The opinions expressed here are those of the author, a columnist for Reuters.
(Reuters) – When Indonesia banned the export of unprocessed minerals in January of this year, the consensus view was that the most significant impact would be on the nickel and aluminium raw material markets in that order.
Copper barely warranted a mention.
Analysts at Macquarie Bank, for example, issued a research note on January 14, two days after the ban came into effect, examining the implications in a question-and-answer format. The only reference to copper came in the 19th bullet point under the telling heading: “Have copper producers been let entirely off the hook?”
Six months on, though, and one of the country’s two giant copper mines is on care and maintenance and the other has cut production by half. There have been no concentrate exports since January.
Not only is this the single biggest hit to copper mine supply this year but it is acting to accelerate a fracturing of the copper concentrates pricing model.
Both Freeport McMoRan, which owns and operates the Grasberg mine, and Newmont Mining, major stakeholder in and operator of the Batu Hijau mine, appear to have been blind-sided by the January rule changes.
After all, not only are both major employers and tax-payers in Indonesia, but both also thought themselves protected by what they believed to be legally-binding contracts of work (COW) covering their operations in the country.
In theory, such COWs set in stone the level of taxes and royalties payable over the contracts’ life-time.
And anyway, copper concentrates are not unprocessed minerals. As Newmont has repeatedly pointed out, around 95 percent of the value chain is captured in this form of copper. Why would anyone build a new smelter in Indonesia just to get the last five percent?
Indonesian policy-makers, though, beg to differ. There will be a steep and escalating tax on exports of copper concentrates until 2017, when they will also be banned completely.
Those legally-binding COWs, it seems, will simply have to be changed to accommodate the new regulations.
After weeks of negotiations, Newmont this week announced it would seek international arbitration.
Freeport is still talking. But then it has an even bigger problem. Its COW expires in 2021, unlike Newmont’s, which runs to 2030.
That places a major question-mark over the future of the Grasberg mine, not least because Freeport has to spend heavily on switching to underground mining when the open pit is exhausted in 2017.
SUPPLY HIT
In the interim, neither has been exporting since the start of the year, depriving the global market of a major source of raw materials.
Freeport has reduced the milling rate at Grasberg by around half to align mine output with the intake capacity of the country’s sole existing copper smelter, which Freeport partly owns.
For the rest of this column, click here: http://in.reuters.com/article/2014/07/03/home-copper-idINL6N0PE3PR20140703