Jakarta (ANTARA News) - Indonesia's mining sector continued to enjoy record financial results in 2007 mainly due to strong commodity prices rather than expansion in business activities, a survey by PricewaterhouseCoopers howed.
"High, and in most cases increasing, commodity prices have continued into 2007, which augurs well for strong financial performance in 2007 and 2008," said Sacha Winzenried, a technical director at PwC.
He said unprecedented demand, primarily driven by Asia, continues to underpin high prices for most minerals. Meanwhile, new supply is struggling to catch demand, partially as a result of global underinvestment in prior years.
Amid rising profitability, the aggregate market capitalization of mining companies listed on the Indonesian Stock Exchange surged by more than 100 percent from 2005 to 2006, and the trend continued in 2007, with mining stocks rising a further 270 percent, he told Thomson Financial.
"These improvements in profitability, however, mask substantial increases in operating costs which have resulted from supply-side constraints. The industry will face a challenge to sustain margins should commodity prices fall," he said.
Winzenried said there is room for improvement in investment given strong interest from global mining companies in Indonesia's mining sector, but investment conditions continue to be ranked poorly.
He said global investment spending is at its highest point in the last decade but Indonesia is not yet capturing its fair share of this increased activity considering its geological potential.
"This indicates that global mining companies are willing to invest in exploration activities if the investment conditions are right," he said.
The PwC survey finds the top five impediments to investment in Indonesia's mining sectors as follows: conflict between mining and forestry regulations; duplication or contradiction between the central and local government; taxation issues; delay to finalization of the mining law; and lack of fairness in divestment of foreign mining interests.
"Due to the significant changes to the regulatory environment proposed in the current draft law, investors appear to be reluctant to commit significant funds to new projects until the landscape is more certain," Winzenried said. (*)