to $3 billion and three to five years to construct. Assuming an investor were willing to build such a smelter today, it would not realistically come fully online until 2020. And this begs the question why someone would be willing to commit money to an investment guaranteed to lose money.
The marginal cost at which a copper smelter operation would buy the concentrate from mining companies would have to be competitive with global prices. At global prices, the smelting operator would barely cover their marginal costs and would never realize a return on their initial capital investment.
Clearly there must be a benefit that the government sees in moving forward with its policy. But it is hard to fathom.
One thing is certain: There are no winners in the current mining impasse, least of all the Indonesian economy.
Andrew White is the managing director of the American Chamber of Commerce in Indonesia