Insight: Downstream Projects for Mining Still Stagnant in the Widodo’s Term

Freeport Indonesia mining site - Photo: Freeport

JAKARTA (TheInsiderStories) – During Indonesian President Joko Widodo’ term, the development of the downstream for mining sectors still stagnant. Even though this sector can provide added value to the economy. At present, the mining sector contributes 7.2 percent of gross domestic product.

Nickel processed production throughout 2018, for example, is far from the target. Based on records from the Ministry of Energy and Mineral Resources (MEMR), of the target of 860 thousand tons, only 744,751 tons were reached.

The production of matte nickel is only 73,566 tons, or about 91 percent of the target set, 80,000 tons. In addition, the realization of copper cathode production was 233,099 tons, or 75 percent of the set target of 310,000 tons.

This decline in the production has an impact on the realization of investment, which also missed the target. MEMR data showed, from January to December 2018, mineral and coal investment was only US$6.8 billion, from the target of $ 7.4 billion.

How could this happen? Legal certainty, such as the unclear nature of the Domestic Market Obligation (DMO) policy, is one of them. This DMO is a mandate of Law Number 4 Year 2008 concerning Minerals and Coal.

The contents of the regulation state that the government can establish a policy of prioritizing domestic minerals and coal. It also stipulated that 25 percent of the production of coal entrepreneurs must be supplied domestically.

The coal will be absorbed by the domestic industry and the PT Perusahaan Listrik Negara (PLN). However, not all coal produced by companies in the country is suitable for PLN plants which can only process 4,200 calorie coal.

From there came the problem. Moreover, the circular letter from EMR Minister Ignasius Jonan numbering 2841/30/MEM.B /18 dated June 8, 2018, stated sanctions for production quota cuts if the business entity did not fulfill the obligation of 25 percent.

The government and employers also had time to find a way to overcome it. One of them is the transfer of quotas. So, companies whose coal specifications are not suitable for buying coal from other companies.

But that does not solve the problem because prices are considered expensive, as a result, many companies have not fulfilled it. The production company that is not suitable should directly pay a sum of money to the government so that it adds non-tax state revenues.

Furthermore, legal certainty, especially for holders of the 1st generation coal mining concession whose contract will expire soon. Until now the government has not issued a regulation regarding the amendment them to special mining business permits. In fact, the company needs legal certainty to project coal production.

Another thing is the limitation of coal imports in China. This policy is one of the reasons for the Reference Coal Price (RCP) to continue to decline. In fact, China is the main market for coal exports. So far, Indonesia has sent around 30 percent of total coal production to China.

If calculated from the beginning of the year, the January RCP is $95.45 per ton. Then, rising in February reached $100.69. A month later it dropped $94.75 per ton. Then, the April period was $101.86 per ton. After that it dropped to its lowest level in May.

On the other hand, PT Freeport Indonesia’ mineral production this year is predicted to decline by almost half from last year. This is because the open pit mine has run out. This year, Freeport mineral production is only 1.2 million tons.

Last year, the production could reach 2.1 million tons. As for exports, it also fell to 200 thousand tons. The remaining 1 million will be sent to PT Smelting Gresik to be purified. Last year, exports could reach 1.2 million tons.

Based on data in the fact sheet of PT Indonesia Asahan Aluminum, Freeport’ projected revenue for next year will be around $3.1 billion, while the company’ profit before deducting debt interest and outstanding tax payable to the government is around $1.2 billion. The miner’ revenue has decreased by around 50 percent compared to the previous year of around $ 6.5 billion.

Like Freeport, copper and gold concentrate production PT Amman Mineral Nusa Tenggara also projected to decline throughout the year. The company targeted the copper production this year to reach 197 million pounds. The target dropped 31.72 percent from last year’ 288.5 million pounds of production.

The same is true for gold. The gold production target for this year is only 100,000 ounces, down 74.84 percent compared to the realization of production in 2017 which reached 397.400 ounces. The declined in production targets was also influenced by the process of developing the Batu Hijau Block which has entered its final stage.

Therefore the government must encourage increased exploration in Indonesia to find new reserves. This effort is important to secure production in the future, while at the same time carrying out downstream mining products so that it adds value to the company and the economy.

Sukmandaru form Ikatan Ahli Geologi Indonesia, said the discovery of new reserves has continued to decline in recent years. In fact, various mining products are increasingly needed in line with the government’s efforts to push downstream in the country to improve the economy and reduce the trade balance deficit.

In addition, the government must increase the downstream mining industry. Because the added value of mining companies lies in the processing industry. If only exporting raw materials, the surplus of the mine balance is very small, even minus. Because the value of various imported mining products is far greater than the value of the exported raw material.

For nickel and bauxite raw materials, for example, the import value of finished products from raw materials is far more than the export of nickel and bouksit. After becoming aluminum, the added value of bauxite has increased a dozen times. Nickel is good for food equipment, cellphones, medical equipment, transportation, buildings, and power plants.

Mineral and coal downstream is also important to help reduce the trade balance deficit and the current account deficit. In 2018, the trade balance deficit reached $ 8.5 billion, the largest in Indonesian history.

With downstream, Indonesia’ trade balance will return to surplus and continue to expand. Downstreaming is also useful for maintaining financial conditions and improving company performance. When coal prices drop, the company will continue to gain profits if the company has a coal-fired power plant.

However, not all mineral and coal companies have the same characteristics. Copper companies such as Freeport Indonesia are already quite optimal by exporting concentrates. Because the downstream process to produce concentrate has reached 93 percent and the price has been referring to the London Stock Exchange.

To increase exports and maintained the performance of mining companies, government policies regarding exports need to provide more certainty.

Written by Lexy Nantu, Email: