The Government is persistent in implementing the downstreaming policy in the mineral sector, despite many objections. Some smelters have already been operational amid worsening global economy and the drop of commodity prices.
Until the end of 2015, there were only six smelters already in operation, out of the dozens that were in planning. Not all smelters are brand new. The nickel-into-ferronickel processing facility owned by the state-owned company Antam in Pomalaa, Southeast Sulawesi, and a nickel-to-nickel matte that belongs to PT. Vale Indonesia Sorowako, are both old facilities.
Indeed, tardiness is on show here. The worsening nickel price is mainly to blame. The same can also be said for smelters of other commodities, such as copper and bauxite.
Many companies building smelters are forced to experience stagnation, albeit as always stated, temporarily. Director General of Mineral and Coal of the ESDM Ministry, Bambang Gatot Ariyono admitted that the global economic situation had influenced the demand for mining commodities. As such, the demand for mining commodities and their derivative products has also been going down. This will impact on the weakening demand for mining commodities. The commodity prices will eventually go down as the market will see a surplus of stock.
“The weakening economic condition has seen mining companies finding trouble securing funding. The weak commodity prices have lowered the economic value (of mining products), therefore many companies are forced to delay their projects,” explained Mr. Ariyono.
There are however companies who choose to continue the construction of their smelters. Mr. Ariyono asserted that the development of some smelters had already shown progress. Some have not really reached the target. This should ultimately be anticipated, and for certain this would become a challenge and a homework for all.
Mr. Ariyono also mentioned that there were at least three internal problems which had caused the construction of smelters in Indonesia difficult to realize. First, the problem with incentives in form of tax allowance and tax exemption (tax holiday) offered by the government for the construction of smelters, which are hard to obtain by mining companies.
“Some companies applied for these tax incentives, however they are still difficult to obtain. This should be pursued further in order to get the construction of smelters going,” he explained during a seminar entitled “Discussion on Smelter and Sustainable Mining” in Jakarta, on Wednesday, 16 December 2015. The seminar was organized by TAMBANG Magazine in collaboration with communication service provider Inke Maris & Associates.
Second, mining companies willing to build smelters still find it difficult to secure land, infrastructure and licensing. He pointed out that there were mining companies who had planned to build their own power stations to support the construction of their smelters, and still failed to obtain the recommendation from the PLN (Naitonal Electricity Company) for the operating license. “(The PLN) argued that this is not included in the RUPTL (Electrical Power Supply Business Plan in its Indonesian abbreviation). It is also difficult to get permission for the location,” added Mr. Ariyono.
Third, there are local governments who somewhat inhibit downstreaming of mineral products by requiring mining companies to build smelters in that region only, prohibiting raw minerals to be transferred out of the region. As a matter of fact, construction of smelter in that region is not necessarily economical.
To suppress such an egotistical manner of those regions, the Directorate General of Mineral and Coal will summon the heads of the concerned regions. The Directorate General will guarantee that producing areas will also be credited accordingly, even if the smelter is built in other areas.
“We will invite the heads of regions, ask them where the problem lies at. The regions should be given appropriate rights. (We want to avoid that) they must do with the environmental impacts but fail to receive the benefits accordingly,” stated Mr. Ariyono.
He added that the government would be persistent in encouraging construction of smelters, although the process would somewhat be laborious. He believed that the consistency of this policy would bring fundamental changes to the pattern of mining here, and it would also provide benefits in a sustainable manner.
In addition to adding value, the government’s downstreaming policy is also believed to be beneficial for a mining-based industry in Indonesia, as it would generate multiple effects significantly. Mr. Ariyono also believed that in addition to further increase the added value, the downstreaming policy in the mining sector would also be applicable up to the final products, not only until mere intermediate products.
The synergy of all parties involved is therefore very important. “It does not only concern the Ministry of Energy and Mineral Resources and mining companies. Many other parties should also be involved,” he added.
The government will continue to help the businesses to carry out the construction of smelters. Some approaches would be offered, such as securing the supply of raw materials. If smelter-developing companies are not mining companies, they would have to get a Special Processing mining business license (IUP) and to cooperate with holders of Production Operation IUP already certifies as clean and complete.
The government will also ease the obligations to the state. Royalty will only be quoted on end products, not on mineral ores. “The obligation of divestment for foreign companies conducting integrated refining activities here is only 40%. It is smaller than that for companies that only conduct upstream activities,” said Mr. Ariyono.
He argued that in addition to increasing the value of mining and protecting the environment, construction of smelters on a national scale would also help control the national reserves of mineral commodities. “We will reach out to local authorities and governments that construction of smelters should not be carried out by all companies or in all regions. This will have an impact on the efficiency and the economics,” he said.
Meanwhile, Chairman of the Indonesian Smelter and Mineral Processing Association (ISPA) Raden Sukhyar admitted that developing smelter at the current economic conditions would not be easy. He pointed to an example that many smelters in China were eventually closed. “For a more competitive investment on smelters, they must be built in the vicinity of where the mineral resources are,” said the former Director General of Mineral and Coal.
He claimed that the Chinese government’s policy to start restricting the industry to curb pollution would be an opportunity for Indonesia. “Chinese investors who want to build smelters would be looking at Indonesia as the resources are near,” said Mr. Sukhyar.
It all however would not be that straightforward as the government should have a more mature planning. Mr. Sukhyar assessed that Indonesia had still not been seriously carrying out the activities to increase the added value.
He claimed that investment opportunities were still open in the fields of iron-based smelter, copper, nickel, alumina and tin including their metal derivatives. To realize it, the government should play a more active role, including in the facilitating of IUP holders, currently in quite numerous amount. Thus the IUP holders could also participate in the implementation of the policy with a view to increasing the added value.
Mr. Sukhyar stated that the national smelter development policy would bring back the excitement to the activities in the mining derivatives industry. “When designing the Mining Law, it was stated that our nation would not only extract metals, but we also rather targeted the downstream industry. The harmonization with the industry would therefore be really appropriate,” he said.
As smelter will require a large investment and is long term in nature, what is no less important is the certainty of supply of raw materials. “Balancing the resources and the demand should be done as a ground in supplying ores in an ongoing basis. It will also help the government control the level of production, and can contribute to control commodity prices,” assessed Mr. Sukhyar further.
He then reiterated his hope that in the future there would be no more overlap of processing and refining permits between the Ministry of Industry and the Ministry of Energy and Mineral Resources.
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The above was echoed by Mr. Bambang Gatot Aryono. He noted that prior to the drafting of the national smelter development, his office would come up with the calculation of the national mineral reserve in each region. It would also coordinate with PT. PLN on the supply of electrical energy for the smelters, as well as on the determination of the types of commodities to be processed nationwide with the Ministry of Industry.
From the current calculations, it appears that the number of IUPs issued by certain regional governments by far exceed the existing reserves in the areas. Therefore, it should be considered whether in the future the obligation to supply mineral to the domestic market would be implemented. If the amount of processed products from smelters are more dedicated for exports, Indonesia would be required to re-evaluate based on the classification of commodities accordingly.
In a sense, Indonesia must really come up with a road map to ensure the benefits of smelters provide positive contribution to the domestic industries, in order to bring the country to become a powerful industrial nation. The knowledge of the needs of the industry to absorb the commodities from smelters would then be also crucial, in order to grasp how big the requirement is within the country.
Mr. Ariyono stated that his office would continue to discuss the road map for the national smelter development. In addition to perceive the production capacity of smelters, it would also be crucial to determine the requirements of the downstream industries. In the end, smelters would be built accordingly based on the requirements of the national downstream industries.
The energy needs could also be expected. “This is what will be reviewed with the Ministry of Industry to explain to the regions by referring to infrastructures, reserves, and the readiness of the energy, so that the investment on smelters could be carried out economically and efficiently,” he added.
The concept of royalty would also be adjusted. Thus far, royalties would always be assumed on the end products, values of which are notably higher. Currently, many companies are seeking that the royalties be imposed only on the raw materials, not on the products from the smelters. This has caused local governments to refuse smelters be developed in their regions. The local governments are mostly afraid that their regions would only suffer from the smelters’ smoke, while the products would be beneficial elsewhere.
What has also become a question is whether the smelter development program would be solely for strengthening exports or strengthening the domestic industries. “What is the benefit of producing ferronickel then (they are) exported, to only be imported back in form of their derivatives? Greater benefit will still be enjoyed elsewhere,” Mr. Ariyono pointed out.
Prior to the ban on export of raw minerals, there were increased exports of mineral ores at an extraordinary level. Following the ban, exports of ores could be eliminated. This will eventually support the steady of supply of raw materials domestically.
