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Unfeasible deadline for miners

Publication Date : 06-02-2013

 

The general mining and coal director general, Thamrin Sihite, has warned mining firms that the Indonesian government will not reschedule the enforcement of the total ban on exports of unrefined ores due in 2014 although many analysts and investors have argued the deadline is unfeasible.

Anticipating overextraction (overexploitation) of the country’s mineral resources in the run-up to the total ban on unrefined ore exports, the government decided last May to impose an export tax at the flat rate of 20 per cent on more than 60 mineral ores in a bid to curb excessive increases in exports.

There is actually nothing wrong nor strange with the regulation. First of all, the ban was stipulated in the 2009 General Mining Law that says that mining companies shall build refining plants (smelters) because they can no longer export unprocessed minerals starting from 2014.

The regulation supports the government policy designed to move mineral commodities higher up the value chain, generating more jobs and maximising profits from the mining sector without excessively exploiting natural resources.

The biggest problem with the enforcement of the mining law is the confusion and uncertainty surrounding the timing and manner of the policy.

The government seemed ignorant of the blunt fact that building a smelter is not a simple task as it needs huge investment and consequently large economies of scale as well as thorough preparations, including feasibility studies that can take at least two years. This was compounded by the fact that the new law virtually sat on the shelf for almost two years after its enactment due to poor coordination among various ministers related to the mining sector. This lack of coordination protracted the drafting process of the necessary regulations on technical directives for the enforcement of the law.

The government began issuing the series of regulations and ministerial decrees providing technical details on the law enforcement only in 2011, causing the misperception among mining companies that the government was not serious about enforcing the provisions of the law on the complete ban on exporting unprocessed mineral ores.

That, we think, was the worst way to usher in a policy for mining ventures that are highly risky, capital- and technology-intensive, and which have a long payback period.

The availability of power — and a huge volume of it — is key to operating a smelter. The smelters built by Vale nickel mining and smelter in Soroako; Aneka Tambang’s ferronickel plant in Southeast Sulawesi; the copper smelter in Gresik, East Java; and the Indonesia-Japan Inalum aluminium smelting joint-venture in North Sumatra are all supported by big-capacity captive power units.

In fact the US$2 billion Inalum aluminium smelter was built not to take advantage of local bauxite or alumina resources but to maximise the benefit of the huge hydropower resources on the Asahan river, near lake Toba. The smelter was built as part of a package with two hydropower stations with a combined capacity of 420 megawatts on the Asahan river.

The Inalum smelter has from the outset depended wholly on imported alumina for its feedstock.

Given the crucial role of power supply and the huge investment needed for large-capacity generating stations, two or even three years are simply not an adequate time-period to build a smelter, especially in view of the acute shortage of electricity outside Java where most of the mining ventures are located.

The best, compromise solution would be for the government and investors to reschedule the full enforcement of the ban on unrefined ore exports and to improve the legal framework and mechanisms to ensure proper implementation of the new deadline.

Slapping a total ban on exports of nickel, bauxite and tin ores in 2014 will cause chaos in the mining industry, which accounts for almost 12 per cent of the country’s gross domestic product, cutting into state revenues and throwing many out of work.

 

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