Even as economic woes continue to grip the world’s developed economies, Indonesia’s mining sector has been on an impressive roll, with strong demand bolstering sales. Unlike the previous global downturns of 2007 and 2008, commodity prices surged in the first half of 2011 before dropping off slightly in the fourth quarter. This led to a windfall for many of the mining companies operating in the country, with year-on-year net profits soaring by double and even triple digits through the first six months of the year.
SOLID POSITION: With expansion plans tapping ever larger amounts of mineral and coal resources, Indonesia continues to rank among the world’s top mining players, with significant production of coal, copper, gold, tin and nickel. Coal in particular is experiencing increasing demand, and Indonesia – having already established itself as a leader in global coal export – is well placed to take advantage of this trend.
Although the new mining law passed in 2009 has in many ways fulfilled its intended purpose by clarifying many of the permit and regulatory aspects of the mining sector and boosting transparency of the process, newer additional regulations proposed in the ensuing years have continued to raise concerns among investors. As such, the final form of these regulations will likely determine whether or not the investment floodgates are thrown open and allow Indonesia to take its place among the global mining leaders.
Early indications are that investors are taking a wait-and-see attitude, with 2011 investments of $1.1bn in the mineral and coal subsectors well off the pace of the $3.19bn 2010 total, according to the Indonesian Directorate General of Mineral and Coal (DGMC).
PLAYING BY THE RULES: Although Indonesia has the advantages of holding significant natural resource wealth within its territory, its investment climate and mining policies in the past were seen as restricting the full potential of the sector.
In order to address these impediments and provide greater certainty for international investors, the government passed the 2009 Law on Mineral and Coal Mining Number 4 to replace its antiquated 1967 predecessor, Mining Law Number 11.
Two years after its passage, the law has garnered mixed reviews as investment has begun to pick up, yet a few critical implementing regulations remain pending. These tricky issues primarily involve balancing the interests of cash-laden foreign mining companies wishing to invest in Indonesia with the desire to retain the vast wealth derived from the exploitation of these resources within the country to benefit the local population. Some of the outstanding issues still to be resolved at the end of 2011 include determining the areas open to mining activities, how price benchmarks are determined and domestic market obligation rules.
As a result, existing Contract of Works (CoW) contracts are in the process of being converted into Intended Use Plans (IUPs) and foreign companies can directly apply for and win mining contracts. Gone also with the CoW is the requirement that all foreign companies divest a minimum of 51% of the company to an Indonesian registered company within 10 years of beginning production. Under the 2009 law, the majority divestment option was watered down to a minimum 20% stake after a period of five years.
RESOLVING ISSUES: Despite the apparent simplification of the law, the Indonesian parliament in early 2011 began mulling a host of issues which were thought to have already been addressed including a return to majority divestment requirements, reducing the concession size of pre-existing contracts to conform with new rules, reducing the length of contracts and increasing the royalty payments from companies.
The other major issue that is still in the process of being worked out is clarifying which government entity retains jurisdiction over resource use permits, mining included. Since the post-Suharto era began in Indonesia, regional autonomy has been on the rise.
Now with the recent increase in commodity prices bringing new wealth and power into the equation, it has proven difficult to centralise authority for the licensing of these potentially lucrative mining concessions. This power struggle continues to muddle the waters on numerous issues which are critical to investors in making long-term decisions, including environmental compliance, overlapping mining claims, local ownership divestment requirements and so on.
“It is still very important for foreign investors to do their due diligence, especially in land acquisition,” Norico Gaman, the head of research for BNI Securities, told OBG. “Some land already has permits for mining from the local government and other land use laws contradict each other, which can be confusing for investors. They also need to ensure that the land and use permits are acquired from local and national government bodies, as well as the Ministry of Forestry.”
OVERLAPPING AGREEMENTS: The central government has made headway on one of the most significant ongoing investor concerns – that of overlapping concession agreements – through the Ministry of Energy and Mineral Resources (MoEMR) national mining map initiative. The MoEMR has managed to cut through the swathe of some 9000 licensed mining companies on record and reduced the number to 2500 through the identification of double licensing, inactive companies and other measures. Lengthy bureaucratic delays have also long-plagued the sector which are also being addressed. This includes a stipulation (Forestry Law #18 of 2011) limiting the time of issuance of a land clearing permit from the Forestry Department to log mining concession areas to 125 days. In the past, this process has often taken years to be resolved. While this process is being undertaken, the government has essentially called a moratorium on issuing new mining permits. While this may slow development and investment in the short term, it should in the long run create a more stable and transparent licensing framework.
DOWNSTREAM IMPLICATIONS: Also in the 2009 law is a stipulation that will have a significant effect on the mineral mining market segment. In an effort to boost downstream industries, the government has implemented a law requiring all mineral producers to refine all exports by a minimum standard of 99% within five years of initiating production. While this law will likely produce the desired effect of boosting downstream capacity of refined metals, particularly in larger mining operations, smaller operations stand to suffer under the added burdens of refining.
From the government’s perspective, the measure is intended to boost revenue in the mining sector by adding more domestic value-added processes to the production line and increasing employment opportunities as a result. Such a move would likely prove popular domestically for any politician supporting the measure ahead of upcoming elections. Mining companies and industry trade groups have vociferously opposed such a measure, citing the substantial capital expenditure required for constructing processing plants, as well as the additional high costs of running the energy-intensive operations. According to Indonesian Chamber of Commerce and Industry advisory board member Herman Afif Kusumo, a new copper smelter would cost approximately $800m to build.
As the regulation continues to be debated leading up to its projected implementation in 2014, other intermediate measures are also being discussed that would form a semblance of a transition period in the run-up to full enforcement. These regulations include proposals to impose new, higher export taxes on raw mineral exports, quota limits on ore exports resulting in an obligation to sell part of production on the domestic market, or a combination of the two.
COAL: Rapacious energy demand throughout the region spearheaded by manufacturing powerhouses China and India has spurred Indonesian coal production to unprecedented growth rates in recent years.
Despite boosting domestic coal production by 26.83% from 2007 to 2010, demand continues to outstrip supply. Production of Indonesian coal has increased from 132.35m tonnes in 2004 to 275.16m tonnes in 2010, according to data from the DGMC. Through the first half of 2011, production reached 149.51m tonnes, off the pace of the projected levels of 327m tonnes.
While the bulk of coal mining is carried out by roughly 80 major mining companies, the sector as a whole is made up of 300-400 registered companies that are operating on 4000-5000 mining permits, according to the Indonesia Coal Mining Association (ICMA). The existence of so many fragmented small-scale operations has proven a challenge for authorities to accurately regulate in terms of compliance with environmental and other laws, as well as timely use of permits.
Coal deposits are distributed primarily in the western and central areas of the country, with nearly half (48%) situated in southern Sumatra and another 8% in northern Sumatra, according to the ICMA. Another 32% is located in east Kalimantan, followed by 10% in south Kalimantan, with the remaining 2% spread out over the rest of the country.
HOME AND ABROAD: According to data from the ICMA, Indonesia’s total coal resources amount to 104,852bn tonnes. The majority of coal produced in Indonesia is exported, with 208m tonnes of the 2010 shipped abroad, according to the DGMC. The primary destinations of Indonesian coal are China, India, Japan, South Korea and Taiwan. According to the ICMA, China and India are the largest purchasers, with 16.7% and 16.51% of total exports in 2010, respectively. South Korea ranked third with 14.27% of the total, followed by Japan (13.76%), Taiwan (10.56%) and Malaysia (5.33%).
While exports currently make up a significant amount of the country’s coal production, domestic demand is also increasing at a quickening pace due in large part to the growing number of coal-fired thermal power plants now coming on-line. National power company PLN is in the midst of a second massive 10,000-MW power generation capacity increase programme, much of which will be fuelled by coal. Six separate large-scale power plants with a minimum installed capacity of 625 MW generating a total of 4480 MW, along with a number of smaller plants generating an additional 1350 MW, are slated to come on-line by the end of 2011. This will be followed in 2012 with an additional 2500 MW and in 2013 and 2014 of another 1400 MW.
The combined fuel requirements of these plants are projected to boost domestic demand by 18.2m tonnes in 2011 followed by an additional 8.75m in 2012. In total, the new electrical power generators will require some 44m tonnes of coal annually when completed.
UPDATED LEGISLATION: Similar to the mineral mining sector, new governmental regulations are also being mulled that would ban the export of lower-quality coal products. But unlike other minerals, for which the intention is to add value to the production process before exporting, the impetus behind the potential ban on low-rank coal with a caloric value of less than 5100 kcal/ kg is to ensure a constant domestic supply of power.
If passed, the new law would likely create a redundancy with the existing Domestic Market Obligation (DMO), which has also already been instituted in order to guarantee the domestic supply of minerals, and coal in particular. The law itself contains no set percentage of the amount of production that must be set aside for domestic market needs, but rather is decided upon annually by the minister of energy and mineral resources on the basis of a number of forecasting procedures.
COAL PLAYERS: Although there are hundreds of small-scale coal mining operations currently permitted in Indonesia, there are only a handful of large-scale operations responsible for the bulk of the country’s production. And with global demand pushing up prices through 2011, these companies reaped windfall profits through the first half of the year. The average selling price of coal increased from $91.30 per tonne in January 2011 to $119.03 by June and is expected to remain in the $90-per-tonne range through 2012, according to the International Energy Association.
Bumi Resources is the largest coal producer in the country through its two producing subsidiaries Kaltim Prima Coal and Arutmin Indonesia, The two operations produced a total of 60.4m tonnes in 2010, up from 59.6m tonnes in 2009, according to the company’s annual report. Bumi also has two more coal companies, Fajar Bumi Sakti and Pendopo Energi Batubara, which are still in the exploratory phases. Net profits for Bumi rose 8.76% in the first half of 2011 compared to the same period the previous year, a boost of $274.37m. The company has ambitious expansion plans for the future already well under way and is projecting a surge in production to 111m tonnes per year by 2012.
The second largest coal producer is Adaro Energy, which produced 42.2m tonnes of coal in 2010. According to company reports, Adaro posted an 103.8% jump in net profits during the first six months of 2011 compared to the previous year to $268m. Adaro also has substantial expansion plans in the works and is expected to double its output over the next five years.
Tambang Batubara Bukit Asam (TBBA) is the only state-majority-owned company (65% government stake) among the top contenders in coal mining, producing 12.46m tonnes of coal in 2010. The company’s primary mine is located in Tanjung Enim, South Sumatra, although it owns several other mines in the region, including Ombilin and Cerenti. TBBA is also boosting its production through a number of investment projects with a target output of 40m tonnes by 2015.
The fifth-largest coal producer in the country, Berau Coal, produced 17.38m tonnes in 2010 and holds the sixth-largest reserve, at 246m tonnes. In first-half 2011 Berau’s net profits hit $90.3m for the period, up 270.3% over the previous year. Its 2011 production is expected to reach some 20.3m tonnes. Other players in the coal market include Indika Energy, which holds a 46% stake in the country’s thirdlargest coal mining firm, Kideco, and Indo Tambangraya Megah, in which Banpu of Thailand has a 65% controlling stake and which produces 20m tonnes annually.
NICKEL: Nickel ore production reached 6.56m wet metric tonnes (wmt) in 2010, with output picking up in the first six months of 2011 to 3.91m wmt. The country’s largest nickel producer since its inception in 1968 is International Nickel Indonesia (INCO), which is majority-owned by Brazil’s Vale Inco (58.73%) and Japan’s Sumitomo (20.09%), with other smaller shareholders making up the remaining 21.18% of the shares. INCO produces exclusively nickel-in-matte, a semi-finished laterite-based product processed at its refining facility in Soroako, South Sulawesi. The company’s entire output is shipped to Japan where it undergoes further purification processes under a long-term contract. Another major nickel producer in the country is Aneka Tambang (Antam), in which the state holds a 65% stake and which is listed on the Australian stock exchange. Total nickel ore production for the company increased 15% in the first half of 2011 compared to the previous year, swelling from 2.39m wmt to 3.91m. Rising production boosted its first-half profits to Au$238.1m ($242.5m), up 9% over Au$218.8 ($222.9m) recorded over the same time period in 2010, according to company reports. Antam also produced significant amounts of gold (1241 kg), silver (9365kg) and coal (215,150 tonnes) in the first half of 2011. Gold production came primarily from its Pongkor mine (974 kg), with 267 kg derived from it Cibaliung mine.
OUTLOOK: With Asian economies showing no sign of slowing, the demand for coal in the region’s power and manufacturing bases is only likely to grow in the foreseeable future. Domestic production is projected to hit 560m tonnes by 2025, according to ICMA estimates. Over this timeline, exports are predicted to remain largely static and account for 260m tonnes by 2025, with growing domestic consumption increasing dramatically to 300m tonnes to consume the remainder of production. “The coal industry continues to thrive as the price climbs and everyone seems to want to enter the market,” Roy Olsen, the president-director of Thiess, told OBG. “The concern of course is that the market overheats and then the potential for a crash emerges.”
Although domestic production will continue to grow, largely due to the increase of domestic coal-fired power plants, the success of Indonesia’s exports will be largely determined by legislation governing the exportation of low-rank coal. Further clarification on the country’s updated mining law should also pave the way for investments. The combination of the global economic rebound and the widely predicted high commodities prices bodes well for Indonesia to capitalise on renewed demand in gold, tin, nickel and copper.
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