The mining industry is highly cyclical and fiercely competitive, given to period overcapacity and sharp fluctuations in prices and demand. Weakening global economic conditions have provided a major “headwind” for this sector but the prospects remain attractive. The decision of the Chinese government in reducing the work hours which was started in the coal sector in the 4th quarter of 2016 boosted the recovery of the coal price which continues in 2017. The rally of the coal prices continue triggered by the unusual high rainy season in Indonesia and other coal producing countries and the Debbie cyclone in Australia which affecting the production level. The recovery the commodity becomes the tail wind which boost the performance of miners in 2017.
In Indonesia, the strong commodity price helped the country economy maintains its growth above 5% despite such growth level below the expectation but still considered good enough given the weak growth level in many countries. The current commodity price benefits not only miners but the state reaps benefit from the increase of the state revenues. The target of non-tax state revenues of the mineral and coal sector has practically been achieved few months before the end of 2017. Overall, the strong commodity price of coal and crude palm oil help to maintain the growth of the national economy. Despite the recovery of the price continues in 2017, the legal uncertainty has been in the top list of issues faced by mining investors. The impact of the not-business friendly policies will remain the priority issue to be dealt by miners in 2018.
The government issued its first regulation in 2017 which regulated business activities in the mineral and coal sector as the fourth amendment of the GR No. 23 of 2010. The GR No. 1 of 2017 took miners in particular contract of work (CoW) holders by surprised as the substance of the GR contained some “controversial” provisions. The GR which was followed by the issuance of series of the implementing ministerial regulations considered as the bold stance by the government bold toward foreign investment in the mineral sector. The GR obliges the conversion of CoW into the Special Mining Business Permit Production Operation (IUPK OP) as the requirement to get the approval on the export of concentrates. PT Amman Mineral Nusa Tenggara (PTAMNT) was the first CoW holder that comply with the government requirement. The copper producer which is currently controlled by the consortium of Medco Energy and AP Investment has obtained its IUPK OP. Meanwhile PT Freeport Indonesia (PTFI) was granted with the temporary IUPK OP and opted to continue the CoW renegotiation with the government.
The GR also stunned mineral producer by revising the divestment requirement as previously regulated under the GR No. 77 of 2014. Under the old GR, which was issued right at the end of SBY presidency, the minimum divestment were set at 30% and 40% for companies undertaking underground mining and developing smelter facility (integrated) respectively. Under the new GR, the minimum of 51% divestment of the foreign ownership in the mineral and coal sector is required after the 6th year of production operation stage. This surprise move created uncertainties for CoW holders especially those that have already signed their memorandum of understanding with the government on the negotiation of their CoWs. The new divestment requirement remains the most complicated item in the ongoing CoW negotiation. To date there are 10 CoW holders that have yet to sign the CoW amendment. For CCoW, the government has claimed its achievement in concluding the negotiation of 5 first generation of CCoW. While 18 other CCoW holders (1 first generation and 17 3rd generation) are expected to sign the deal soon.
The issuance of implementing regulation of the GR also triggered controversies in relation to the export of ores. The government policy on the limited ore export relaxation has been blamed on the declining of the nickel price. The policy has significant impact on the investment decision of investors who plan to build processing and refining facilities as claimed by the Indonesian Smelter Processing Association. One of the considerations behind the issuance of the policy is that the government want to support mineral value added development especially for miners that are committed to build smelter but facing financial difficulties. PT Aneka Tambang in particular is expected to benefit from the policy as the state-owned miner has huge low grade ore stockpiles but unable to export them due to the export ban policy under the GR No. 1 of 2014. Despite the granting of temporary export permit, the decision by the government in granting limited export to selected companies has been criticized. There are allegation that such policy has benefited certain companies that have lack of commitment to build smelter facilities.
The result of the negotiation between PTFI and the GoI perhaps will be the most anticipated news in the sector. The outcome of the complex negotiation will send either positive or negative signal to the existing as well as to the potential mining investors. Both parties are optimistic agreements could be reached very soon and the government sets February will be the deadline for the negotiation. PTFI so far insisting to retain control of the company operation whilst agree to divest further roughly 40% shares to comply with the 51% divestment requirement. The copper producer has been expecting to be secure the automatic 20 years extension of its operation until 2041. Meanwhile the government prefer to stick with 2 x 10 year extension as set out in the Mining Law. The company has also agreed in principle to build a new copper smelter once the 20 years extension granted and the divestment issue resolved.
The future of the revision of the Law No. 4 of 2009 on Mining Law will be determined in early 2018. Even though the House of Representative has listed the bill as one of the legislation priorities in the period of 2014 – 2019, but to date the progress is very slow. So far the Parliament has yet to finish drafting the bill as the politicians lacking of interest in the legislation and focus more on the election issue ahead of the year of the politic. Some parliament members prefer to bring the bill to the Legislation Body in order to speed up the legislation process. On the other hand, the working group of the national meeting (Rembug Nasional) demands the government to take over the initiative rights on the mining bill from the parliament The pressure group insists that the revision is highly needed to provide legal certainty on the sector. The confusion over the mining authority ruled in the Mining Law vs the Regional Autonomy Law should be immediately resolved. The provincial governments have been demanding the parliament to speed up the legislation process as the local government need to have the strong legal basis to perform their authority.
In the coal sector, coal miners have been expecting a fair policy on the formula of the coal domestic price. The state electricity agency (PLN) has been seeking a favorable coal price formula for the company’s perspective as the state-owned enterprise claimed in 2016 it suffered huge loss of IDR 16 trillion mainly due to the impact of the significant rise of the coal price. In this regard the MoEMR is weighing several options to accommodate the interests of PLN as well as the coal miners’s. The introduction of the ceiling and floor price approach was initially discussed but the government decided not to pursue. The proposal for the use of two price indexes as opposed to the existing four indexes in the Coal Price Reference has been discussed as well but the miners worried that the revision of the indexes could drag down the prices. Another method proposed by the PLN in the form of progressive discount is definitely not attractive for coal miners. The main concern of the miners have been the consistency of the government in implementing the policy for the long-term.
Coal miners will have to deal with a new regulation issued by the trade minister which is feared could affect the coal export activities. The ministry has just issued a new minister regulation (MR) No. 82 of 2017 on October 2017 which requires coal and CPO exporters to use vessels and insurances owned by nationals. The ruling will take effect six months after the enactment of the regulation or April 2018. Indonesian Coal Mining Association (ICMA) has earlier challenged the draft policy when it was discussed in April – June period. The proposal came out initially as part of the 15th series of economic deregulation package aimed to improve logistic efficiency. But the coal miners afraid such policy will only benefit national ship owner at the expense of coal exporters that have contributed significantly to the state income. The readiness of the national owned vessel and insurance providers to implement the policy is likely to affect the export activities. Miners fear such policy could increase the costs and affecting the competitiveness of Indonesian coal export.
Fiscal issue will remain one of priority issues to be dealt by miners as the government is finalizing the taxation bills. In early next year the government in this case the MoEMR is expected to finalize the revision of the GR No. 9 of 2012 on Types and Tariffs Applicable in the Ministry of EMR. In the latest draft, the industry has raised their concern on the introduction of the progressive royalty for minerals. The government is also planned to raise the royalty tariff for the sale of processed and refined mineral products. If that is the case then such policy could further affecting the economic viability of the downstream mineral investment. The bold decision from the government is highly expected to make the mining sector great again in 2018 and beyond.
(*) Vice Chairman of Indonesian Mining Institute, Executive Director of APBI-ICMA. He can be reached at firstname.lastname@example.org. The opinions expressed are his personal view.