High risks, low returns on state-mandated investments
Indonesia’s aim to boost its mining sector through more value-added production is driven more by nationalism than sound economics
PT Amann Mineral, an Indonesian consortium which bought US-owned Newmont Mining’s Batu Hijau mine last year with the backing of local banks, does not have the same government mandated divestment problem of its foreign mining company counterparts.
But the local company, too, must spend US$650 million on a smelter and another $2.2 billion on a new phase in the mine’s development under government orders to add more value to extracted mineral resources.
Amann and Freeport McMoRan Copper & Gold, a Phoenix-based mining giant that operates Indonesia’s largest copper mine, currently supply about 35 percent of their concentrate to the Mitsubishi-run PT Smelting smelter in Gresik, East Java. The 300,000-ton facility provides half of its output to eight domestic wire-rod producers around Greater Jakarta that meet most of Indonesia’s needs.
London-based copper analyst Simon Hunt says Indonesia has always had a surplus capacity of wire rod, the base product for power, telecom and building cables, partly because aluminium is a common substitute and partly because of stiff overseas competition.
According to industry sources, PT Smelting’s customers, which include the only two Japanese-owned power cable-makers in the country, all report difficulty competing against an over-abundance of cheaper imports from China and South Korea.
While there may be room for expanding the domestic production of sheet, strip and tube – and perhaps building a brass mill — Hunt says it will still be less costly for local firms to order from suppliers in China rather than invest in new plants on Java.
Indonesia’s trade figures do not narrow down copper products, but base metal imports from China — separate from iron and steel — were up 88 percent to $109 million in 2015, when China exported a record 400,000 tons of refined copper.
Deputy Mines and Energy Minister Archandra Tahar says Indonesian producers will have to be more efficient. But that’s the problem when logistics costs, particularly in moving copper cathode by road from East Java to Jakarta, are among the highest in the region.
Where Freeport would have an advantage is if it funnels concentrate to its own planned smelter at cost, then directly exports the cathode to what Hunt says would be ready markets in the Asian region. In that case, it would be “highly competitive,” he says.
Paying market prices for concentrate means smelting has always been a marginal business. One Jakarta-based analyst who has studied the 300 latest copper discoveries around the world says only a “handful” were big enough and had high enough grades to justify investing in a smelter.
Indeed, PT Smelting has only earned a one percent rate of return on investment since Mitsubishi, the majority stakeholder, and Freeport entered into the joint venture in the mid-1990s as a sign of good faith to the government.
PT Smelting has only earned a one percent rate of return on investment since Mitsubishi, the majority stakeholder, and Freeport entered into the joint venture in the mid-1990s as a sign of good faith to the government.
Mitsubishi earns some revenue pumping sulphuric acid across the fence to a state-owned fertilizer company and supplying two other by-products, copper slag and gypsum, to the cement and ship-building industries.
Its only real profit, however, comes from so-called anode slime, the gold, silver and other precious metals left over from the smelting process, which is sold to Naoshima, a Mitsubishi Materials Corp subsidiary.
Even there, the government now wants state-run mining company Aneka Tambang to build a refinery to process the final one percent of those metals, which unlike concentrate may at least be exempt from an expected 5-10 percent export tax.
“From a purely economic point of view,” says one industry executive, “the capital to be invested in smelting and refining would be better spent in the upstream but the government can’t seem to accept the reality.”
Upstream production begins with exploration, but the Indonesian government has made it so difficult for mining companies to function that one of the most prospective countries in the world hasn’t opened a new mine of any significance in two decades.
John McBeth, a former correspondent with the Far Eastern Economic Review, is a Jakarta-based columnist with over 45 years’ experience covering Southeast Asia.