With vast potential of untapped mining opportunities, the Indonesian mining sector is set to receive large investment. The new mining law is expected to propel the sector forward.
Mining plays a central role in Indonesia's exports. Figures released last week from the Central Statistics Agency (BPS) show Indonesian exports have done exceptionally well in 2006 with a 17.55% year on year increase in 2006. Total exports reached $100bn for the first time ever, according to Rusman Heriawan, director of the BPS.
This impressive growth was driven in large part by the country's mining activities particularly for coal, metal ores and copper. Export for mineral fuels, primarily coal, grew by $1.98bn, 30% over the previous year and metal ore export reached $4.9bn, a 28% increase on the previous year.
Yet Indonesia's mining sector is still considered to be vastly underdeveloped. Indonesia is recognized by mining companies as highly prospective yet foreign investment has not met this potential. This is mostly attributed to the current mining law of 1967, which is regarded to be much outdated. Analysts say mining companies would be willing to increase their exploration activities if the legal situation for them improved.
The new mining bill was targeted for release in March 2007 but this will be delayed, most probably until 2008. The bill is currently in the House of Representatives where scrutiny is taking longer than expected. To date, the committee handling the legislation has only discussed two chapters, covering definitions and licensing procedures but the more controversial issues have yet to be discussed. These include the securing of concessions and the terms of production-sharing contracts (PSCs). This delay will be a blow to the industry's effort to attract foreign investors.
The importance of this law is acknowledged by government officials. Purnomo Yusgiantoro, minister of energy and mineral resources, told OBG the new bill would "be important for conducting mining business in Indonesia" and also said late last year to the local press that "it would significantly boost investment in the mining sector if enacted in a timely manner".
Soermano Witoro Soelarno, a technical director within the ministry of energy and mineral resources, told the local media that some investors want the law to be passed before they invest in Indonesia. He used the example of the Rio Tinto Group, which is reported to be waiting for the new law to be passed before going ahead with a $2bn integrated nickel mine in Sulawesi.
Further investment will be crucial for a sustainable mining sector boom in Indonesia. According to a PricewaterhouseCoopers (PwC) report of the Indonesian mining sector released in 2006, while the industry as a whole is very profitable on the back of rising commodity prices, "the longevity of a lucrative mining industry is in doubt if significant investment is not made in Indonesia."
Indonesia's attractiveness as an investment destination can be measured by the amount of exploration activity. Total global exploration spending in 2004, according to the Metal Economics Group, totaled $3.8bn. Exploration in Indonesia represented less than 1.5% of the total amount.
This low level of exploration spending does not reflect the potential of Indonesia's resources. The PwC report states Indonesia was ranked in the top six by the Fraser Institute, an independent Canadian research organization, in the list of mineral prospective countries yet, while Indonesia scores highly for its potential, it is not well regarded for its investment conditions due to the mining legislation. Foreign companies are spending their exploration budgets in countries with more attractive mining laws.
Latest figures show an increase in total investment in the mineral and coal sector in 2006 reached $1.09bn, compared to $880.4m in 2005. This increase can mostly be attributed to investment undertaken by local companies.
Foreign investment is not completely on hold. The latest investment announcement came from Chinese Tjanjin Material and Equipment Group Corporation, which announced an investment of $10m in metal mining in South Sulawesi, according to a statement made by a company executive on January 16. The Chinese company will be working in cooperation with Indonesian PT Sangkaropi to explore ore, copper and tin deposits.