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It has been a year of uncertainty for one of Indonesia’s most lucrative industries, with the 2009 Mining Law amended in May to restrict most exports of raw mineral ore – coal excepted. That move was met with concern by the industry as it rushed to meet a requirement that plans be put in place to construct smelters to process minerals for export by 2014.
Then more confusion followed in November 2012 with a ruling by the Supreme Court that effectively annulled parts of the new regulations.
For nickel miners the issue has been particularly acute. Indonesia is the world’s largest nickel exporter and a major player in bauxite and iron ore and initially it appeared as if the industry might be mortally wounded.
The May ban, however, made an exception for companies operating under mining business licenses (IUPs) that have plans in place plan to build smelters in Indonesia before a total ban is imposed in 2014. Having a plan, it seems, is enough to continue exporting.
The ban also does not apply to companies operating under previously issued contracts of work such as Freeport-McMoRan Copper & Gold Inc. and Newmont Mining Corp. (Under the 2009 mining law, the longer-term and more lucrative contracts of work will no longer be issued but existing ones remains in effect.)
The government move aimed to bump up revenue by adding value to minerals onshore, conserving resources for domestic needs and boosting the downstream mining sector. But it faced opposition from an industry already tightening its belt due to falling commodity prices.
This led the Indonesian Nickel Association (ANI) and the Association of Indonesian City and Regional governments (Apkasi), to issue a legal challenge on the basis of Indonesia’s 2004 regional autonomy law, and the Supreme Court agreed, ruling that four chapters of the regulation should be dropped. They restricted exports and effectively gave the central government control of mining despite the local autonomy law, which handed control of mining permits and exports to local governments.
The ruling leaves open the question of which agency should approve mineral exports. Will this be handled at the district level or will either the trade ministry or the mining ministry call the shots? The ban was imposed at the central government level but the court has curtailed that power.
“The [May] ministerial decree is in opposition to the mining law,” Shelby Saleh, ANI chairman, said in describing why the association went to court.
He also said that getting into the smelter business is no simple matter. “It takes seven years to build a smelter unless the government is willing to take part in financing,” said Shelby. “So it does not make sense to curb nickel exports.”
What all this means in the longer term remains to be seen but it adds to the picture of an industry in flux and beset by legal challenges and policy changes. Susyanto, the head of the legal bureau at the Ministry of Energy and Minerals, told Reuters that a separate pending Constitutional Court case on regional autonomy also could have a strong influence on the government’s reaction to the ruling.
The government still firmly believes in restricting raw mineral ore exports to help build a domestic processing and refining industry, which would raise the value of finished products for export. And under the Mining Law’s implementing regulations, the ban on unprocessed minerals comes into effect in 2014.
“We’re preparing a new regulation to amend the current rule and to bring it in line with the Supreme Court decision” without changing the policy on ore exports, Susyanto told Bloomberg.
Shelby, while pleased with the Supreme Court ruling, says that it is more than just legalities that pose a threat to the industry. He says building smelters is a complex undertaking, and that Indonesia may not be ready for a large downstream processing industry.
“You can’t build smelters if the infrastructure and electrical supply are inadequate,” he said.
AmCham - 2012
Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)
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