2013 ends a year in which the Indonesian economy made a strong start and sputtered mid year when rumors of an end to the US Fed’s monetary easing, and uncertainty over nationalist trade policy spooked investors. Policymakers reacted with measures to preserve the rupiah’s value and reign in an advancing current account deficit. Come January 12, an export ban on raw minerals (mandated by a 2009 law) will only increase the deficit, depreciate the currency, and push the economy towards recession as upwards of $7 billion of foreign exchange earnings will be lost along with 800,000 jobs. One would think that Indonesia’s Parliamentarians and senior economic officials would be on the same page regarding the bad economics of an outright ban. But, at the moment, that is not the case. Senior officials seeking a solution recently met with the Parliamentary Commission on Mining, which was in no mood to grant any exceptions to the law.
Simply put: there is no market within Indonesia yet for the hundreds and thousands of tons of coal, bauxite, gold, silver, nickel, and copper that Indonesia produces. Neither the smelting capacity, nor enough downstream off takers exists. Even the Gresik copper smelter that Freeport(operator of the huge Grasberg Mine) and Sumitomo helped to create years ago can only absorb 40% of Grasberg’s production.
AICC, along with mining industry associations and most of Indonesia’s main partners have been highlighting the bad economics for the past several years. The mining law of 2009 had some laudable goals (growth of downstream processing, more local control over permitting) but an uneconomic method of achieving them. Some leaders have gone so far as to say that the lost foreign exchange can be replaced by increasing the use of biodiesel, a pipe dream that also ignores the damage to the economy of mass unemployment of miners and small businesses that support them. The ban, others say, is helpful to control illegal mining and permits given under corrupt circumstances. Given Indonesia’s recent failure to create a local beef industry through an import ban (resulted in skyrocketing prices) one hopes cooler heads will prevail as the deadline nears.
I use the following analogy in my discussions with Indonesian officials. For over 70 years Indonesia has shipped a product, primarily in a raw form, to the US and the world, never once instituting an export ban. Meanwhile, plenty of downstream business has been built in the country. That product is natural rubber. Exports continue unimpeded and Indonesia has factories that produce latex gloves, sport shoes, tires, fan belts, grommets, paint and many other products. When Indonesia’s infrastructure and other policies are in coordination with international supply and demand logistics, more smelters and related downstream industries will come. The government should not be legislating these things to happen.
A recent flurry of news reports in the Indonesian press, a petition by the Indonesian Mining Association to the Supreme Court asking for an opinion that the 2009 law does not actually mandate a ban (only mandates local processing), comments of Japan and China, are all signs that a compromise can be arrived at either at the deadline or soon after. Indonesia has done this in the past on other big issues. The President is hosting a special Cabinet meeting next week that could yield one. If so, it will probably utilize some of the ambiguity in the law over purity levels, allowing the export of copper concentrates, for example, from the large mines run by Newmont, Freeport that are above 90% purity already. Stay tuned, this one will go down the wire and I predict a way will be found. Our friends in Indonesia know how to do this.