Long considered one of the world’s premier mining destinations – for coal, as well as for precious and industrial metals – Indonesia finds itself in a transition period in 2020, with significant questions being raised about the future of the industry. In recent years the government has sought to expand and consolidate its role in terms of ownership of the sector, but this has been met with pushback from private sector mining companies. Some overseas players have chosen to leave the country, with overall investment on exploration subsequently falling.

Nonetheless, Indonesia is home to considerable reserves of a wide variety of metals that are crucial to the global economy, and several metals that are key inputs for electric vehicles and industrial-scale batteries. This provides opportunities for foreign investment in mining services and downstream industries, which should appeal to those seeking to secure offtake. In a sector where investors are primarily focused on extraction and exports, the government is seeking to increase the focus on domestic processing as well, enabling the development of domestic supply chains that utilise raw ores. The government is also considering revising the current mining legislation in a manner that could support a rise in private investment.


Regulatory oversight comes from the Ministry of Energy and Mineral Resources (MEMR); the Directorate General of Minerals and Coal, which is located within the ministry; and regional governments, which have their own licensing processes. Both the ministry and the directorate are responsible for issuing regulations, such as those that set coal prices and domestic market obligations, those that determine which areas are open to mining, and those that govern licensing and industry standards.

Also at the federal level, Luhut Pandjaitan, coordinating minister for maritime affairs and investment, plays a key role. In his position as a coordinating minister, the former mining executive oversees the Investment Coordinating Board and the MEMR, and is considered a trusted adviser to President Joko Widodo, better known as President Jokowi, in the process of speeding up development, smoothing the investment process and overseeing ongoing operations. For example, when the regional government of West Kalimantan lobbied in 2019 to increase the 3.75% royalty rate for bauxite following a surge in sales, it was Pandjaitan’s coordinating ministry that issued a statement announcing that the federal government would comply.

Mining Law

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 surrounding 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. A new version of the law, passed in May 2020, will allow miners to extend permits and seek expansion of mining areas beyond current legal limits. The updated law allows miners who are building smelters to export ore until 2023; however, it adds that the government can rule against the export of specific ores under a separate regulation. Those who oppose the changes cite potential issues such as the environmental impact of allowing larger mining areas.

Change in Ownership

Government entities have been given the right of first refusal in buying stakes when it is time to divest, at a negotiated determination of fair market value. These negotiations, however, can take a considerable amount of time. It took several years, for example, before the Indonesian unit of Freeport-McMoRan agreed to sell the government its controlling stake in the hugely productive Grasberg mine in the province of Papua – the world’s largest gold mine and the second-largest copper mine. The deal was complicated by the foreign investor’s desire to stay on in a diminished role, which will see it remain the operator of the mine. Other companies have generally not elected to retain any stake after divestment, or indeed play a continued role as operator, although some firms have chosen to share equity through stock sales on the Indonesia Stock Exchange. The deal for ownership of Grasberg was struck between state mining holding company and aluminium producer Indonesia Asahan Aluminium (Inalum) and Freeport in late 2018 and saw the former pay $3.85bn for a 51.23% stake. This has given Freeport clarity over its Indonesian operations until 2041, alongside the obligation to invest $14bn in the mine. The company has also agreed to construct a copper smelter, set to be integrated by the end of 2023, and will oversee a shift to underground mining, which will ultimately add 300 km of underground tunnels to the existing 700-km network. Two other large overseas mining companies have also made their divestment plans clear. Brazil’s Vale was in talks with Inalum to divest shares of its nickel-mining assets as of late 2019, including a 20% stake in its local subsidiary, for which Inalum plans to pay $500m. Meanwhile, in early 2020 Australia’s Newcrest Mining agreed to sell its 75% stake in the domestic firm Nusa Halmahera Minerals, whose subsidiary owns the maturing Gosowong gold and silver mine in the province of North Maluku, to another local player, Indotan Halmahera Bangkit. The deal was worth $90m, and the formal handover is slated for end-2020.

Problems with the 10-year timeline extend beyond the potential frustration of foreign investors, Nathaniel Adams, chairman of the Association of Exploration and Mining Development (EMD) Indonesia, told OBG. “Ten years is just too short,” he said. “It incentivises bad mining practices, such as high-grading – namely, mining only the deposits that are easiest to get at, and leaving the rest. That robs the country of revenue.”

Periodic export bans aimed at boosting the mineral processing segment are another challenge for firms that sell unprocessed mineral ores such as nickel. Although Indonesia has seen an uptick in the development of smelters, the increased availability of domestic off-takers has not led to greater investment in exploration. Several foreign miners have exited the market altogether, and the government has sought ways to improve the investment climate other than dropping the export ban or the divestment policy. This includes the passing of a new regulation in March 2018, which allows foreign investors to participate in mining business licence areas of over 500 ha, whereas previously they could only bid for projects over 5000 ha.


Mining accounted for 4.98% of GDP in 2018. This marked the highest contribution since 2014, when it was 5.01%, but was still lower than the peak of 6.14% reached in 2011. The recent increase can largely be attributed to rising commodity prices rather than changes in the level of activity or investment, according to a PwC report published in June 2019, “Mining in Indonesia: Investment and Taxation Guide”.

The sector’s economic contribution also differs by province: in East Kalimantan, where most of Indonesia’s coal is mined, the sector accounts for 45.2% of GDP, while in West Papua, Riau, South Sumatra and South Kalimantan, it contributed more than 20% of GDP, according to figures from the EMD. In terms of jobs, the mining industry accounts for a total of 1.2% of national employment but its contribution is considerably higher in some regions, peaking at 9.7% in East Kalimantan.


Indonesia continues to be one of the world’s leading producers in terms of mining output. This is in part due to the Grasberg mine, which has the world’s largest gold deposits and second-largest copper deposits. Indonesia is also the second-largest producer of tin, behind China, and was the second-biggest coal exporter in 2018, after Australia. Notably, in 2019 the country ranked 27th out of 76 jurisdictions in terms of investment attractiveness in the annual survey of around 2400 international mining companies, carried out by the Canada-based Fraser Institute. This reflected a marked improvement on the previous year, when it ranked 47th out of 83 jurisdictions. According to the survey, the improved ranking was largely attributed to reduced concerns over security; however, it also noted an increase in concern among survey respondents regarding the country’s geological database.

Sector Composition

The mining sector features a combination of state-owned enterprises (SOEs), domestic private companies and three major foreign-owned investors, namely Freeport, Newcrest and Vale. The state-owned group is led by Inalum, and three other firms were brought under its corporate structure as part of a wider effort to consolidate SOEs under an umbrella organisation for each economic sector.

While Inalum now has a mandate to emerge as a regional player, one key concern among sector stakeholders is continuity of leadership. “The idea of combining the mining or energy SOEs under one holding company has some potential benefits, particularly in terms of driving synergies or joint large-scale investments,” Sacha Winzenried, lead adviser of energy, utilities and resources at PwC Indonesia, told OBG. “However, there is an issue with frequent changes in the management of SOEs, which makes it difficult for long-term strategies to be applied consistently.”


In the private sector, foreign producers have typically led the way in hard-rock mining, while local companies dominate the coal sector. A number of local mining firms have sought to expand revenue streams at home and abroad in recent years, including Adaro Energy, Indonesia’s second-largest coal miner by volume. The company took control of coking coal assets from Australia’s BHP in Indonesia in 2016, and purchased another coking coal mine in Queensland, Australia from multinational firm Rio Tinto in 2018 as part of its diversification away from thermal coal.

In terms of coal production, the most recent fullyear figures from the MEMR show output of 557.8m tonnes in 2018, exceeding the ministry’s target of 507m tonnes. Prior to this, between 2013 and 2017 production had plateaued at around 460m tonnes. Coal mining companies must fulfil a domestic market obligation, and this was increased from 97m tonnes to 115m tonnes in 2018. For 2020 the proportion reserved for the domestic market is 25% of production, with the MEMR-set price at $70 per tonne. Exports in 2018 reached 356.4m tonnes, which represented an increase of 19.7% from 297.7m in 2017. Reserves as of December 2019 totalled 39.89bn tonnes, with 42% of this figure located in East Kalimantan and 25% in South Sumatra.

Although global coal use may fall as efforts intensify to combat climate change, domestic demand is expected to be strong for the foreseeable future as it was prioritised as the feedstock for new power plants, even as officials increasingly look to cleaner sources such as gas and renewables. However, one important variable for industry players is how quickly the new plants will be constructed. The government’s plans to build an additional 35,000 MW of total energy capacity were scheduled to be complete in 2019, but the deadline was extended to 2024.


Indonesia had 2600 tonnes of proven gold reserves and 160 tonnes of production in 2019, up from 135 in 2018, according to the US Geological Survey (USGS). Meanwhile, nickel production surged from 345,000 in 2017 to 606,000 tonnes in 2018 thanks to the temporary lifting of the export ban. According to USGS, the country produced an estimated 800,000 tonnes of nickel in 2019. Most nickel reserves are on Sulawesi, and the leading miners are Vale and ANTAM, an SOE that is now part of Inalum.

Indonesia has roughly 28m tonnes of copper content in reserve. Production in 2019 decreased by 91% to 340,000 tonnes, a result of the Grasberg and Batu Hijau mines’ transition to new ore zones for those deposits. Grasberg is set to enter a new phase in 2020 as open-pit mining is exhausted and underground mining becomes the main activity.

Due to this transition, full-year figures, once available, are likely to show a major decrease in production at the mine, with concentrate exports falling to 200,000 tonnes, down from 1.2m in 2019. However, output is expected to return to normal levels by 2022.

Bauxite production rose to 16m tonnes in 2019, up from 11m in 2018, according to USGS data. Reserves stood at 1.2bn tonnes, concentrated in West Kalimantan, Sulawesi and the Riau Islands. In the latter two provinces, efforts are under way to encourage downstream processing, including at the new Galang Batang Special Economic Zone in the province of Riau, and in Kayan in North Kalimantan.

Bauxite is not currently subject to the export ban, though the government has indicated this could change. Tin mining has been steady for most of the past decade, albeit at lower levels than in the past due to export quotas and a crackdown on illegal mining. In 2019 reserves stood at 800,000 tonnes and production dropped by 6% to 80,000 tonnes.

Sales & Exports

The government has moved decisively to increase its influence over how mined output is used and sold, with policies such as the export ban and capping of coal prices meant to develop local value chains, and ensure a secure and affordable supply of coal for the state’s power plants. The export ban, initially implemented in January 2014, was meant to last for three years and applied mostly to unprocessed ores, with the intention of incentivising the construction of downstream smelters. This mostly impacted low-grade nickel ores and bauxite, and only allowed exports if companies met a set of requirements, including downstream investment and increased export duties. In January 2017 the ban was lifted for a period of five years, but, in a reversal of policy, in September 2019 it was announced that the ban would resume from the beginning of 2020. The regulation has helped to define export volumes in recent years. Mining accounted for 17% of exports in 2013, but this fell to around 13% from 2014 to 2016 after the implementation of the export ban. The sector’s contribution to exports climbed again from 2017, and reached 16% in 2018, but most additional revenue came from higher global prices for exports. Revenue from exported nickel ore totalled $155m in 2017 and $628m in 2019, and $66m in 2017 and $265m in 2019 for bauxite ore.

At present, mining companies that commit to building processing or refining capacity enjoy tax breaks as an additional incentive to invest downstream. For those companies that wish to remain exclusively upstream, however, the alternative is to use the processing capacity of other firms. Several domestic companies are building such capacity following an aggregator model that uses the output of other companies.

Most aggregator activity is happening on the nickel-rich island of Sulawesi and is being coordinated by Pandjaitan. There are five nickel-processing plants under construction at Morowali, in the central part of the island, all of which could help to develop supply chains for nickel-based batteries, which are used in electric vehicles. Investors have come from China, Japan and South Korea, and include China’s Zhejiang Huauou, GEM and Tsingshan, which already produce nickel pig iron and stainless steel on the island.


Given regulatory changes and uncertainty, exploration spending has slowed considerably. Having registered a high of just above $450m in 2012, the total has not surpassed $100m since 2015, according to EMD data released in January 2020. Indonesia’s share of the global exploration budget was close to 6% in 1997 and roughly 2.5% during the 2012 boom. For foreign players, a long-standing obstacle has been the divestment mandate, and more recent hurdles include the data access fees that now apply to participants in the tendering process. Given the centrality of coal to power generation, this is an area in which exploration spending could rise if the government strikes a balance between state priorities and investor preferences.


Indonesia has remained steadfast in efforts to expand state ownership and nurture domestic supply chains. As Inalum and other SOEs manage their expanded asset base, hopes remain among investors that reforms to the legal code and regulatory environment will facilitate a rebound in exploration spending, particularly as demand for rare metals rises in the future. While the Covid-19 pandemic has slowed investments and plans for new nickel smelting plants, the government is continuing to prioritise these facilities as they will be key to developing downstream industries.