Thu, 08 Jan 2009
From: The Jakarta Globe
By Mita Valina Liem
Soaring prices in the mining sector in the first part of 2008 fueled a flurry of exploration and investment activity until the industry was bought back down to earth with a crash by the global financial crisis.

Now, with the prices of many mining products at decade-lows, the industry is operating in a starkly different environment.

The higher prices heightened tensions in the sector, with international arbitration, price disputes and concerns about the passage of a new mining law all coloring Indonesia’s mining sector in 2008.

During the first seven months of 2008, the mining sector was buoyed by skyrocketing price of crude oil, which reached a record high of $147 a barrel in mid-July. This, in turn, propelled the prices of coal, gold, tin and copper to new highs and caused a mini-boom in exploration and investment activity. The high prices, however, do not end up boosting Indonesian mining output.

In fact, the country’s production of silver, gold and copper is believed to have dropped significantly in 2008 from the year before as a result of a landslide at one of Indonesia’s biggest mines.

Silver production is believed to have dropped from 209.06 million tons in 2008 from 269.38 million in 2007, according to industry projections for the year to November.

Gold production, meanwhile, is believed to have dropped to 57.94 million tons last year from 117.73 million tons in 2007, while copper is expected to have fallen to 580,950 million tons from 797,400 million tons.

The significantly lower production of all three metals was due to a major landslide at the country’s largest gold and copper mine in Grasberg, Papua, which is controlled by US mining giant, Freeport McMoRan Copper & Gold Inc.

The most important development
of the year was the enactment
of the new mining law

By contrast, production of raw nickel ore increased dramatically, more than doubling from 6.63 million tons in 2007 to 14.9 million tons in 2008, although much of this ore had not been processed by the end of the year in an attempt by the country’s nickel producers to cushion prices against falling demand.

Despite the fact that the price of coal rose to a peak of $217.50 a ton in July, before falling back to about $80.63 a ton at the present time, production only rose slightly to 225 million tons last year from 217 million tons in 2007 due to a lack of new mining capacity. Nevertheless, for most of the year the country’s coal fetched impressive prices, with increasing demand from power hungry China and India, as well as local demand, boosting the earnings and stock prices of the country’s largest coal miner, PT Bumi Resources Tbk - until the global slowdown dragged prices down in September.

Given the high prices of mining products in the first part of the year, the government became eager to cash in and issued a number of decrees and regulations designed to extract maximum revenue from the industry. However, the most important development of the year was the enactment of the new mining law.

The year was also marked by disputes in the sector, including one between the central government and US-based Newmont Mining Corp. In February, the government sent a letter threatening to terminate Newmont’s contract for its gold mine in East Nusa Tenggara Province, arguing that it had failed to meet the deadline for the divestment of a 10 percent stake to local governments in the area. The miner resolutely defended itself against the government’s allegations, saying it had made a number of offers to the local governments in question, but all had been rejected. The dispute went to arbitration in December, and a ruling is expected in March.

In the coal sector, the government was also playing hardball. In a ministerial directive issued in August, the Ministry of Energy and Mineral Resources instructed coal mining companies to commence talks with a view to renegotiating their existing export contracts, setting them a deadline of Dec. 3 to do so. As a result, PT Adaro Energy, the country’s second-biggest coal exporter, declared force majeure, saying it was incapable of meeting its obligations to deliver coal to three international buyers after negotiations with the buyers broke down.

At the same time, a dispute between the government and the country’s coal miners over tax rebates and royalties turned ugly when the government slapped travel bans on 14 executives from six coal companies, arguing the companies had failed to pay around Rp 7 trillion ($ 651 million) in mining royalties between 2001 until 2007. The miners argued that they were entitled to withhold the money as the government had failed to refund value-added taxes worth about the same amount.

In December, the year was rounded out by the passing of the new mining investment law by the House of Representatives after four years of deliberation. This resulted in more consternation in the sector, with mining companies concerned that the new legislation, which replaces the old contract of work system with a more complex licensing scheme, would increase bureaucratic interference in the sector, and scare off new investment.

Despite all the problems facing Indonesian mining, one sector that is set to expand in 2009 is processing. According to Simon Sembiring, an advisor to the mines and energy minister, the new mining law has already resulted in proposed investment of more than $4 billion in new smelting capacity this year.



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