Substantial mineral reserves have put Indonesia on the brink of a new wave of development. Nevertheless, investors still need to contend with a legacy of regulatory uncertainty and a growing trend of resource nationalisation. While policymakers have made efforts to adjust the regulatory regime, exploration hurdles remain in the form of divestment rules and a lack of coordination between central and regional governments. In addition to these constraints, the government’s move to nationalise the Grasberg mine in Papua – the world’s largest gold mine and the second-largest copper mine in terms of output – was met by alarm from some international partners and those eager to see new dispute resolution mechanisms enforced.

Despite market uncertainties, global mining companies broadly continue to show interest in Indonesia’s lucrative reserves. According to the Ministry of Energy and Mineral Resources (MEMR), Indonesia has recoverable coal reserves of 27.2bn tonnes, which will last for 60 years at current production rates. The country also had nickel reserves of 3.2bn tonnes, 1.9bn tonnes of tin and 1.3bn tonnes of bauxite. Despite this mineral potential, Indonesia claims a relatively low rate of worldwide exploration spending, at around 1% between 2015 and 2017.

Structure & Oversight

In terms of oversight, the MEMR determines which areas can be mined as per the One Map initiative, which clearly demarcates areas for specific purposes, while regional governments grant licences within a particular zone. This process has been criticised by some for being overly complex and slow, partly due to a lack of coordination between the central and regional governments. However, the Indonesia Investment Coordinating Board set up a one-stop system, which has sped up the approval process for investments.

To balance the interests of investors and the state, a new mining law was adopted in 2009. Prior to this legislation, mining companies were granted contracts of work (CoWs) or coal contracts of work (CCoWs); in their stead, the 2009 regime mandates the issuance of mining business licences (IUPs).

However, a range of uncertainties surround the law, including divestment rules, domestic processing requirements, and how to convert CoW and CCoWs to IUPs, are currently being addressed. While there has been progress in the renegotiation of CoW and CCoW amendments, concerns remain over a regulation that requires a rate of 51% divestment after 10 years of production to a specified range of local investors with preference given to central or regional governments. Given lingering concerns, the new licensing regime have yet to usher in a major wave of sector investment.

Mining Performance

Mineral and coal mining nonetheless attracted $6.8bn in investment in 2018, up from $6.1bn in 2017. Metal mining accounts for a substantial share of state revenue, and Indonesia’s mining sector was the fifth-largest contributor to the economy in 2018, earning Rp1191.4trn ($85.5bn), or 8% of the national GDP of Rp14,837trn ($1.1bn), as per figures from Statistics Indonesia. Given the country’s position as a major exporter of thermal coal and its dependence on coal-fired power, coal mining made up 2.3% of total GDP in 2017. In terms of wage rates, the mining and quarrying sector has the highest monthly salary among all sectors, with a total average of $330 net per month, according to Bank Indonesia, the central bank.

Stainless steel slab exports rose to 459,502 tonnes in the first nine months of 2018, up from 302,919 tonnes for all of 2017. The segment is set to grow further as more facilities are developed in the Indonesia Morowali Tsingshan Industrial Park (IMIP), located in the main nickel-producing region of Sulawesi. As of April 2018 eight factories operated in the industrial park, and three steel factories and two coal-fired power plants were expected to be built. The industrial area’s targeted stainless steel production capacity of 4m tonnes per year would make the country the world’s second-largest producer of stainless steel.

The price of nickel was up 15% on the London Metal Exchange at the end of March 2019, reaching a three-month high of $13,605 per tonne, though growing levels of nickel output from China and Indonesia are expected to dampen prices in 2019. According to estimates from data and consultancy firm Wood Mackenzie, smelter expansions in both countries will result in a 12% rise in lower-grade nickel pig iron production to a record 840,000 tonnes for 2019. Meanwhile, bauxite exports are on the up following the relaxation of the ore export ban in 2017, with Fitch Solutions forecasting domestic bauxite production would grow from 5.4m tonnes in 2018 to 11.4m tonnes by 2027.

Tin production, for its part, increased in 2018 after a slower start to the year. State-run tin producer Timah announced an rise of 27% quarter-on-quarter in September 2018. Its tin production reached 8898 tonnes for the third quarter, although production through September was down 7% year-on-year (y-oy). According to the International Tin Association (ITA), the stronger output in the second half of the year was a result of investment into tin mining technologies. The ITA also reported that the tin content of Timah’s tin ore and slag inventories was up 46% from the beginning of the year and 5% from the previous quarter. Over the same period, refined tin stocks rose 14% y-o-y to 4546 tonnes.

However, exports fell 42% in October 2018 from the previous month after a decision by the Indonesia Commodity & Derivatives Exchange to suspend the operations of some traders of tin ingots and tin ore following a police report relating to the sale of minerals from sources without permits.

Grasberg Output

The output of gold and copper from the Grasberg Mine, run by US mining company Freeport-McMoRan, exceeded expectations towards the end of 2018. Around 453.6m kg of copper and 837,000 oz of gold were sold in the third quarter of 2018, surpassing previous targets of 440 kg and 700,000 oz, respectively. Sales figures reflect higher operating rates and ore grades.

In September 2018 Grasberg began the shift from open-pit to underground mining, with production from its cave project scheduled to start in the first half of 2019, the same period that the company expects operations at the Deep Mill Level Zone to commence. Production is expected to lower considerably in 2019 and 2020 as the mine transitions to an underground operation. During the third quarter of 2018 Freeport-McMoRan realised net income of $514m, or $0.35 per share, compared to $492m, or $0.34 per share, in the same period a year earlier.

Black Gold

The outlook for the coal sector is promising. Towards the end of the year the MEMR increased Indonesia’s 2018 coal output target to 507m tonnes from a previous target of 485m tonnes. To achieve this new target, the ministry issued new output quotas to 32 coal mining companies totalling around 21.9m tonnes. The increase in quotas was a welcome boost to the industry as miners of coal have had to contend with a new price ceiling and 25% supply requirement to domestic coal-fired power plants (see Energy analysis).

In the first nine months of 2018, national coal production hit 63% of the full-year target, with output reaching 319.1m tonnes in September 2018. However, according to an official statement by the MEMR, the January-to-September production figures were understated as they only included output by coal miners active under long-standing COWs and did not include data production from IUP holders.


While the nationalisation of important sector assets has been explained by the government as a necessary measure to safeguard Indonesia’s mineral resources, stakeholders express concerns that the process may discourage future investments, especially from foreign sources.

The Grasberg mine is one of the more notable strategic assets facing nationalisation. After lengthy talks, terms were signed between the Indonesian government, Freeport-McMoRan and its joint-venture (JV) partner, multinational Rio Tinto, in July 2018, giving the state a majority stake in the local JV Freeport Indonesia through the state-owned Inalum. In December 2018 Inalum signed a deal agreeing to pay a combined $3.9bn to both parties to acquire a 51% share in the Grasberg mine, while Freeport-McMoRan will hold onto the remaining 49%. Rio Tinto is to receive $3.5bn for giving up its stake in the venture. Freeport-McMoRan’s rights to the mine were extended to 2041, at which point Inalum is expected to become the sole operator. “From a business plan perspective, the main concern about the shareholder shift from Freeport-McMoRan to Inalum would be the level of expertise,” Heri Susanto, managing director of construction firm L&M Systems Indonesia, told OBG.

Freeport-McMoRan initially opposed the plan to nationalise the Grasberg mine, which includes a ban on ore exports not processed in Indonesia. This forced the US company to halt all operations at Grasberg, which in turn led to a considerable increase in copper prices. As the open-pit mine was expected to run dry of ore reserves in 2019, the project has switched to underground mining. Given the higher costs associated with underground mining and plans to build a second smelting plant, a cost-sharing agreement may take some time to be finalised.


Regulatory reforms affecting the industry were issued in recent years, something not uncommon in a market known for frequent regulatory changes. In a bid to promote downstream activity, a ban was placed on the export of unprocessed ores between the first quarters of 2014 and 2017. During this period, mining firms were allowed to export concentrates provided they met minimum requirements, which included the building of processing facilities and paying increased export duties on concentrates. By January 2017 the ban had effectively been lifted. As such, between the first quarters of 2017 and 2022, holders of IUP licences are allowed to export approved quantities of unprocessed and semi-processed product, provided that processing and refining commitments were met.

Under the new requirements, nickel and bauxite miners must reserve at least 30% of smelter capacity to process low-grade ore of no higher than 1.7% nickel. If installed smelter capacity cannot absorb miners’ production, then the low-grade ore can be exported. Similarly, bauxite with an aluminium oxide content of at least 42% may also be exported.

The easing of the ban was met with mixed sentiment. On the one hand, Indonesia’s smelting industry would have preferred the ban to be held in place to gain a competitive advantage over other regional nickel-producing heavyweights, such as the Philippines. On the other hand, some industry analysts believe the relaxation was a positive development needed to boost export revenue, which in turn can be used for developing value-added industries.

In March 2018 the government issued guidance on the pricing of coal for electricity supplied to power plants (see analysis). Aimed at protecting consumer purchasing power and shielding state-owned utility Perusahaan Listrik Negara from price fluctuations, officials set the selling price of coal for electricity generation at a maximum of $70 per tonne.

Dispute Resolution

Given Indonesia’s record of policy fluctuation, a number of foreign and local mining firms have called for greater regulatory certainty in the form of dispute resolution mechanisms to boost investor confidence. Australian firms that are invested in Indonesia, as well as Indonesian firms that are open to foreign investment, successfully pressed both governments to enshrine an investor-state dispute settlement (ISDS) clause – an international arbitration procedure used to resolve conflicts between governments and foreign investors – within the bilateral Comprehensive Economic Partnership Agreement (CEPA), which was signed on March 4, 2019. With the mining sector accounting for about one-third of Australia’s foreign direct investment to Indonesia, a transparent and effective dispute mechanism is seen as important for reassuring investors, although labour unions opposed the inclusion of an ISDS clause on ideological grounds.

Australian concerns are founded on the experiences of some of their biggest resource-based companies, with firms such as Newcrest Mining and Rio Tinto forced to sell stakes in mines and to increase domestic ownership to at least 51% by the 10th year of production. The challenges faced by Planet Mining, an Australian outfit under the umbrella of Churchill Mining, were examples of legal hurdles that investors have to mitigate. Since 2012 the company has been engaged in arbitration with the Indonesian government over the revocation of mining licences in the East Kutai Regency of Kalimantan. As of March 2019 Churchill’s arbitration was being conducted under ISDS clauses contained in existing bilateral investment treaties between Indonesia and Australia, and Indonesia and the UK, both of which pre-date the CEPA. “An ISDS is a good idea as leverage, but even if you win, you still need to enforce it against the Indonesian government through its court system,” David Quinlivan, Churchill’s executive chairman, told local press in late 2018.

Duty Calls 

As part of Indonesia’s nationalisation of mineral resources, new tax rules were issued in 2018 for mining companies shifting their current contracts to special mining permits – a move that was cited as pivotal in the eventual resolution of the Grasberg mine negotiations. In a bid to provide legal certainty for holders of special mining permits, the new fiscal terms took effect in August 2018. They include a corporate tax rate of 25%, a 4% levy on net profit to be paid to the central government and a 6% levy paid to local authorities. Under the previous rules, Freeport Indonesia was required to pay corporate tax at 35%, but no levies were owed to central or local governments.


Global efforts to reduce carbon emissions and a growing demand for stainless steel have triggered new interest in Indonesian nickel mines. Given the surge in demand for metal components used in the batteries for electric vehicles (EVs), major plans are in place to accelerate local processing of nickel laterite ore. To capture a greater share of the lithium battery market, a $4bn Chinese-led project is earmarked to transform Indonesia into a global hub for producing and exporting EVs. This major development is set to inject life into Indonesia’s mining segment and is in alignment with the government’s Making Indonesia 4.0 strategy, which targets automotives as one of five priority industries for high-value growth (see Industry chapter).

While major investment in nickel smelter technology bodes well for downstream activity, Indonesia’s investment climate remains hampered by a poor perception of its mining policy framework, which in turn has hindered upstream initiatives. Indonesia’s mining sector ranked 84th out of 91 countries on the policy perception index (PPI) of the “Fraser Institute Annual Survey of Mining Companies 2017”. In contrast, the country ranked first on the survey’s mineral potential index. This has meant that despite the abundance of reserves, greenfield developments have stagnated in recent years, with mining firms cutting expenses to focus on easier-to-mine deposits rather than new developments.

A consortium of companies that includes Chinese battery firm GEM announced in September 2018 that it was investing $700m in a project to produce battery-grade nickel chemicals in Indonesia. The announcement followed GEM’s agreement to purchase approximately one-third of the global cobalt production of Glencore, the world’s biggest producer, for the next three years. Part of the $700m funds will be used to establish nickel smelting capacity of at least 50,000 tonnes per year at IMIP. As per the initial plans, the project will also have 4000 tonnes of cobalt smelting capacity, which will be adjusted according to the demands of the global market. The project will rely on Tsingshan, the biggest nickel producer in Indonesia, to provide the nickel ore. As of March 2019 no launch date had yet been issued for the project, although market reports suggested that a Hong Kong unit under Tsingshan will hold a 21% share in the project, while GEM subsidiary Jingmen GEM will hold 36%. Brunp, the recycling arm of Chinese battery producer Contemporary Amperex Technology, will hold 25%, Japanese firm Hanwa will have 8% and IMIP, a JV between Indonesia Bintangdelapan Group and Tsingshan, is expected to hold the remaining 10%.


While international demand for EVs bodes well for Indonesia’s mining segment, trade wars between the US and China will continue to play a major factor in metal prices – particularly copper. For the foreseeable future, China will continue to drive the demand for Indonesian minerals. However, China’s shift towards a consumption-led economy may significantly alter demand for imported metals and minerals in the longer term.

As has been the case in recent years, the future of the Grasberg mine will have a significant impact on global copper production and prices. As such, reaching a cost-sharing agreement between Freeport-McMoRan and Inalum is vital for the mid- to long-term future of the industry. Indonesian nickel mines are expected to generate strong profits over the next year. Investment in the ore processing technology known as rotary kiln electric furnaces, as well as solid investment from China’s biggest stainless steel maker, Tsingshan, bode well for the industry.