Jakarta mired deep in mining mess – by John McBeth (The Straits Times/Jakarta Post – January 20, 2014)

http://www.thejakartapost.com/

Giving with one hand and taking with the other, the Indonesian government has effectively enforced a blanket ban on mineral ore exports in a bizarre, nationalist-driven decision-making process that will cost the country billions and put tens of thousands out of work.

While value-added is an understandable goal for a country blessed with so many natural resources, the implementation of the signature policy has been bedevilled by weak leadership, poor conceptualising, political grandstanding and bureaucratic ineptitude.

Miners are now threatening to head to international arbitration, with copper giants Freeport Indonesia and Newmont Nusa Tenggara facing the prospect of shutting down 65 per cent of their production – a huge chunk of the US$10 billion Indonesia makes each year from mineral exports.

The move to process all mineral ore onshore within five years was foreshadowed in the 2009 Mining Law, but only given clarity – and teeth – in a ministerial regulation issued belatedly in July 2012, which laid out the required purity levels for each individual mineral.

With copper’s purity level set at 99.9 per cent, the country’s two biggest miners are clearly the main targets of a government fixated on building a smelting industry that, in the case of copper, is only marginally profitable.

Both companies have refused to invest in smelters and, as the clock ticked down to what was now an unrealistic January 12 deadline for the ban to take effect, the government appeared to be scrambling to get itself out of a fix of its own making.

At the eleventh hour, President Susilo Bambang Yudhoyono signed an outwardly watered-down regulation reducing the copper-refining requirement to between 15 per cent and 30 per cent, and also allowing 60 nickel, lead, zinc, manganese firms to continue exporting semi-processed ore until 2017.

Then a day later, the other shoe dropped. The Finance Ministry slapped a progressive tax on all exports of concentrate, starting with 25 per cent in the first year and rising in half-yearly increments to a prohibitive 60 per cent in the second half of 2016.

The Straits Times has learnt that while Cabinet discussed the possibility of a small export tax, neither Coordinating Minister for Economic Affairs Hatta Rajasa nor Mines and Energy Minister Jero Wacik were aware of just how high the Finance Ministry intended to go until it was announced.

Freeport and Newmont regard the duty as a violation of their contracts, which prescribe no new taxes. The first year’s export tax bill alone would cost Freeport an estimated $800 million to $900 million, wiping out profits and reducing funds for operations and expansion.

Both companies probably have no other choice than to go to arbitration. Phoenix-based parent Freeport McMoRan Copper & Gold called people back from vacation, and sources say the “A word” – arbitration – has already been raised with the government and Parliament.

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